Nigeria’s Economy Too Fragile to Accommodate Rate Hike –Analysts

Nigeria’s Economy Too Fragile to Accommodate Rate Hike –Analysts

With worsening macroeconomic indicators, Nigeria’s economy has been considered relatively weak to accommodate interest rate hikes in the financial year 2023. In its last policy committee, the Central Bank of Nigeria (CBN) raised the benchmark interest rate to 18.75%.

Overall, in an effort to fight inflation, the monetary policy has increased the rate by 725 basis points cumulatively.  Unstable price levels and a steep unemployment rate with accelerating lending rates have been noted as downsides to industrial growth.

Nigeria’s gross domestic product (GDP) growth has been projected to taper in 2023 as the Central Bank (CBN) raised the benchmark interest rate as a tool to fight rising headline inflation.

In a very similar pattern, the CBN and United States (US) Federal Reserve interest rate hikes have been following a similar pattern. According to analysts, this is to make Africa’s largest nation competitive in attracting foreign investors, an expectation backed by exchange rate reform.

There have been heavy, strong, and sustained flights to a safe haven due unattractiveness of return on the naira assets. In their respective views, analysts agreed that money goes to where it is treated well.

In Nigeria, higher interest rate hike is putting pressure on production, and financing costs. The apex bank switched to monetary tightening last year in line with global developments.

The monetary policy rate, the benchmark interest rate has been adjusted upward by 700 basis points 18.50% without achieving inflation fighting result.

According to analysts, an increase in monetary supply in the Nigerian economy makes a good case for another rate hike; but forex and subsidy pressures would worsen key macroeconomic indicators throughout the second half of 2023.

Interest rate is expected to rise further by another 50 basis points before a hold regime, Jimoh Abubakar, Group Managing Director, TrustBanc Financial Group predicted in the first quarter of 2023.

The CBN has been faced with criticism from economists, and analysts over its monetary policy tightening as the fight against accelerating inflation rate gets dirty.

Recall that the monetary policy committee began a journey into interest rate hikes in May 2022, a contraction approach that analysts feel has failed to solve pressures associated with the consumer price index.

With claims that the US banking crisis was spurred by the Fed’s hawkish tone, analysts have expressed a divergent view about the possibility that CBN will stop pushing rates higher and allow inflation to fly.

TrustBanc Financial Group GMD said that based on current developments, this is not a systemic contagion that will filter into Nigeria, the world is not in a banking crisis.

“Rather, what we have seen is that the banks in recent headlines had risk management issues with their traditional assets, and rapidly rising rates exposed those weaknesses”.

Ratings agencies’ reports showed that Nigerian banks are not really exposed to shake-ups in the US banking sector. Then, the decision to float rate came and some analysts believe that some local lenders may experience a decline in capital ratio.

With the June inflation print of 22.79%, the CBN may intensify efforts to rein in the accelerating consumer price index, which is about to quadruple its inflation targeting rate of 6% – in the lower band, and 9% in the higher range.

After CBN serial interest rate hikes, the gap between the inflation reading and the monetary policy rate adjusted. Speaking about what this means for the market, TrustBanc Capital’s chief said the gaps help with insights on real returns.

MarketForces Africa reported that negative real return has increased with an inflation rate of 22.79% and a benchmark interest rate of 18.5%.  The trend suggests that the CBN could increase policy rate in July meeting so far inflation continues to maintain an upward trend”.

TrustBanc Capital GMD Abubakar said CBN’s MPC decisions are partly driven by US rate hikes.

“The moment Fed started increasing interest rates in March 2022, MPC immediately changed tone and joined the rake hike train at its next meeting in May 2022 when Nigeria’s inflation rate was less than 18%”, Abubakar added.

“…pause to the hawkish mode will likely coincide with when Fed stops hiking”, Abubakar told MarketForces Africa.

On the exchange rate, TrustBanc Chief said the exchange rate projection for 2023 hangs on stronger oil production, subsidy removal, and improved intervention in the foreign exchange market.

While other industries are expected to be affected significantly by changing market dynamics, analysts reveal that higher interest rates will support banks’ earnings in 2023.

Some banks recently told customers they have started factoring increased rates into transactions- both deposits and lending sides. For Nigerian deposit money banks’ balance sheets, analysts noted that there are both ups and downsides to higher inflation, interest, and FX rate movements.

Explaining, TrustBanc Chief said higher interest rates tend to favour banks in the short run because of their capacity to expand their margins as rates go up. He also added that higher foreign exchange rates and devaluation are typically favourable to banks with net FX assets, saying this is usually the case for Tier-1 banks.

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