By Emeka Chiakwelu
The Central Bank of Nigeria (CBN), the country’s supremely reserve bank
has made a decision of hiking the interest rate from 11% to 12%. It was
puzzling to many financial and monetary observers because it was less than
three months that CBN reduced the interest rate from 13% to 11%. Then it
appeared that the monetary policy was gearing towards enhancement of
liquidity, but the latest U-Turn has thrown cold water to the pursuit of
liquidity.
The reversal by CBN was triggered by the rising inflation and the logical
step at its disposal was to restrict and constraint monetary policy. With
the weakening of oil price and paucity of foreign exchange, the import
based economy of Nigeria is suffering greatly. Nigeria being a
recalcitrant country has refused to diversify her economy and failed to
invest timely on agriculture, where she enjoyed the maximum comparative
advantage.
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Many essential commodities and food products are still imported and
whenever there are restrictions in importation, it does trigger inflation.
Those that bear the greatest brunt of inflationary trends are poor
Nigerians. About 85 per cent of the population is living with stagnant or no
income and are surviving with less than one dollar a day.
Due to the nosedive of oil price, the country generated limited foreign
exchange; therefore importers rely on the parallel market for acquiring of
foreign exchange at a much more exorbitant price. With fewer products in
the market, the prices of food products will go up and those consumers
with fixed income are barely surviving in the consumer market.
In order to checkmate the surging inflation, CBN resort to hiking of interest
rate. The mopping of liquidity has its downside for it will principally
depress business expansion and commercial growth. The prospect of solving
the issue of inflation becomes more elusive, if not dim because of the
circumstances Nigeria found herself. One of the matters rising from
constraints of monetary policy is the emergence of illiquidity. It
implies that the interest rate of borrowing will be higher and that is a
major discouragement to the business community and marketers.
The inflationary trend will not be resolve by hiking of the interest rate;
Nigeria’s problem is much deeper than that. Despite the attraction of
higher interest rate, the investors are not coming because of country’s
debilitated infrastructures, poor image, remittance policy and price
instability.
This is just the beginning; the more hiking of interest rate appears to be
call of the future because inflationary pressure is not going to ease due
to 1% hike. The country’s reserve bank has demonstrated its limited
monetary policy contribution that may become waned in face of daunting
challenges as the fiscal policy of the executive is struggling to define
itself.
*Chiakwelu, Principal Policy Strategist at AFRIPOL. His works have
appeared in Wall Street Journal, Huffington Post, Forbes and many other
important journals around the world. His writings have also been cited in
many economic books, publications and many institutions of higher learning
including tagteam Harvard Education.
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