The recent hike in the benchmark interest rate, i.e, the Monetary Policy Rate (MPR), by the Central Bank of Nigeria (CBN) from 11.5 percent to 13.5 percent, an increase of 200 basis points, has generated mixed reactions across the country. To many who have been following the development in the domestic and global macroeconomic environments, the hike did not come as a surprise. Notwithstanding, Nigerians are worried about its ripple effects on the nation’s fragile economic growth.
The CBN cited the rising inflation in advanced and emerging market economies, driven by the rising aggregate demand and wage growth coupled with the actions taken by the US Fed, Bank of England, European Central Bank as well as the Bank of Canada as serving as guidance in its latest hike in the benchmark interest rate.
This is a development that will place Nigerian manufacturers at the receiving end of a short stick, following the launch of the African Continental Free Trade Area (ACFTA) agreement
The rising inflationary pressures came at a time when unemployment is very high in Nigeria. The recent supply shocks caused partly by Covid-19 pandemic and the conflict in Ukraine are not helping matters. It is therefore in the interest of Nigerians that a thorough appraisal of the CBN’s action is carried out.
In its simplest terms, a rise in the benchmark interest rates means an additional burden on the debtors and a gain to the creditors. In other words, a rise in interest rate signifies a higher cost of capital. In the last few years, the federal and some state governments have virtually lived on loans, which is why the interest payments, especially to the domestic creditors, have gone up.
As of December 31, 2021, the Federal Government of Nigeria owed N19.24 trillion as domestic debts, with 72.56 percent of the domestic debts in FGN bonds, 19.68 percent in Nigerian Treasury Bills, 3.96 percent in Promissory Notes, 3.18 percent in FGN Sukuk, and the balance held in FGN Savings bonds, green bonds, and the Nigerian Treasury Bonds.
The domestic debt of the 36 sub-national governments and the Federal Capital Territory (FCT) was N4.458 trillion as of December 2021. Meanwhile, debt servicing in 2021 alone gulped N2.05 trillion with interest payment, N1.66 trillion as well as charges of N81.80 billion accounting for the largest chunk of debt servicing that year.
It will be recalled here that an agency of the Federal Government admitted that a significant amount of Nigeria’s crude oil production is lost to theft and pipeline vandalism. Synthesising all the above scenarios together gives a picture in which more Nigerian resources are going in the way of debt servicing in view of the recent hike in the benchmark interest rate.
The hike in interest rate will also directly affect businesses who will in turn transfer the burden to the hapless Nigerian consumers. According to the CBN data, in 2018 when MPR was 14 percent, prime lending rate in Nigeria averaged 16.91 percent. In 2019, while MPR averaged 13.58 percent, the prime lending rate was on the average 15.61 percent. In 2020, on the average, the MPR was 12.5 percent while the prime lending rate was 13.31 percent.
In 2021, the MPR was 11.5 percent while the prime lending rate was 11.48 percent. This implies that the MPR and prime lending rate are directly proportional in that a rise in the former brings about a similar movement in the latter. The Nigerian manufacturers are therefore justified for complaining that the recent rate hike by the CBN will affect not only their businesses, but also the Nigerian consumers.
In addition, a further rise in the operating cost of manufacturers in this country will make Nigerian goods less competitive at the international market. This is a development that will place Nigerian manufacturers at the receiving end of a short stick, following the launch of the African Continental Free Trade Area (ACFTA) agreement.
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From another perspective, the CBN could have been motivated by the not-too-impressive performance of the naira relative to other major currencies in recent times. At the Investors and Exporters FX Window (I&E window), the naira fluctuates around N418.88/$, but the same cannot be said of the N/$ exchange rate at the parallel market where it currently trades, North of the N600/$ mark, thus leaving an arbitrage opportunity of close to N180 for rent seekers.
With Nigeria not yet maximising the opportunity in the international crude oil market due to its inability to meet daily production quota, there is no guarantee that further pressures will not be mounted on the naira, which will further cause depreciation of the currency, relative to other major international currencies.
Another point to note is that with this hike in the benchmark interest rate, risk-free instruments of the Federal Government will appear more attractive to foreign investors, however, with other countries’ central banks raising the benchmark interest rates. The following weeks will demonstrate how much impact this policy will have in attracting foreign capital.
The stock market has so far remained insulated from the CBN decision, with equities gaining after the CBN decision. However, this may not last long as investors will soon begin to rebalance their portfolios in favour of securing Federal Government’s risk free assets.
It is clear that the CBN has placed controlling inflation and naira stability at the centre of its recent rate hike. But the downside, which is a surge in the cost of capital, will definitely affect local manufacturers and the hapless Nigerian consumers.
