Global Economic Outlook (G.E.O)
Nigeria needs more than Interest Rate Management to Curb Inflation. Vol. 98. July 18, 2022.
Dear readers, welcome to another edition of the Global Economic Outlook (G.E.O) - our weekly newsletter providing insights on finance, investment and the economy. Today’s focus is on how to manage the inflation in Nigeria.
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Nigeria needs more than Interest Rate Management to Curb Inflation
Inflation remains a global challenge and many central banks are trying all they can to keep it in check. Nigeria is no different as the Central Bank of Nigeria (CBN) hiked the Monetary Policy Rate (MPR) by 150 basis points in May in a bid to stop prices from spiraling out of control. The MPR refers to the interest rate at which the CBN lends to commercial banks and is a monetary policy tool for tightening or loosening the economy. Increasing the MPR is indicative of a tightening of the economy and vice versa.
The CBN took the decision to increase the MPR in May as it prioritized curbing inflation above stimulating economic growth. However, there is very little indication that the interest rate hike is having any effect at all considering the Consumer Price Index (CPI) Report released by the National Bureau of Statistics (NBS) for June 2022. The report shows that Nigeria’s inflation rate rose to 18.60% in June 2022 from 17.71% a month earlier with food inflation even higher at 20.60%.
Nigeria’s situation is a peculiar one because in addition to high inflation, there is also the case of slow economic growth. The data for the first quarter of 2022 shows that the economy grew by just 3.11% which is low for a country at Nigeria’s stage of growth. While it will take the optimal combination of monetary and fiscal policies to achieve the best outcome for the economy, there is very little to show that the monetary policy framework currently in use in Nigeria is efficient.
If we look at the foreign exchange (FX) market for instance, we will see a lot of lapses which have created room for arbitrage and has proven detrimental to businesses. The official exchange rate in Nigeria is around ₦415/$ but it is about ₦615/$ in the parallel market. Investors need more clarity around this and this is definitely affecting the level of FX inflows into the country through Foreign Direct Investment (FDI). You will recall that capital importation for the first quarter of 2022 fell by as much as 28.09%.
There is chronic FX shortage in Nigeria at the moment and many companies are suffering the ill-effects as they are unable to repatriate proceeds or profits from their investment in Nigeria. The International Air Transport Association (IATA) recently disclosed that around $450 million is being held up in Nigeria due to the FX shortage and that is just for the aviation sector alone. Who knows how much is being held up in other sectors?
The Monetary Policy Committee (MPC) is currently meeting in order to decide on what next to do for the Nigerian economy. It might be better to find an efficient way to manage the FX situation rather than focusing on interest rate.
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The 8th Live Edition of the Global Economic Outlook (G.E.O) was held on Tuesday, 28th June 2022 with experts discussing the state of the Nigerian economy and how Small and Medium Scale Enterprises (SMEs) can navigate the difficult business environment. It is a must watch!
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If you have any questions or you need help on how to manage your personal finance, please send us an email at info@ecofinar.com.
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