25.2 C
25.2 C
Thursday, August 11, 2022

Raising interest rate in a broken economy

By Adefolarin Olamilekan

In recent times, the most unavoidable question confronting many economists and policymakers is; should interest rates be low or high?

Unfortunately, the entire global economic environment is in bad shape. With so much to bear, from energy complication issues to food and logistic chain disruption as well as uncertainties in financial flow.

Whereas, the big blow from all this, is the decision of central banks across the world in tightening monetary measures on cash flow in the hope of keeping inflation at bay, with controllable fiat.

Regrettably, inflation is making a mess of currency, by weakening purchasing power and eroding its value.

Chiefly, by making a mockery of early decision that seems not to be working for a global economy that has so pride itself in profit after profit. The only trust now is jerking interest rate up, of course, this on its own is never to be trusted.

For instance, there is no universal rule when it comes to raising or lowering the interest rate. Nevertheless, what the central banks should be interested in is minimal stability. And this comes with its own issues, especially for underdeveloping and developing economies that may not find it suitable.

Because there is an unstable and poorly manage economy respectively, hugely suffering from fiscal Imbalance, government debt, corruption, and poor revenues.

So what can an interest rate hike do for a broken economy like Nigeria? That the Central Bank of Nigeria (CBN) lately raised its interest rate to 14 per cent from the previous 13 per cent and 11.5 per cent, respectively.

Instructively, the Central CBN Governor, Godwin Emefiele, said the hike in interest rate would help address Nigeria‚Äôs rising inflation. This is quite bold going by the latest Nigerian inflation rate standing at 18.60 per cent. And occupying the eighth position amongst the 10 Sub-Saharan African country’s economies with higher inflation.

Unfortunately, the CBN Monetary Policy Committee (MPC) decision connotes the second consecutive time it would raise the benchmark rate in 2022. Sadly, inflationary pressure in Nigeria is fueled by rising prices of food and the high cost of diesel.

READ ALSO: Sokoto Gov Tambuwal visit Obasanjo over 2023 election

In the same vein, rise in staple food like bread, cereals, potatoes, yam, meat, fish, oil and fat, and wine. These are worries to many Nigerians across board.

Succinctly, Nigerians are questioning the rationale behind the CBN interest rate hike. With the clear understanding that raising interest rates is not a solution to the inflation problem.

Rather, this is more or less, a mechanism of anti-crisis monetary economic policy, that may not work well.

Particularly as inflation in our clime is driven by cost-push, low supply of goods and essential commodities. Not ruling out sabotaging elements that constitute hoarding and artificial scarcity.

However, a critical look at the CBN decisions in hiking interest rates is for us to think through.

First, what is the apex bank aiming at? Is it a short-term measure to attract increase in stock and bond sales on the stock markets and maintain liquidity in the financial systems? As it is currently done in developed nations, to mop up excess cash in the system.

Another is the CBN trying to avoid counteracting an economic crisis such as not adding to the 33 per cent unemployment rate, failed manufacturing sector, dwindling investment environment weakening citizens’ purchasing power and income, amongst others.

On the other hand, we are not in doubt that the CBN is aware that several of its specific instruments of interventionism has failed to resuscitate our broken economy.

Even though it targets financial support to SMEs micro and big and the real sector were faced with high cost of production.

As much as we would like to commend the intervention instruments of the regulatory bank, the obvious as we know and the CBN cannot run away from is the structural deficit in our economy. Is too deep to entertain interventionist deleveraging. Throwing money at opportunist individuals and groups.

Who themselves are potential risk against real economic production. What we are saying is that the situation and the recent intervention fall short of what should be done talkless of jerking up the interest rate. As this has further, compounded the macroeconomic problems.

Thereby creating a gap of no confidence and as well as the risk of mistrust toward gaining public support.

What needs to be done? We acknowledge the current predicament is not just peculiar to us. But we are not shy about telling ourselves the truth. First, Nigerians are interested in a stable economy that should be far away from the broken economic situation.

And this requires strong pro-people monetary and fiscal policies that have an effect on the real economy.

Secondly, our interest rate should be adaptable to our macroeconomic development needs. Tackling the energy, manufacturing and agricultural sector.

Lastly, we are a nation with a democratic governance system, the Nigerian state must factor in the issues of intervention programmes beyond throwing money at the problem. It’s time the government takes these issues into account when making decisions. Especially as social unrest and the possibility of political risk are highly associated with high cost of living.

As a late economist, Henry Boyo would say, “Let’s save the Nigerian economy”, from a broken one infact.

* Olamilekan is a Political Economist and Development Researcher

- Advertisement -spot_imgspot_img
Latest news
- Advertisement -spot_img
Related news