6th March, 2023
Nigerians have had a problematic few years. The country underwent two economic recessions, with GDP growth averaging 1.1%.
According to the most recent National Bureau of Statistics data, unemployment and underemployment reached an all-time high of 56.1% in 2020, forcing 133 million Nigerians into multidimensional poverty.
The term “economic growth” refers to the amount of money a country earns in a given year, not the amount that a country makes in a given year.
Another distinguishing aspect of Nigeria’s economy over the last seven years has been a shift in economic activity toward agriculture and a slowing manufacturing sector.
With all of this to contend with, they would hardly have been happy to hear the news that interest rates were set to rise to an all-time high this year.
Following a 100-bps hike in November, the Central Bank of Nigeria unanimously resolved to boost its monetary policy rate to 17.5% at its January 2023 meeting, exceeding market estimates of 16.5%.
Officials noted inflationary concerns and slowing economic development. In December, headline inflation decreased slightly for the first time in 11 months to 21.3% but remained close to a 17-year high.
Nevertheless, economic growth slowed more than expected to 2.3% in the three months to September, down from 3.5% in the previous quarter.
According to staff predictions, production growth recovery will likely continue reasonably in 2023 but at a slower pace.
While this is implemented to help an economy recover, the short-term effects can be damaging.
For example, the currency value will drop, affecting businesses, the forex market, and many other things.
Let’s delve deeper into the impact this will have in the following section.
How will this have an impact?
Today’s economy appears quite different from last year’s, and many Nigerians are worried about inflation, market downturns, and even a future recession.
However, making sense of such a flood of negative news in these uncertain times can be challenging, with many asking about the chances of a recession.
The central bank of any country is in charge of setting interest rates.
In other words, the rate at which a borrower needs to repay a principal debt to a lender, such as a bank or credit provider.
If interest rates are raised, the cost of borrowing money increases, but if they are dropped, it decreases.
Central banks do not take rate changes lightly, and they are thoroughly considered before being enacted to maintain monetary stability.
Interest rates are crucial to any functioning economy, affecting everything from credit card and mortgage repayments to consumer spending and inflation.
The theory is that if goods and services become too expensive, fewer people will buy them, forcing merchants to drop their costs to retain customers.
For example, if potential purchasers are hesitant to pay the higher interest rates on auto loans, a car dealership may be obliged to reduce the price of a new car.
It may appear a straightforward formula, but the truth is far more complex.
Aside from corporations overcharging for their products, the economy is experiencing several restrictions.
Other analysts warn that bringing the economy back into balance would require a massive drop in demand, which might lead to a recession in which more workers would be laid off.
Because the global economy is based on money, when the cost of money in the form of interest rates rises substantially, growth may halt significantly or even enter a recession.
Whether these outcomes indicate that interest rates were raised too quickly depends on the specific economic circumstances, including an estimate of the cost of raising rates more slowly.
Unfortunately, there is no one-size-fits-all definition of how fast is too fast.
The only way to determine if policymakers have made optimal tradeoffs between growth and inflation is in retrospect.
All governments must decrease debt and encourage growth. Still, only some governments, aside from those with the most significant economies, have the choice of simultaneously addressing their balance sheets and economic recovery.
Most will promote economic recovery by reducing spending or increasing returns on investment, considering their country’s context, global worldview, legislative structure, national ideology, and political will.
Governments and corporations have functioned in silos for far too long, resulting in neither sustainable nor inclusive economies.
Restoring national economies to grow efficiently and equitably would necessitate more coordinated, seamless collaboration between public and private sector leaders.
Only time will tell if these interest rate hikes will positively impact the Nigerian economy.
It’s clear the government is trying to intervene and at least isn’t sitting back watching the country go into a crisis.
However, with such rapid interest rate increases, many question whether they have the balancing act right.