‘I’m Going Higher, Yes I Am!’ – Interest Rates
Imagine you are in a car, driving down a long, winding road with no clear destination. The road ahead is riddled with bumps, sharp turns, and potholes, making every mile a test of endurance. For Nigerians, this journey mirrors their unending battle with inflation—the ever rising costs of things that make life an uphill struggle. The Central Bank of Nigeria (CBN) has been behind the wheel, attempting to steer us safely through this uncertain terrain. This week, they pressed the accelerator again, raising the benchmark interest rate to 27.5% to regain control over rising inflation. Why did CBN increase the rate again? CBN Governor Yemi Cardoso announced that the Monetary Policy Committee (MPC) unanimously agreed to hike interest rates. The decision comes as inflation continues its relentless climb—not just year-on-year, but month-on-month as well. In October, inflation soared to 33.9%, a level not seen since 1996. This price surge is mainly due to rising costs of food and fuel, coupled with a depreciating naira, which together are straining household budgets and squeezing business operations for many Nigerians. At the same time, the naira has struggled this year, losing 46% of its value against the dollar. This depreciation comes from efforts to let the currency float freely and address the ongoing dollar shortage. As a result, the cost of imports has soared, adding to Nigeria’s inflation problems. But they have been increasing rates. Why is inflation still going up? Despite the CBN’s repeated interest rate hikes, inflation in Nigeria continues to rise, and the naira remains under pressure. This raises a pressing question: why isn’t it working? Raising interest rates is a classic tool for controlling inflation, but it’s only one piece of a larger puzzle. By making borrowing costlier, the CBN aims to reduce spending and cool demand. However, Nigeria’s inflation is deeply rooted in structural problems that extend far beyond consumer behavior—problems that interest rate hikes alone can’t fix. The core problem is supply-side inflation, which is driving up the cost of living, particularly in essential areas like food and fuel. Much of Nigeria’s inflation is tied to rising food prices, which continue to climb sharply. Food inflation is particularly severe in urban areas, where supply chains are under more strain due to higher transportation costs and challenges in food preservation. As food gets more expensive in cities, the burden on consumers grows heavier. To truly tackle inflation, the CBN’s monetary policy must work hand-in-hand with solutions targeting these underlying challenges. Key issues like the high cost of production—caused by a weakened naira, soaring fuel prices, and poor infrastructure—are making it more expensive for businesses to produce and transport goods. These structural problems cannot be solved by interest rate hikes alone, underscoring the need for broader, more comprehensive reforms. What does this mean for you? For most Nigerians, this means that the cost of living will remain high for the foreseeable future. With interest rates increasing, borrowing costs will increase, making loans and credit more expensive. While higher interest rates can lead to better returns on savings, inflation is still outpacing the benefits. This means the naira in your pocket is losing its purchasing power daily, especially for food and fuel.
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A decline in remittance inflows
According to the Central Bank of Nigeria’s (CBN) international payment data, remittances in the first nine months of 2024, amounted to $1.54 billion, a 16.7% decline from $1.85 billion recorded in the same period in 2023. Remittances refer to amounts sent by individuals working abroad to support their families and loved ones in their home country. The decline in remittances may be attributed to several factors, including a weak global economy, and a weak domestic currency. Over the last decade, remittance inflows played an important role in the Nigerian economy. Remittances help households with members in a foreign country to meet basic expenses such as education and healthcare. It is also an important source of foreign currencies and contributes to the country’s foreign exchange reserves. Beyond substistence purposes, remittances are also channels into productive investments, in turn, bolstering economic growth. While the government might have limited influence on the global economy, government policies aimed at improving the domestic business environments could help reverse the declining trend of remittances.
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Headline inflation rose to 33.88%
According to the National Bureau of Statistics (NBS) Consumer Price Index (CPI) and Inflation Report for October, headline inflation increased to 33.88%, from 32.70% in September, and 27.33% a year ago. The headline inflation surged due to rising food prices for commodities such as guinea corn, rice, and maize grains. Food inflation increased to 39.16% from 37.77% in September and 31.52% in October 2023.  At the state level, Bauchi recorded the highest inflation rate at 46.68%, while Katsina had the lowest at 29.59%. Sokoto had the highest food inflation at 52.18%, while Rivers had the lowest at 33.87%. The continuous rise in inflation could further worsen already weakened purchasing power. Unchecked high inflation might result in social unrest, as more Nigerians are unable to afford essential items they could buy a year ago. Hence, the government must tackle inflation head-on. Food inflation can be reduced by addressing security concerns, increasing agricultural productivity and reducing post-harvest losses arising from poor storage infrastructure and weak transport networks.
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Average Capacity Utilisation decreased to 51%
According to the Central Bank of Nigeria’s October 2024 Business Confidence Survey, average capacity utilization fell by 4.3 percentage points to 51% down from 55.3% in the previous month. Each sector of the economy exhibited varying levels capacity utilization. Mining and quarrying, electricity, gas, and water supplies had the highest levels of utilization in October at 57%, followed by manufacturing at 52%. Compared to the average installed capacity of 51%, the agriculture sector reported the lowest level of utilization at 48%, suggesting there is room to increase the sector output. The low level of utilization is partly due to high interest rates, insecurity, complex tax structures, and inflation. These factors have all contributed to a less advantageous business environment, resulting in lower capacity utilization. Declined capacity utilisation signals a negative consequence on the economy which could result in output levels below potential and low export volumes. Low capacity utilization posits a challenge to the aspiration of the government to achieve a $1 trillion economy by 2030. Hence, the government needs to address the insecurity issue, prioritize infrastructure development and maintenance, lower the interest rate, and improve the efficiency of energy sources and alternatives.
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