Borrowing rates

Businesses and startups brace for impact as borrowing rates rise in Nigeria

Nigeria’s central bank raised interest rates by 150 basis points to 15.5%. The move, its biggest increase since the measure was passed in 2006, is the country’s apex bank’s attempt to rein in devastating inflation and the rapid depreciation of the local currency.

This decision to raise the rate to 15.5% from 14% was announced on Tuesday afternoon during the meeting of the Monetary Policy Committee (MPC) held in Abuja, the country’s capital.

“Inflation over the past four months has been rising aggressively. It’s hard for us not to take the aggressive path that we have today. That’s the best option right now,” said the central bank governor Godwin Emefiele, quoted by journalists.

Annual inflation in August was 20.5%, its highest level in 17 years. The naira, the country’s currency, is also fighting a losing battle against the dollar, and its value is at an all-time low in official and parallel markets. Falling currency value, rising commodity prices following Russia’s invasion of Ukraine, and steadily rising interest rates lead to higher prices for imported goods.

The apex bank also announced it would increase the cash reserve ratio – the percentage of a lender’s deposit held by the regulator – to 32.5% from 27.5%. It will reduce cash flow in the economy and threatens to make it harder for businesses to borrow money, as it will reduce the money banks have to borrow from. Combined with rising interest rates, this also means that the cost of borrowing will rise as banks pass on higher costs to individuals and businesses. That’s the goal, because it will help curb inflation.

Nigeria has joined other emerging economies that have raised interest rates this year to protect their currency from the dollar and reduce pressure on prices, which stokes inflation. Ghana raised its interest rate to 22% last month. In July, South Africa had raised its rate to 5.5%, its highest rate in 20 years. Other emerging markets such as Brazil and Mexico have raised interest rates since last year.

In July, the MPC predicted that the country’s $450 billion economy would grow 3.3%.

The country’s business and startup owners will struggle to cope with rising inflation, rising borrowing rates and rapid currency depreciation as the ease of doing business deteriorates in Africa’s largest economy.

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