As interest rate rises, who would create jobs for the youths?

Just when everyone expects to breathe fresh air, with a sigh of relief from the pandemic pressures, a new crisis seems to be emerging and this time, it’s not anything medical. Rather, it’s about the financial health of people, businesses, and governments. Raging like COVID, with a strong contagion, it’s an economic crisis that is […]

Just when everyone expects to breathe fresh air, with a sigh of relief from the pandemic pressures, a new crisis seems to be emerging and this time, it’s not anything medical. Rather, it’s about the financial health of people, businesses, and governments. Raging like COVID, with a strong contagion, it’s an economic crisis that is threatening to trigger a new world order. Some governments and economists blame it on Russia’s invasion of Ukraine, which has disrupted grain and energy supplies. But the intensity and structure of the inflationary pressures around the world are more than what this theory can explain.

The prices of energy, and consequently food and all basic necessities continue to skyrocket, with inflation hitting new record decade-highs in the United States, United Kingdom, Canada, and elsewhere across the globe. From the Americas to Europe, Africa, and many parts of Asia, inflationary pressures are eroding purchasing power and denting standards of living. Workers in both developed and developing markets are agitating for increases in wages and salaries, even as governments are broke and corporate earnings are under pressure, as operating costs balloon.

 In fragile markets like Ghana, the agitations are fast mutating into days of protests, a development which many say may evolve into Ghanaian’s own version of #EndSars as the social unrest heightens, with protesters, who initially kept to court limits crossing the boundaries and getting into squabbles with the police. Some say this may be another “Arab Spring” and this time, it may rage more in West Africa and perhaps America and some European countries, where new songs are being chorused in the polity, as many think the government could have done better to avoid current calamity.

It’s increasingly hard for an average Briton to pay rent, even as the government dishes out subsidies to the low-income earners. Canadians are screaming about the cost of groceries and the general cost of living just as many Americans are saying they have never had it tougher in their adulthood. Nigerians are prayerful and resilient, but the decay is apparent in the rising insecurity across the country, as many million jobless youths become devil’s workshop, taking up arms and becoming brigands for kidnapping, banditry, terrorist recruits, and all sorts of criminal ventures.

The average Nigerian is no longer safe anywhere and nowhere is safe for the average Nigerian, except for the politicians and their cronies who think they are exempt from the menace because they live in fortresses manned by the limited security forces the country can afford. After all, you can find more sophisticated weapons with the escorts and guards of our politicians and rent-seekers than you would find in many police stations and barracks.

Interestingly, as prices of goods rise, with the threat of even the worse to come, monetary policy authorities seem to have run out of options and the only bullet left in their guns is an interest rate hike. Many central banks have raised interest rates to new highs, some back to pre-COVID levels, with indications that they would tighten even further, all in a bid to stem the rising inflationary pressure. Indeed, about 60 central banks have jerked up their benchmark interest rates in the past six months. However, it seems illogical that as prices of goods rise and people’s purchasing power is being eroded, policy authorities are withdrawing their support to households and businesses; hence it’s a double whammy.

At a time when people’s income can no longer keep them afloat, the central banks are hiking interest rates and causing the cost of borrowing to spike, a policy that further takes away money from households and compresses their disposable income. Yes, policy authorities are not stupid and the expectations are simple: as the interest rate rises, the money supply would fall, and demand for goods would fall, so prices would fall. Unfortunately, this may not be true for many economies because the rise in prices isn’t caused by increased demand; rather it is triggered by supply shortages. So, how do we treat cost-push inflation with a demand-pull solution?

Interestingly, the Monetary Policy Committee in Nigeria joined the frenzy at its May 23 and 24 meeting where the Central Bank Governor, Godwin Emefiele, noted: “Whilst it may seem contradictory to raise rates in the face of fragile growth, it is a dilemma that most central banks around the world today are grappling with at this time…On balance, it is quite clear and compelling that attacking inflation is more urgent in the sequence of policy objectives in this regard.”

So, the policy authority knows it is hurting to see the interest rate rise at this time when it is needed the most, but seems to be stuck between a rock and a hard surface. Yes, simple classical theory supports the decision of the MPC to hike interest rate but Nigeria’s current situation would not improve with the use of orthodox measures at this time when unemployment is at an all-time high. Half of the Nigerian youths are jobless and perhaps another one-third are underemployed, thus vulnerable to becoming a “devil’s workshop”. How will the government cope when it has to pay higher interest rates on its debt, which is already a major burden undermining the ability of the government to finance infrastructure development.

Of course, as interest rate rises, businesses find it more expensive and less attractive to borrow to expand their operations and new entrepreneurs get shut out of the opportunity to borrow. Many Nigerians, who were gradually accessing loans to finance household equipment and other necessities, are now being denied the opportunity to finance their demand. Yes, consumer demand would further wane, as people have no option but to adjust to the reality of low income, and high prices.

And so, companies should brace up for low sales and of course, they would not be shy to lay off staff as they reduce production to align with the realities of lower demand for their products. So, where would the jobs come from? Who would create the jobs for our youths, and how do we get them off the streets and idleness and put them to productive use? It’s a chicken-and-egg situation. You either oil the economy and channel monies toward productive activities to support demand and at the same time stimulate the supply of goods, or you shut down the economy with stagflation and we face the scary consequences of harsher social unrest and insecurity.

It’s really a difficult situation for policymakers but definitely, the latter is not a pleasant option. When we provide stimulus in whatever form, let us ensure it is targeted at productive activities, and when it is for consumption, let us ensure it is transparent and targeted at the low-income earners. A common pitfall of most stimulus programmes in Nigeria, be it fiscal or monetary, is that it is hijacked by a few elites, who make a mess of the programme and loot the best part of it.

The monetary policy committee does not only need to rethink its proclivity for rate hikes, but also think out of the box to carry out uncommon reforms needed to create jobs and stimulate demand from the bottom!