"Interest rates need to be reduced to increase investment and consumer purchasing in ways that sustain the economy at a higher level."
The above were the exact statement of President Bola Tinubu on the day of his inauguration as Nigeria's 16th President. However, in the last one year under his leadership, Nigerians have experienced the direct opposite of his words as in a bid to tame the hyper-inflation seen in the, the Central Bank of Nigeria (CBN) has raised interest rate so high that it is choking businesses and hurting economic growth.
Precisely, the CBN has raised the monetary policy rate (MPR), known as the benchmark interest rate by 825 basis points in the last on year, from the 18.50 per cent it was of May 2023, when Tinubu assumed office, to 26.75 per cent as of May 2024.
This year alone, the Monetary Policy Committee (MPC) has raised the MPR three consecutive times and has maintained a hawkish stance in a bid to tackle the country's persistent inflation.
Despite Tinubu's promise of a low interest regime when he assumed office, the apex bank has continue to signal a return to orthodox monetary policy regime as CBN Governor, Mr. Olayemi Cardoso, vowed to continue to adopt a contractionary policy stance to tackle inflation to achieve price stability - as long as it takes.
Regrettably, despite all the fire-fighting measures adopted by the CBN, inflation rate has remained stubbornly high in the last one year, as it climbed to 33.69 per cent in April 2024, compared with the 22.41 per cent it was when Tinubu took over. Food inflation stood at 40.53 per cent as of April 2024, as against the 24.82 per cent it was as of May 2023.
Beside the high interest rate, the naira exchange rate against the dollar has fallen sharply in the last one year under Tinubu. From N700 to a dollar in May last year, the naira exchange rate against the dollar continues to hover around N1500 to a dollar since this month. Around March this year, it depreciated to about N1600 to a dollar on the official market and N1800 to a dollar on the parallel FX market and was then adjudged the worst performing currency in the world. The free fall of the naira exchange rate has defied all measures adopted by the central bank, even as dollar scarcity remains a concern.
Another major challenge that the Nigerian economy was confronted with in the past one year, was the decision by Tinubu to in his inaugural speech, announced the scrapping of the decade-long fuel subsidy policy, which saw prices of goods and services increasing rapidly since May last year. That announcement overheated the system and raised the country's poverty level.
The fuel subsidy removal led to a rise in the price of petrol from a subsidised price of N190 in May 2023 to over N600 in some cities, while workers' wages remained flat.
The pass-through effect was that the price of most consumer products, such as bread, rice, industrial goods, cost of transportation, cost of agricultural inputs, all rose sharply and some beyond the reach of ordinary Nigerians. In the last one year under Tinubu, the effect of this singular decision was felt by everyone, both the rich and the poor. Even food palliatives that were introduced by the federal government as well as some state governors, were not enough to quench the level of hunger as hundreds of Nigerians in major cities in the country demonstrated against the soaring cost of living. The level of starvation saw a lot of families skipping their meals.
The protesters were furious that despite the removal of petrol subsidy, the government failed to equally raise minimum wage, a situation which the Tinubu's government has not been able to address till today.
In response, Tinubu repeatedly assured Nigerians that the economic hardship would soon be over, stressing that his focus was to stop the Nigerian economy from bleeding.
The country's worsening socio-economic condition forced more Nigerians to relocate from the country.
Clearly, the Nigerian economy is in dire straits with major economic indicators looking grim amidst increasing vulnerabilities.
Today, companies in the debt market are finding it extremely difficult to raise funds as a result of the high interest rate environment. The restrictive monetary policy posture of the central bank has put unfair burden on certain sectors of the economy and is weighing heavily on interest rate sensitive sectors of the economy such as construction, manufacturing and other highly leveraged businesses. Tight monetary policy and a higher interest rate environment could as well result in increased unemployment and slower economic growth.
Financial results released so far on the Nigerian Exchange Limited (NGX), mostly by blue-chip companies such as Nestle Nigeria Plc, Nigerian Breweries Plc, MTN Communications Plc, in the last one year have been poor, due to the adverse effects of government policies, which has been worsened by the MPC's decision to stick to its contractionary monetary policy regime. All the indices are squeezing business owners and the current monetary policy regime does not favour entrepreneurship. Banks are currently saddled with the task of meeting up with central bank's recapitalisation target in the bid to support the federal government's drive to build a $1 trillion economy in the next eight years.
Start-ups and MSMEs, which are the real engine of growth of any economy, are presently bearing the brunt of the higher interest rate regime and restrictive monetary policy.
No doubt, the current fight against inflation is impeding Gross Domestic Product (GDP) in the country, as growth rate slowed to 2.98 per cent, in real terms in the first quarter of the year (Q1 2024), compared to 3.46 per cent in the preceding quarter, according to the National Bureau of Statistics (NBS).
For households, with food inflation over 40 per cent, a lot of them are struggling to feed as wages remains flat, which prompted the recent protest in some cities in the country,
While it appears foreign portfolio investors (FPIs), who typically are excited to rush to any high interest rate environment for fixed income instrument are flocking in, there is need for both the fiscal and monetary authorities to give some incentives and attract foreign direct investors (FDIs).
As Edo State Governor, Godwin Obaseki, pointed out recently, "Interest rate is already high and jacking it up will not allow small businesses access to credit to make them grow. We must focus on the fundamentals which is increasing production, making sure our citizens produce what we consume and depend less on imports. Our economic and monetary policies should not be determined by exchange rate alone.
"The issue of increasing the cash reserves in a bid to tighten liquidity is going to be detrimental to our economy. We should focus on fiscal issues to enable us to grow our economy, not panic about the interest rate. Creating jobs should be a priority for us as a nation."
Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, shares same sentiment, noting that over the last two years, there had been persistent monetary policy tightening, "yet there has not been any significant impact on the inflationary pressures. If anything, the general price level had been continuously on the increase.
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"We recognise that the primary mandate of the CBN is price stability, but numerous headwinds had posed significant risks to this critical objective. Some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, global supply chain disruptions and the surge in ways and means finance. The hike in MPR or Cash reserve requirement would not change these variables.
"The credit situation in the economy is already very tight, with lending rate ranging between 30 and 35 per cent. The Nigerian banks are yet to live up to their financial intermediation role because of these constraining factors."
The federal government needs to focus on policies that would encourage local production of goods and services as well as to aggressively drive exports so as to increase foreign currency inflows to the country. Policies that discourages imports should be introduced, while encouraging productivity, both in terms of tax incentives.
There is also need to address the structural issues that have continued to impede growth and discourage investments in the country, such as insecurity, crude oil theft, so as to unlock dollar liquidity inflow and encourage productivity.
Finally, there is also need for better coordination between the fiscal and monetary policies in order to win the battle against inflation and lower interest rate.
