How often is investment consumption insensitive to interest rates in Nigeria?

Business | Key Insight 

Nigeria's monetary policy falls short in addressing loan access challenges.

Despite a 48.3% YoY surge in money supply to N107.7 trillion, interest rates remain unsustainable for many Nigerians, fueling economic inequities.

The insensitivity of investment consumption to interest rates in Nigeria has surpassed the term 'alarming.' The Vanguard newspaper, on December 12, 2024, in its business outlet, drew attention to the fact that Nigeria’s broad Money Supply (M²) increased by 48.3 percent year-on-year (YoY) to N107.7 trillion in October 2024, from N72.6 trillion in the corresponding period of 2023. Yet, numerous Nigerians still face challenges in accessing loans and other credit facilities at sustainable interest rates. Nigeria’s inflation rate surged to 33.88% in October 2024, up from 32.70% in September, according to the Consumer Product Index report released by the National Bureau of Statistics, sourced from The Punch newspaper report on November 15, 2024. This already shows the negative effect of a deregulated increase in money supply.

An increase in money supply is supposed to be an effective tool that promotes financial inclusivity, yet the reverse is the case in terms of the Nigerian economy. Why do we always have a reverse? Could it be blamed on institutional frameworks or the fact that the underlying assumptions of the monetary policy tools do not follow suit?

The effectiveness of monetary policy in Nigeria and most other African countries in the world, such as changes in the money supply, depends heavily on the slope of the investment consumption curve. The investment consumption curve represents the relationship between interest rates and output in the goods market. Conversely, the slope of the investment consumption curve in Nigeria or any other African country is determined by how sensitive businesses and households are to changes in interest rates. Thus, enabling me to focus on two measurable points:

1. If households and businesses are highly sensitive to interest rates: A small change in rates due to changes in money supply leads to a large change in borrowing, spending, and investment. This makes the investment consumption curve elastic.

2. If households and businesses are not sensitive to interest rates: A change in rates due to changes in money supply has little effect on borrowing, spending, and investment. This makes the investment consumption curve inelastic.

These two points acknowledged above significantly orchestrate what ought to be the natural pattern when monetary policy tools (such as changes in money supply) are used. However, the influence of the insensitivity of investment consumption to interest rates in Nigeria goes beyond these mere points, as it has to do with the recent lack of confidence by businesses or investors, consumption behavior influenced by future job security, credit constraints, and so on. This invariably leads to the issue where a change (increase/decrease) in money supply is not being matched by an equivalent change in the production of goods and services. It further exacerbates the issue of credit crunch (a situation where banks are risk-averse and prefer to maintain high reserve ratios).

In The Vanguard newspaper of December 12, 2024, it was noted, according to the CBN, that credit to the government increased by 326.5 percent YoY to N40.05 trillion in October 2024, from N9.39 trillion in October 2023. This tells us more about the reason why investment consumption is insensitive to interest rates in Nigeria, as the majority of the increased components of money supply year-on-year are usually used to finance government spending rather than private sector investment. Thus, loans become relatively expensive due to the high demand for money that is considered unavailable, as far as the data reveals, for both businesses and households.

Given the above problems stated, It is imperative that;

1. The Nigerian government strengthens its institutional framework by addressing structural weaknesses in monetary policy implementation through the enhancement of collaborative effort between the Central Bank of Nigeria (CBN) and other financial institutions to improve transparency and efficiency in monetary policy execution.

2. The Nigerian government provides incentives such as government-backed credit guarantees to enhance credit accessibility for businesses and households.

3. The Nigerian government should not only implement consistent policies that boost investor confidence in the economy but should Launch financial literacy programs to educate businesses and households about loan acquisition processes and benefits.

4. The Nigerian government Reduces over-reliance on domestic credit markets for public spending and Explore alternative funding mechanisms, such as foreign direct investment (FDI) and public-private partnerships (PPPs).

 
 

 


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