As IMF downgrades Nigeria’s economic growth, the Central Bank Must Stop Rate Hikes

Nigeria should get the message on the latest report from the International Monetary Fund (IMF): “Nigeria’s economic growth is projected to decline from 3.3 per cent in 2022 to 2.9 per cent in 2023, the International Monetary Fund (IMF) has said”. Sure, many agencies and banking institutions, including IMF, Goldman Sachs, and JP Morgan Chase praised the changes made in early June 2023. But over the last few days, we are reading different takes. 

The Financial Times recently wrote: “In removing a costly fuel subsidy and in shifting towards a market-driven exchange rate, which has sharply weakened a previously overvalued currency, he has gone some way towards persuading investors he is serious about reform. But four months into his presidency, there are signs of things going awry.”

Across all indicators, most of these foreign institutions misjudged the double whammy of floating Naira (without adequate US dollar to support the policy) at the same time one of the nation’s key imports (petrol) is cut-off from subsidies. While the exuberance was evident in the financial market as some assets yielded huge paper profits for banks, the impact on manufacturing was fatal. That is what IMF is reporting there.

The government is adjusting for some of these challenges, and we do hope it gets things right. Specifically on inflation, I call the government to soft-pedal on raising rates because our inflation is not driven by too much consumer demand. Our inflation is mainly due to low supply and with limited consumer credit in the nation, higher rates punish companies which actually need more capacities to produce more (when rates go up, borrowing costs go high, and companies reduce production which then affect supply, which ideally should be expected to go high to reduce inflation). 

 This is different from the US and Europe where changes in rates can influence consumer spending (they have huge consumer lending/credit), pushing inflation to new positions. When you raise rates in Nigeria, most of the time, only corporate borrowers are affected and interestingly they are the entities you need to boost supply. So, instead of using raising rates as a tool, we need to see if we can even make cheaper loans to producers. 

In the past few years, the apex bank had raised rates even as it lent free cash (yes, Ways and Means window) to the government which flooded the nation with easy Naira. So, while corporations were struggling with high rates, the government was injecting huge liquidity canceling out the very reason the central bank raised rates. We raised alarms on the stupidity of those own-goals and we do hope the new CBN team must stop them, so that Naira can breathe.

Inflation has remained high in Africa’s largest economy, prompting the apex bank to hike interest rates to their highest levels in nearly two decades. In July, the CBN raised its benchmark lending rate to 18.75 per cent. The bank said, “hiking the interest rate has made a lot of difference in moderating the rate of inflation”.

It noted that the option to continue the hike in the policy rate, albeit moderately, also presented a strong alternative premised on the expected liquidity injections into the economy from the recent efforts to unify the nation’s foreign exchange markets.

Also, the country has in recent years faced severe revenue problems, pipeline vandalism and crude oil theft in its oil-producing region.

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