I read with nostalgia the inflation report of our west African neighbour, Ghana, which has seen headline inflation ratchet up from a single digit of 9.7 per cent in August 2021 to a historic high of 33.9 per cent in August 2022, just one year later. It is sickening to see this astronomical erosion in purchasing power in a country where most of the people, just like Nigerians, are barely living above the poverty line.
The country’s currency, cedi, has been awarded the worst-performing currency on the continent, having lost over 45 per cent of its value year-to-date, when benchmarked to the United States dollar. Like most policymakers in Africa, the Bank of Ghana has been under pressure, with perhaps some confusion on how to address the challenge. It has raised the country’s benchmark interest rate to 22 per cent and increased the yield on government bonds and treasuries, with the 182-day sovereign treasury bill sold at a yield of 31.3 per cent.
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So, the interest rate is on the roof, and banks are not even interested in lending money to any business any longer, not to talk about giving loans to individuals. Of course, blame not the banks, when the government borrows money for a 6-month tenor at 31.2%, what would be the appropriate lending rate to a small business or an individual for the same duration? Perhaps that would be anything in excess of 40% and you still can’t say that is enough premium to take on such risk at a time when the economy is in a state of quagmire and policymakers are merely just following the orthodox practice of raising the interest rate in the expectation that such would attract foreign portfolio investments into the country and thus dampen the pressure on the currency.
Unfortunately, the interest rate is not a magic wand and there are conditions precedents for such policy to work. Unfortunately, those factors are nonexistent in Ghana now, so if you see the governor of the Bank of Ghana, tell him, raising the interest rate is good to address the country’s challenge, but that is only ceteris paribus, although all things are not equal in that country at the moment.
Ghana is not alone. The Francophone African nations which have enjoyed low inflation rates are now seeing a fast rise in prices of consumer and producer goods. Indeed, the XOF and the XAF, popularly known as CFA, have seen steady depreciation this year. You may be wondering what went wrong. Like Nokia CEO once said, “They did nothing wrong,” but their offense is that they left their fate to the euro. Yes, it came with great benefits when the euro was strong and stable, but with the obstinate weakness of the euro over the past year, it’s not Eldorado in the 14 Francophone African countries that adopted euro as the peg for their currency.
Incidentally, the French followers do not also seem to know of a solution. Some say it is late to unwind the peg because it would come with great consequences, while others say it is better to maintain the status quo and absorb the shock, even as many think political independence should include economic sovereignty. That’s a story for another day. Let’s just hope that the decision makers take the right course that minimises the burden to the masses, as many of the affluent Africans are immune to the vagaries of their decisions, and maybe that is why they think and care less about the consequences.
So, like the female African elephant, “cow”, Nigeria is not alone. August headline inflation rose to 20.5 per cent after hitting 19.64 in July, and the naira has been under pressure in both the official and parallel markets. Having jerked up the policy rate by a cumulative 250 basis points to 14 per cent, the Monetary Policy Committee perhaps should have explored other measures to tame the inflation and exchange rate pressure. Rather, tempted by the largely structurally induced inflationary pressure and exchange rate volatilities the MPC hiked the policy rate by another 150bps to 15.5 per cent, a new high which may hurt not only the banking sector but the overall economy.
Indeed, raising the interest rate to attract foreign portfolio investments at this time is perhaps a disservice to the country, as very few, if any, foreign investors would take an uncovered new gamble on naira-denominated assets at this time. Yet, the higher rate may still not stop speculators from hoarding foreign currency as a store of value and asset class for investment purposes. So, what purpose would the elevated interest rate serve in an economy where household consumption is not influenced by credit because that pass-through mechanism is non-existent in Nigeria, given the low credit penetration?
The odds are high as the rising election risk exacerbate concerns for further Naira depreciation or an outright devaluation, especially as the scarcity of foreign currency and the wide gap between the official and parallel market speaks volume of the bottled pressure in the current FX management approach, which like many have expressed, is not a sustainable model. With rates on government bonds rising and the Debt Management Office doing its job of raising debt to finance recurrent expenditure in the name of budget deficit, the government would soon get to a stage where even the annual revenue won’t be enough to pay interest on debt obligations, not to say of redeeming the principal.
If the dynamics of this month’s bond auction is anything to go by, if things are not well managed, we are heading for another season of high teens in sovereign yields. This is not to say it would be as bad as Ghana, but we should be mindful of the consequences. The legislators are passing bills to establish more MDAs as if that is the only thing they can do to justify their implicit and explicit jumbo packages, constitutional and perhaps otherwise. They seem neither to have clues about the rationality of their actions nor the priorities of the country.
I just like to say that the policymakers should be conscious that the choices they made for us in the past define our present, and today’s policy decisions would determine where we would be tomorrow. History is neither wise nor foolish; it only says what people were and wished for!
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