Nigerians must have received with a sigh of relief the announcement by the Central Bank of Nigeria (CBN) that it would soon begin to slow down on its interest rate hikes. In its pursuit of a tight monetary policy stance, the bank has raised its key benchmark interest rate-the Monetary Policy Rate-by a whopping 750 basis points this year: 400bps in February; 200bps in March; and 150bps in May. These have taken the rate to 26.25 per cent.

While the CBN hinted at the possibility of loosening the current tight stance “soon”, it nonetheless defended the policy measures it has implemented since the beginning of the year. This stance, the central bank has repeatedly said, is imperative if the current inflationary spiral in the country is to be tamed and prevented from transforming into hyperinflation. Its Monetary Policy Committee (MPC), the organ responsible for interest rate decisions, meets again later this month.

The rise in the MPR has elicited concerns from different segments of the country, from industrialists to farmers and small-scale entrepreneurs, whose businesses have been hamstrung by the cost of finance. With the MPR at its current level, effective rates at which businesses can access bank credit have risen as high as 30 per cent, a cost that very few companies can borrow at and still be profitable. Even Alhaji Aliko Dangote, Africa’s richest man, and Nigeria’s leading industrialist recently raised the alarm over the harmful effects of the high-interest environment hoisted on the economy. Dangote argued that the high interest rates will hurt economic growth and inhibit job creation.

There is a critical need to protect industries in the face of the current economic decline. If companies cannot operate profitably, then there is no basis for them to venture into any business in the first place. This is, especially so because interest costs are just part of the myriad of costs facing businesses in the country. The inflation rate is 34.19 per cent, and the country’s naira has lost over 70 per cent of its value in the last year. The astronomical rise in the inflation rate and the steep depreciation of the naira followed the removal of petroleum subsidies and the flotation of the naira. These measures formed the pillars of the present administration’s economic reforms, designed to improve the performance of the economy.

Therefore, pursuing such a tight monetary policy stance without taking cognisance of the above background begs the question of realism in the policy milieu. The CBN cannot continue with its obsession with the monetary approach to inflation control when it is clear that Nigeria is suffering from more of a structural inflation than a monetary phenomenon.

Factors that push a country to hike interest rates are obvious, and they include the need to reduce or halt currency depreciation, as part of the monetary policy. But this has become an example of the one-cap-fits-all approach to economic management, often advocated by the international financial institutions, notably the World Bank and the International Monetary Fund (IMF).

Today, the MPR is high partly because of the policy to raise it to match the inflation rate. In its reports on the Nigerian economy earlier this year, the IMF recommended a continued hike in interest rates until it exceeded the inflation rate for savers and investors to achieve positive real rates. This stance, as theoretically sound as it is, is ineffective in curbing inflation, especially when it is clear that the problem of inflation is caused by other factors, in addition to just monetary issues. In practice, such an approach does not work in Nigeria, and we know the reasons. Inflation in our country is a function of the failure of production generally, and especially in the agricultural sector. A clear indication of this is the rise of food inflation to as high as 40.66 per cent in May. There is no amount of interest rate hike that will bring down food prices without an increase in food production.

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