As inflationary pressures ease and economic growth slowly recovers, it remains a matter of ‘when, not if’ the Central Bank of Nigeria will raise interest rates in 2022.
Other central banks have already joined the global tightening train in 2021 including South Africa, New Zealand, and Brazil among many others. With inflation across the globe rising in the face of supply chain disruptions, higher energy prices, and improving consumer demand, financial conditions are set to tighten as more central banks take action.
As this era of easy money comes to an end, this certainly does not bode well for emerging markets – especially those with higher dollar-denominated debt. Tighter policy in developed economies certainly remains one of the biggest risks to the outlook for emerging markets. When considering how Nigeria’s total public debt stood at $87.24 billion earlier this year, this is a theme that must not be overlooked in the new year.
Market expectations remain elevated over the Federal Reserve speeding up tapering and re-evaluating the timings of future interest rate hikes. There is a risk of a potential domino effect with the Fed’s eventual rate hike accelerating the shift towards monetary tightening across the globe. Traders are currently pricing in a 72% probability of at least one rate hike by early May 2022 and a 100% probability by mid-June next year. This comes after the U.S. consumer price index for November jumped 6.8% year-on-year, overtaking the 6.2% increase in October which was the highest level seen since 1982.
For Nigeria, the question remains whether higher interest rates are the right medication for the country’s ongoing illness. Higher interest rates may support the Naira and control inflation which fell for the seventh straight month in October. However, such a move could also discourage business investment and consumption at a time where the country remains on a fragile road to recovery. So, the question is whether the CBN will raise rates to help the Naira or raise rates to prevent from being behind the curve. Whatever the decision, it will certainly have an impact on Nigeria’s economy which is projected to expand 2.7% in 2021, according to the International Monetary Fund (IMF).
Looking beyond monetary policy, other themes that are likely to impact Nigeria’s growth revolves around oil prices and the Omicron menace. Oil prices recently secured their biggest weekly gain since August despite ongoing uncertainty revolving around the Omicron variant. WTI and Brent are both up over 45% since the start of 2021. However, expectations around oil markets returning to oversupply in the coming months may cap upside gains.
With the Omicron variant threatening global demand and OPEC+ moving ahead with its planned January oil output rise of 400,000 bpd, oil remains vulnerable to downside losses. Given how a handsome chunk of Nigeria’s export earnings and government revenues are sourced from oil sales, falling oil prices could threaten the country’s economic outlook.
In regards to Covid-19, Omicron cases are rising with the United Kingdom banning travel from Nigeria. Other countries have taken similar steps in an effort to contain the more contagious variant. While it may be early to gauge the economic impacts, it may be wise to keep a close eye on how this will impact relations moving into 2022.
Nevertheless, the threat of new Covid-19 variants remains a major risk that could derail the global economic recovery. It’s worth keeping in mind that the pace of vaccine rollouts was the main driver behind the positive economic forecasts. However, the risk of more aggressive vaccine-resistance Covid-19 variants poses a serious risk to developed and developing economies. It will be interesting to see how Nigeria fares in 2022 as it juggles domestic and external risks.
* Otunuga is Senior Research Analyst at FXTM