I do not understand the rationale behind raising the benchmark interest by 400bp by Nigeria’s Central Bank.
The price of a loaf of bread has gone from N1,000 in November, 2023 to N1,400 by the end of February, 2024. The reason for the astronomical increase is due to the rise in the cost of input materials such as flour, sugar, butter, etc. It was not because more people now eat bread.
The price of bus fare from Ajah to Oshodi has risen from N1,500 to N2,500. It is not because more people now travel to Oshodi from Ajah daily, but because of increase in the price of petrol.
A paint bucket of beans used to go for N3,000, but it is now N5,500. It is not because more people are queuing up to buy beans but because the cost of farming input such as fertilizer and labour, and transportation have risen astronomically, affecting output drastically.
This is the same with other staples such as rice, garri, etc.
The above shows that what we currently have is cost-push inflation. Yet Nigeria’s central bank went ahead to raise interest rate by 400 basis points to 22.75% in order to tackle the inflation. The same approach that the former Central Bank Governor, Godwin Emefiele adopted to no avail.
Emefiele bumped interest from 13.5 to 18.75%, but only had higher inflation to show for it.
From what I learned from basic economics, the Central Bank can only effectively use higher interest rate to subdue higher inflation when the inflation is demand-pull.
And demand-pull implies that demands have outstripped supply in an economy, due to a strong economic growth that has resulted in low unemployment and higher consumer spending.
But what we have in Nigeria is far from a demand-pull inflation. In our case, economic growth is marginal, unemployment is at a historical high, and consumer confidence is abysmally low. So, I am not exactly sure what informed of the MPC’s decision to raise the MPR.
Central Banks all over the world are concerned about price stability and jobs. And that is why to maintain price stability, Central Banks would use higher rates to control liquidity in the financial system during strong economic growth, and then lower the rates to stimulate growth by incentivizing borrowing to boost productivity, which usually translates to more jobs and higher spending during periods of economic stagnation.
By raising the interest rate at this time, the Central Bank has inadvertently raised cost of borrowing. For several businesses with ongoing obligations, the cost of servicing those facilities have also gone up. These costs will be transferred to consumers in the form of increase in the unit costs of goods and services, which is more inflation.
Worse, those businesses will likely freeze hiring and in some cases may even have to shed jobs. This is an unlikely outcome that the MPC may have hoped for in reaching their decision.
I am a bit concerned that this CBN is taking on so much at the same time in a bid to see things improve, and that may have started to impact on the quality of its decisions.
Over the past few weeks, we have seen the apex bank deploy every trick in the book, including a raft of measures aimed at stabilizing the FX market, but I have not seen much activity from the fiscal side.
What exactly are the Finance, Agric, Trade Ministries and other members of the Economic team doing? Those in charge of those ministries are not pulling their weights, and they too need to put on their thinking caps.
The writer: Jonah Solomon is an experienced business journalist, author & TV presenter with a demonstrated history of working in the print and online media industry.
[N.B: This post was first published on Jonah Solomon’s LinkedIn page]
