VICTOR OGIEMWONYI
Victor Ogiemwonyi, a retired investment banker, is a former Governing Council member of the Nigerian Stock Exchange (NSE), now Nigerian Exchange Group (NGX Group). He sent this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com
The Monetary Policy Committee of the Central Bank of Nigeria (CBN ) last week, raised interest rate for the 5th consecutive time, by 50 basis points, bringing current base interest rate to 27.25 percent and tightening the asymmetric corridor for banks.
This was a surprise for many analysts, who thought, the cooling inflation rate, as reported by the National Bureau of Statistics (NBS) in its latest report, and the call from the Manufacturers Association of Nigeria (MAN) and others, who say high interest rate hurts manufacturers and the growth of the economy, may sway the CBN to, at least, pause interest rate and not raise it.
Those who borrow large sums to support their businesses are horrified.
What the CBN has done was to signal that inflation is still too high, and the pressure on FX is still significant, as witnessed by the worsening FX rates in the last quarter. There is a need to still push the base interest rate up, to further get the economy to slow down, and catch up with the reality of our economic situation. The new petrol price hikes have not helped. This fuel price increase is expected to further spike inflation. So, a 50 basis points increase in interest rates, was a good way to prepare for this expected inflation spike, as well as discourage speculative leading that is also responsible for the rampant speculative trading in our economy, either in the significant liquidity that goes to speculative Fx trading, or the high demand for FX, to import into the Nigerian economy.
Those who are responsible for this huge import bill, often cannot see how they are part of the problem. They buy FX at any rate, import and price their goods at any rate, sometimes twice the FX rate they bought the goods with. They blame, and justify this, on the high FX rates they buy at, and the persistent inflation in the economy, but fail to see how their own action fuels FX rates and Inflation.
The only known efficient way to signal markets, to the direction you want the economy to go, is to use market prices. Price will always create equilibrium, when things swing too far to the other side.
It is assumed that most of the speculative lending that the banks make, go to these short term transactions, whether to buy foreign exchange or to import on a short term basis. The lender profits from this short term lending, as most of its deposits, also come on a short term basis. The trader also profits from the ever increasing prices of goods they sell. They have an endless market for their goods, and can always pass on their inflated prices to Nigerians because of the very little that is manufactured in Nigeria.
One way to discourage these tendencies is to keep hiking interest rates, to keep fighting inflation, to curb the huge demand for FX that is putting pressure on the Naira.
While high interest rates are not good for the economy in the long term, the current temporary hikes in interest rates are justified. Higher rates discourage speculative lending and trading, it also forces FX users to be efficient and to look for other ways to manufacture, with local substitutes. It will also encourage exports, for FX earnings, as we have seen in the growth of non-oil exports lately.
The CBN has limited tools to fight inflation. Of the three rate indices – FX rate, inflation rate and interest rate – the CBN can only control interest rate, it must therefore necessarily use it, to fight inflation.
Inflation is currently too high and it hurts the poor and small businesses. They are paying an inflation tax, they cannot afford, and cannot fight. It is currently hitting them hard. Only the CBN can fight it off, on behalf of all of us. Higher interest rates hardly hurt the poor and small businesses because they hardly have access to bank lending. Those who have access, will find other ways to cope for now. This is not new, even the USA, once raised rates to as high as 20 percent in the last years of the Carter presidency. The Paul Volcker Federal Reserve Bank of that period, equivalent to our own CBN, chose the hawkish policy of high interest rates, to fight off the high inflation that was coming from the high oil prices, arising from the Arab Oil embargo of the 70s. Even lately, we have witnessed high Fed Fund rates in the US, used to fight off inflation, arising from the Covid 19 pandemic and the disruptions to supply chains, all around the world.
The current CBN interest rate hike, and the tightening of the asymmetric corridor for banks, are all aimed at reducing inflation, while discouraging speculative lending in the economy.
The high interest rates now, will also attract FX investments into the economy, in the form of Foreign Portfolio Investments, which is required in the near term, until we can stabilise our reserves, and stabilise the naira.
The current policy should be seen as supporting the greater good. Because, a lower inflation, a more stable FX rate, and a stable Naira, is good for everyone.
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