Sifting through the noise of Interest rate hikes and rising Inflation rates in Nigeria.

Double digit Inflation has irresistibly remained one of the most revered monsters in most emerging economies today. Nigeria is not left out of the show as the nation is currently witnessing a spiraling rise in the prices of basic commodities including food and agricultural produce.

I will like to acknowledge the fact that Nigeria still remains one of the cheapest countries in the World (Numbeo) and that my analysis is not intended to make a cost of living comparison given that the basis used to arrive at these decisions are divergent. Also, please note that all my arguments are under the protection of Ceteris Paribus :) These are all my opinions, they are backed by my knowledge and understanding of reality and figures and not the figures in itself.

Causative factors of Nigeria's Inflation

A lot of causative factors can be attributed to Nigeria's historically rising inflation rate, prominent among these are dependency on foreign products, volatile currency, rising PMS prices, corruption (Increased cost attributed to bribery), Increasing population without equivalent increase in productivity, Insecurity and a host of many others. These factors can be classified and further subdivided into cost push (Supply) and demand push (rising income and increasing population, etc.).

How does Currency volatility affect Inflation and Interest rate in Nigeria.

Because Nigeria is a highly dependent import country as previously highlighted (sources available online), it needs to accumulate the US dollar which is the reserve currency for many nations to import commodities; these could be food, processed products or raw materials, and because Nigeria's currency (Naira) is pegged to the US dollars, it has to always struggle to ensure that its currency does not fall so much against the US dollar in order for it to maintain its value and purchasing power.

When the value of Naira falls against the US dollar, Importation of raw materials becomes expensive and to improve the worth and value of the Naira, the government needs to take measures to make the country's currency more attractive. There are many ways to make a country's currency more attractive, they include; increased production and exportation, Industrialization and infrastructure (Attracting FDIs), Political stability and Security, increasing interest rates (attracting FPIs) and a host of many others. What do I mean by attractive? This simply means increasing the demand of the naira which invariably creates scarcity and drive up value (Basic economics).

All of the above listed measures can be achieved through two broad classification monetary policy and Fiscal policy. Raising interest rates (monetary policy) is known to be a much quicker fix and what this policy basically does is that it promises increased returns for investors in the Nigerian economy. However increasing interest rates are usually accompanied by what is known as contractionary monetary policy which involves mopping out money from the Nigerian Economy by selling government debt instruments with the hope that people have higher borrowing cost thereby borrowing less and save more thereby having less money to spend, thereby buying less.

When this is done, it is expected that Inflation will fall giving that inflation is assumed to be a situation where too much money chase fewer goods.

How does that play in Nigeria today and how effective is an increasing interest rates

It is important to note that the idea of interest rate hike as a means of curbing inflation was initiated by matured economies and thereby more effective in those economies. That been said, it has recorded relatively meagre success in emerging economies given their already low credit rating and the impact of a pegged interest rates which means emerging economies could also bear the brunt of an increasing interest rate in developed economies such as the united states which they borrow from. this means that inflation could still persist in World economies (Especially emerging economies) even if they raise interest rates as long as countries like the United states keep hiking their interest rates.

What are the dangers of Increasing Interest rates

Increasing interest rates makes borrowing more expensive within the economy and for the economy thereby decreasing output. when output is decreased, companies might also need to cut manpower in order to minimize cost. the results have two sides to its coin. Decreased output without an equivalent reduction in inflation will lead to more inflation. Decreased output and decreased inflation will stabilize prices but may not necessarily reduce them, thereby leading the economy to stagflation, other extremes include recession and depression which are normal cycles in an economy.

Should Nigeria Increase interest rates?

Historically, Inflation in Nigeria has been very sensitive to fall in naira against the dollar and increased cost of petroleum. several other sentiments also play their part, but because of their high level of divergence, we will be focusing on the key factors.

Increasing demand for dollar in Nigeria and the fall of Naira can also be linked to numerous factors, they include; medical tourism, importation, educational tourism, migration (Japa), and speculation (caused by low confidence in governance) and low productivity, etc. Meanwhile, the need for increased interest rate hikes asides rising inflation and other minor factors can be linked or attributed to declining credit rating/higher risk of default.

If the increasing demand for dollars is attributed to factors that can be solved by fiscal discipline and political stability thereby leading to low demand for dollars and invariably low inflation rate, and the borrowing costs (Interest rates) can be reduced by other factors asides inflation, such as prudence, transparency and sound economic and fiscal policies by the government, Why then has Nigeria not been able to solve its volatility and inflation problems?

Nigeria's Problems and 'possible' ways to solve it

Nigeria's problems are inherently planted in the corrupt systems and structures in place in every levels. and despite having smart people at the helm of economic affairs, no significant progress has been recorded, not even stability.

Increasing interest rates are a good way to manage inflation in a developed economy. In my opinion, it is just a patch fix for an economy like Nigeria, but it doesn't really solve the problem in developing countries whose interest rates and inflation rates runs double digits. Just like we discussed earlier, Nigeria's inflation rate is caused by several factors camouflaged under falling exchange rates, even if the falling exchange rates are curtailed temporarily, what happens to the accumulating debts and the high interest rates that will be paid in future? which will increase debt servicing costs and interest payments.

According to Business day, Debt servicing bill gulped 66.9 percent (N5. 79 trillion) of total revenue of N8. 65 trillion in the first nine months of 2023, lower than 99.3 percent (N4. 23 trillion) in the same period of 2022. African nations already expend so much of their revenue on debt servicing. High interest rates and high borrowing costs means that more and more of under privileged countries income will not go to fiscal expenditure (without more borrowing), which is much needed than monetary policy for Nigeria or any other emerging economy to attain the status of a developed Nation.

Meanwhile, High interest rate means life will become harder for the common Nigerian barely earning minimum wage. If you live in Nigeria, you will agree with me that when prices rise they hardly ever go down, maybe not at the rate at which they rose. This is because people don't think that government policies are effective enough to curtail the loses they will encounter by reducing their prices.

Have you ever wondered why the poor and common Nigerian always take to the streets whenever fuel prices rise, it is simply because to them, low fuel prices are the only direct benefit they get as a result of government policies.

The central bank of Nigeria has no doubt done their Job. Meanwhile, the government needs to do much more in fighting corruption by starting with 'themselves', providing security for the masses, Investing in the development of key sectors and boosting the confidence of it's people. Only then can we grow to the stage where we can leverage monetary policies effectively.

Implementing monetary policy measures in an ailing economy is like building sand castles in a beach. when the sea tide blows, everything is washed away and everything starts afresh.

Monetary policies are meant to be a surface fix and not the underlying foundation for a progressive economy. If Nigeria is to grow and develop, more needs to be done besides acting scripts in economic textbooks and juggling the balls of corruption and nepotism.

Else, we will have more Binance executives escaping majestically and bandits posting their revenue (Ransoms) publicly and confidently, not on financial reports but on social media with facial signatures, demonstrating their confidence in the failure of Nigeria's governing structure and systems.