MPC shuns bleeding economy, raises interest rate to 18.5 per cent
Yesterday was a tough day for the economy with the National Bureau of Statistics (NBS) confirming slower growth, while the Monetary Policy Committee (MPC), raises the benchmark interest rate by another 0.5 point, suggesting that growth is not yet its priority.
MPC has had an unbroken monetary tightening run in the past 12 months, raising the interest rate from 11.5 per cent to 18.5 per cent. Yet, inflation has remained stubbornly high at 22.2 per cent at last reading.
Earlier in the day, NBS released the Q1 Gross Domestic Product (GDP) data, which showed that the growth momentum seen last year had weakened in the first three months of the year, considerably.
In 2022, the economy closed at annualised expansion of 3.1 per cent. The Guardian reported that the Q4 number suggested the growth trend was on a downward slope and that the economy could be kneecapped this year by rising risks.
With the commercial rate already exceeding 30 per cent market, there are indications the economy is trudging into the second half of the year more battered.
Some experts have blamed the naira redesign policy and the general elections for the drop in the first quarter GDP, while others said the structural challenges would need to be dispatched to give the economy some level of comfort.
But the risk could be compounded by ultra-high interest rates as the MPC, after its meeting yesterday, only slowed down its rate hike as against pausing it. The committee also retained the cash reserve ratio (CRR) at 32.5 per cent, liquidity ratio (LR) at 30 per cent and asymmetric corridor at +100/-700 basis points around the MPR.
The slowdown from 100 basis points (bps) speed to half a percentage is a sign the rate hike is closer to the end than the beginning. But the current high interest is a sufficient concern for economic agents, who said they can no longer inject fresh investments because of the prohibitive cost of borrowing.
But Prof Ken Ife, an economist, pushed back on the claim that hikes in interest rates were crushing the economy, especially the real sector. He argued that the manufacturing sector is not the target of the CBN in raising the rate, as there are other buffers to cushion the pains.
“We do know that whenever CBN increases rates, it does affect lending to manufacturers. But the manufacturing sector is not the target of the CBN in increasing rates. Manufacturers have many interventions that insulate them from commercial facilities. They have domestic finance interventions targeting those manufacturing companies. The CBN gives them single-digit interest rates of about nine per cent to them,” he said.
Prof Ife, who is a member of the governing council of the Ministry of Finance Incorporated (MOFI), added that inflation must be properly contextualised when interrogating the MPR to headline inflation.
“We have to look at the components of inflation. For example, you have the food basket index, which is crucial at a very high level of about three to 24 per cent. Then you have the headline inflation, which is the composite price index. That is the one that is 22 per cent.
“But then below it, the core inflation is the lowest and core inflation is all other indices, minus the food supply to the food sub-index, because it is the price of food that is most volatile. We all know why this is so. Insecurity is number one on the list of all kinds of things that are going on,” the economist said.
According to him, the recent deceleration of food inflation is beginning to take the steam off the food basket because it is not increasing as rapidly as it was before now.
But the Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, insisted that yesterday’s hike means that the prime lending rate is 19.5 per cent and that the Central Bank will be unable to cap commercial lending at 28 per cent. Already, the maximum interest rate was 28.6 as of April.
Emmanuel maintained that the most crucial option for improving the productivity of the real sector was for the MPC to cut rates to raise access to credit and stimulate growth since strengthening the supply-side economy is key to solving the demand-pull inflationary pressure.
He said it was important for the leadership of the Central Bank to understand that since there is a 0.7 correlation coefficient between exchange rate depreciation and foreign demand-induced inflation, the solution to slowing down the inflation is systematic devaluation that closes the spread between the official and parallel markets.
“The Central Bank also needs to get an amendment to sections 24(B) of the CBN Act of 2007 as a tool to divesting a share of Nigeria’s foreign reserves as a tool to providing liquidity for swap lines and settlements in the Naira-Yuan swap deal arranged in 2018 – considering that 26 per cent of Nigeria’s trade is with China, it makes no sense that Nigerian businesses need to secure form M in dollar trade with China, at a time when Brazil and Argentina have resolved to settle all their trade with China in Yuan.”
Prof. Uche Uwaleke, who decried the hike, said the action was a joke taken too far. He insisted that the hike was not in the interest of output growth as access to credit for micro small and medium enterprises will further be stifled.
He maintained that the upward adjustment of the rates has not shown that it can check inflation if recent experience is anything to go by.
He argued that any significant moderation in the inflation rate can only come from dealing with supply-side factors and structural issues that are fuelling rising prices such as insecurity, electricity and fuel challenges.
The 2.3 per cent growth in Q1 is a steep fall from 3.11 posted last year’s comparative quarter and 3.52 per cent recorded in Q4’22.
