Nearly 60 days have passed since Bola Ahmed Tinubu became president, and it appears that many Nigerians are grappling with considerable challenges. Throughout his political campaign, Tinubu and his APC party members played to the sentiment of the populace through the slogan “Renewed Hope,” aiming to address the hardships endured over the previous eight years under President Mohammed Buhari.
However, the current economic propositions put forth by Tinubu have drawn sharp criticism from human rights activist and former presidential aspirant Omoyele Sowore, who poignantly describes the government as that of “Renewed Shege”. Translating from Hausa, “Shege” in Nigeria’s urban context signifies suffering, capturing the stark reality of Nigerians amid escalating inflations. Sowore’s statement tersely underscores the prevailing economic challenges and their harsh impact on the people.
In June, Nigeria experienced a significant surge in inflation, reaching a new seven-year high of 22.79%, as reported by the National Bureau of Statistics (NBS). This spike occurred after President Bola Tinubu eliminated fuel subsidies and allowed the currency to weaken before declaring a state of emergency to control staple food costs.
Last month, headline inflation rates in the country were on a consistent upward trend with no signs of abating. Recently, petrol prices skyrocketed to a record high of N617 per litre, fueling concerns that inflation rates may escalate further. Furthermore, the naira’s depreciation against the dollar, reaching N850 at the parallel market, added to anxieties as the demand for the greenback surged.
To control the surging inflation rates, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) recently decided to increase the benchmark rate by 25 basis points, reaching an all-time high of 18.75%. This move came despite the President’s appeal for a reduction in lending rates. In response to the decision, the acting CBN governor, Folashodun Shonubi, offered a defence for the rate hike stating that the need to address inflation and promote economic growth led to the decision to raise interest rates. This measure aims to stabilize inflation expectations, close the negative real interest rate gap, and boost investor confidence.
As interest rates rise, the impacts are not evenly distributed. Entities or individuals who do business in Nigeria can be affected positively or negatively by interest rate hikes.
First, lenders and financial institutions often benefit from interest rate hikes. These entities take the liberty to charge borrowers higher interest on loans, leading to increased profits for the lenders. More so, savings account holders or investors in fixed-income securities like bonds can benefit from higher interest rates. As rates rise, the returns on these investments increase, providing them with higher earnings on their savings.
On the other hand, individuals and businesses with variable-rate loans, such as adjustable-rate mortgages or lines of credit, may see their borrowing costs increase with higher interest rates. That can lead to higher monthly repayments for businesses or consumers, potentially impacting their budgets and spending. Again, higher interest rates can reduce consumer spending as the cost of purchasing high-priced items like houses and cars becomes pretty expensive. That could impact on the overall economic growth.
Secondly, the latest hike in interest rates may attract foreign investors looking for better returns on investments. When a country’s central bank raises interest rates, it makes its bonds and other fixed-income securities more attractive to foreign investors. A higher interest rate means investors can earn a better return on their investments- compared to other countries with lower interest rates. It can lead to an inflow of foreign capital seeking higher yields. Increased rates create a demand for the naira, causing it to appreciate and enabling foreign investors to earn more interest on their deposits in the naira.
Whereas, businesses that greatly depend on borrowing to fund their operations or expansion may be stifled due to high-interest rates. When interest rates go up, it becomes more expensive for businesses to borrow money through loans, bonds, or credit lines. Companies with existing loans tied to variable interest rates will have to pay more in interest. This may impact profitability and potentially lead to a slowdown in scaling and hiring.
In conclusion, the impact of increased interest rates on individuals, businesses, and investors in an economy can be complex and varied depending on where they find themselves.
