Raising Interest Rates will Spur increase in Nigeria’s Debt Servicing Cost

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Raising interest rates will lead to a “significant increase in debt service and a growth in the fiscal deficit, without the commensurate pump in savings,” Ben Akabueze, director general of the budget office, told an event in Lagos.

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“While the monetary authority is arguing that way, we on the fiscal side say no, we don’t see that this is the likely impact,” Akabueze said.

Nigeria has a debt servicing problem, which consumed almost all of the government budget last year, and Tinubu promised to lower rates while he campaigned for the presidency.

Finance Minister Wale Edun, speaking to Bloomberg Television Wednesday in Davos, offered a more nuanced explanation.

“We have an autonomous central bank, so the instruments of monetary policy – interest rates, money supply – are controlled by them,” he said. “But of course, it is one government and the objectives of the government, whether fiscal or monetary policy, are set by the government itself.”

He said that the need to stabilize the naira and attract foreign investment means “the direction of interest rates, in the short term, naturally is upwards.”

He also said the central bank’s policy committee has typically met every two months “so I’m sure one is imminent. And I’m sure it will be very rich in what it tells investors.”

Still, monetary policy isn’t very effective in Nigeria, a challenge shared by other nations in the region where the share of the population with access to credit is small, muting the impact of policy changes.

“Nigerian is not a credit economy; there are no mortgages, credit cards that will change your behavior when the interest rate goes up,” said Taiwo Oyedele, chairman of the Presidential Fiscal Policy and Tax Reforms Committee.

Steadying the naira means boosting foreign investment to ease a local shortage of dollars, which has contributed to its 46% decline against the US currency since exchange rules were eased in June.

But that means narrowing the gap between inflation and the central bank’s policy rate, which currently stands at more than 10 percentage points. That makes Nigeria’s real, or inflation-adjusted interest rate, deeply negative, discouraging investment.

“There needs to be some level of harmonization between monetary and fiscal,” said Ayodeji Dawodu, //director of fixed income for Central and Eastern Europe, Middle East and Africa// at BancTrust & Co. Investment. “The lack of clarity on policy is a concern.”

Inconsistency between the central bank’s OMO auctions, and the much lower yields offered on government debt auction, is compounding that problem, said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank.

She said that until there is better signalling of monetary policy intent, which an MPC meeting would help, Nigeria is taking the pain of currency liberalization, with the naira weakening to record levels, without the benefits of attracting capital inflows.

“Meaningful monetary tightening is a pre-requisite to the ultimate success of FX liberalization, with all of its long-term economic benefit,” she said. “An MPC meeting would be helpful.”

Godwin Okafor
Godwin Okaforhttps://naija247news.com
Godwin Okafor is a veteran Financial Journalist, Internet Social Entrepreneur, and the visionary Founder of Naija247news Media Limited. With an extensive career spanning over 16 years in financial journalism, Godwin possesses a wealth of experience that seamlessly bridges both traditional and digital media landscapes. His journey in journalism commenced at Business Day, Nigeria, where he laid the foundation for his prolific career. In 2010, Godwin took a bold step by founding Naija247news Media, a platform that has since become a prominent player in delivering timely and accurate news. Educationally, Godwin Okafor holds a Bachelor's degree in Industrial Relations and Personnel Management from the prestigious Lagos State University, Ojo, Lagos. His commitment to continuous learning led him to the Lagos Business School, where he further honed his skills. Additionally, he is recognized as a Fellow of the University of Pennsylvania, having successfully completed the Wharton Seminar for Business Journalists. Throughout his illustrious career, Godwin has earned acclaim by winning numerous journalism awards, a testament to his dedication to excellence in reporting. Beyond his role as a Financial Journalist, Godwin Okafor wears the hat of the Chairman at Emmerich Resources Limited, the publishing entity behind Naija247news. His visionary leadership has played a pivotal role in shaping the media landscape and establishing Naija247news as a trusted source of information. Godwin Okafor's multifaceted expertise, commitment to journalistic integrity, and leadership in the realm of business journalism underscore his influential presence in both the media and entrepreneurial spheres.

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