Reacting to the slide, the Lead Director of the Centre for Social Justice (CSJ), Mr. Eze Onyekpere, said nobody should be surprised because it was during the first quarter 2023 that the cash crunch resulting from the naira redesign hit the nation hard, virtually grounding economic activities
He hoped that by the time the second quarter 2023 GDP figures are released, there will be an improvement.
Also reacting, the CEO of the Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, expressed no surprise that the figures buckled. He noted that the poor growth did not come as a surprise.
“There were significant shocks to the economy in the first quarter. There was the massively disruptive naira redesign policy, fuel scarcity and electioneering activities. But the most devastating of the shocks was the CBN’s ill-advised mopping up of cash in the economy disguised as naira redesign,” he said.
He added that for the first time in a long time, the agricultural sector contracted in the first quarter of 2023.
“Expectedly, oil refining, and rail transportation contracted considerably by 35.8 per cent and 49 per cent respectively. Curiously, the insurance sector also contracted after impressive growth in the last few quarters,” he noted.
A professor of finance at the University of Nigeria, Chuke Nwude, argued that the GDP data do not reflect the current realities. Nwude pointed out that when output increases alongside the interest rate, the rational reconciliation is that increasing output comes from inflationary pressure. The implication is that the output which is measured by GDP is not real, he argued.
“When the increase in GDP is not powered by inflation, prices of goods and services will fall and interest rates head southwards. The current scenario is what obtains when GDP is inflation-powered and the official record keepers are not telling the citizens the truth about the economy,” he said.
Vice President of Highcap Securities Limited, David Adonri, described the 2.3 per cent rise for Q1 2023 as surprising.
According to him, the economy could not achieve any growth, considering the negative impact of the failed currency redesign program, which triggered a loss of over N20 trillion in the economy.
He said: “How can an economy that suffered such a monumental loss within the same period achieve growth at the same time? I do not have confidence in the report. With rising inflation, under-capacity utilisation and scarcity of economic goods, what propelled the economy into growth? One can only conclude that this is an inflationary growth which does not foster economic development,” he said.
Meanwhile, a pan-African multilateral financial institution, African Export-Import Bank (Afreximbank), said the global economy faces a perfect storm of stubborn inflation, high-interest rates in key economies, trade wars, supply chain difficulties and fallout from the Ukraine crisis.
It stated that the development is having a big impact on emerging and developing market economies, including African economies in the form of fuelling price rises, constrained trade volumes, reduced access to capital markets and food supply problems, adding that African economies as a whole will slightly outperform the global economy this year, with most enjoying higher levels of growth than in 2022.
In a report published by the financial institution, titled, ‘Africa’s 2023 Growth Prospects: Securing growth resilience in a ‘polycrisis’, highlights the various factors that are currently plaguing the global economy including stubbornly high inflation, U.S. and Chinese trade and tech wars, geo-political tensions and supply chain problems.
“Following a strong economic recovery from the height of the Covid-19 pandemic, global growth of 3.4 per cent in 2022 was far lower than the IMF forecast of 4.9 per cent, in part reflecting the extremely difficult global economic environment and a dramatic shift towards price stability in the inflation and growth trade-off. Efforts by key global central banks to rein in inflation must take priority but this is hurting Africa, with higher external debt servicing costs and a collapse in African sovereign debt issuance. Only three African nations, Angola, Nigeria and South Africa, successfully accessed capital markets in 2022, collectively raising $6bn, down from the nine that raised almost $20bn in 2021.”
The report further said: “Inflation is proving difficult to tame, while the opening up of the Chinese economy from COVID-19 lockdown measures could further fuel global inflation by releasing pent-up domestic demand. However, “heightened geopolitical tensions, besides preventing opportunities for international cooperation on global issues such as security, climate change and trade, have raised the risk of fragmentation.”
The Afreximbank report forecasts 4.1 per cent GDP growth for Africa this year, above the global average, with growth shared around the continent, although power shortages and other infrastructural shortcomings will see South African growth slow. The continent has the potential to accelerate its economic prospects, including via increasing infrastructural investment; ongoing structural transformation; improving the macroeconomic environment; digitalisation; and the implementation of the African Continental Free Trade Agreement (AfCFTA).
Afreximbank chief economist and director of research and international cooperation, Dr. Hippolyte Fofack said: “Inflation, which hit multi-decade highs and is raising the spectre of stagflation, is likely to emerge as the dominant macroeconomic story, eclipsing the short-lived globalisation of growth resilience post-pandemic… In the immediate term, restraining inflation in the most affected leading economies without provoking a hard landing or a full-blown financial crisis remains the most urgent challenge and risk to both global and African growth.”
