The Monetary Policy Committee (MPC) of Egypt on 18th March 2021, held the deposit rate at 8.25% and the lending rate at 9.25% which maintains its position as the world’s highest real interest rate. The MPC rationale was that “Global economic and financial conditions are expected to remain accommodative and supportive of economic activity over the medium term.”
Egypt’s attractive yields and a stable currency have made them the most preferred option for foreign investors aiming for emerging markets. Egypt’s Treasury bills and bonds reached $28.5 billion at the end of February, the highest ever recorded. The appetite for this security was driven by the high real interest rate, which is second only to Vietnam.
However, Egypt’s high real interest is an upspring of combating inflation as far back as 5 years ago. The success of Egypt’s MPC policies may seem attractive to emerging economies like Nigeria but there may be some associated negative impact, which some economist view as a necessary evil to propel growth.
Popularly known as the ‘Volcker effect’, increasing interest rates would lead to a recession initially, and reduce inflation massively, eventually leading to stable prices and a growing economy as seen in the economies like the United States in the 1980s and Egypt’s interest rate hike in 2016.
Other economists mostly from the structuralist school of thought believe that this policy would only cause more harm than good in Nigeria.
In a chat with Nairametrics, Dr. Ifeoluwa Israel Ogunrinola, lecturer of Economics at Covenant University, Ota, Ogun State postulates that with the Egyptian central bank’s decision to maintain her current high-interest rate, the economy is set to take full advantage of the supply-side policy to avoid a further spike in prices to achieve its planned inflation target of 7% at +/- 2 basis points in the fourth quarter of 2022.
He said, “Egypt’s current annual inflation stands at 4.5% which is a 0.2%increase from the former 4.3% recorded in February, 2021. While this current rate competes favourably with the targeted rate, Egypt’s central bank hopes that the high-interest rate regime will attract more foreign investments into her local debt market and that currently, restrained demand due to the covid-19 pandemic could help keep rising prices checked.”
He added that the fundamental lessons Nigerians can learn from the Egyptian story are; to keep the supply-side policy active, and also increase access to FX. This will help boost the purchasing power of the naira. Furthermore, the Current MPR stands at 11.5%. Either maintain this rate to avoid aggregate contraction or reduce the rate to keep at par with inflation target (single-digit inflation).
Dr. Ogunrinola also believes that keeping inflation low in Nigeria rests on the government’s ability to stabilize upward pressure on the FX.
“With imported inflation currently being experienced, attendant overvaluation of the naira under a tightly managed multiple FX window further misaligns the domestic currency relative to its fundamentals. With current inflation standing at 17.3 percent, a protracted FX restriction will further weigh down on the value of the naira while the current account deficit worsens and international reserves remain strained.
“Consequently, a bleak outlook is perceived for FDI and FPI inflows as international investor confidence is not guaranteed; production is hampered and inflation will further rise. Possible (short-term) solutions are; Unify the FX windows as recommended by the IMF, weigh heavily on round-tripping and unhealthy arbitraging activities within the FX space, take advantage of rising oil prices to boost oil revenue,” he added.
Nigeria’s central bank mentioned in one of its monetary policy committee communique that it was abandoning fighting inflation with monetary policies, citing supply-side constraints such as insecurity, social unrest, logistic gridlocks as the major factors contributing to the galloping inflation rate. In addition, the recent hike in electricity prices and the call for the removal of fuel subsidies are also major factors out of the hands of the CBN that are weighing on inflation.
Outlook
- Inflationary concerns may have a significant impact on the Nigerian economy as unemployment only affects a fraction of the population while rising prices affect everyone.
- Looming stagflation as Fitch Ratings raised concerns about CBN’s N13.2 trillion funding of Government expenditure.
- Low rates may be unaffected for portfolio investors but entail the capacity to spur real growth.
