In a move to check galloping inflation, the Central Bank of Nigeria (CBN) at its recent Monetary Policy Committee (MPC) meeting in Abuja, raised the benchmark lending rate to 24.7 per cent. When inflation rate increased to 31.7 per cent in February, the CBN hiked interest rate by 400 basis points to 22.75 per cent. The CBN Governor Olayemi Cardoso, who disclosed the key decisions taken at the MPC meeting, also said the bank retained the Cash Reserve Ratio (CRR) of commercial banks at 45 per cent, and adjusted the CRR of Merchant banks to 14 per cent and left the liquidity ratio at 30 per cent.
Apart from bringing inflationary pressures under control, the move underscores the CBN’s objective of ensuring sustained rate stability in the economy. The new measure is reportedly informed by economic data and market analysis to ensure price stability. Expectedly, the CBN’s decision to hike interest rate has elicited varied reactions, with many policy experts, including organised private sector, expressing concerns that the new lending rate will not achieve the intended objectives. They contended that it would lead to hike in inflation, massive job cuts in the productive sector, especially the manufacturing and other sectors that rely on bank loans for their operations and worsen the economic situation.
It will also increase lending costs, which will also affect manufacturing and economic growth. Last year, the Manufacturers Association of Nigeria (MAN) lamented that its members borrowed N1.8trillion from banks in the first half of 2023 to remain in business. There are also indications that the new measure will favour foreign portfolio investors. The International Monetary Fund (IMF) has endorsed the new hike in interest rate. Earlier, it had advised the monetary authority to raise interest rate above the present rate to tame inflation. It is not certain if the new move is taken from the IMF. On December 9, 2023, the Fund’s Director of Communication, Julie Kozack, had noted that CBN’s policy of mopping up excess liquidity from the system had contributed to the nation’s soaring inflation. Without doubt, the high inflation has been driven largely by rising food prices. Even if the new measure favours foreign portfolio investors, the CBN has not addressed the operational bottlenecks, which have dampened foreign investors’ participation in the economy. Therefore, the CBN should exercise utmost caution in formulating crucial monetary policy reforms, especially if tailored to favour foreign investors. While we welcome concrete policy measures that will reduce inflation, especially with CBN recent assurance to bring down inflation to 21 per cent by year end, we should not lose sight of making our business environment attractive to both domestic and external investors.
The IMF has projected a GDP growth of 3.2 per cent for Nigeria this year. The forecast is basically anchored on improved oil production and the expectation of a better harvest in the later part of the year. But to realise this, the foreign exchange market must be stable. The food insecurity must be addressed and the exchange rate must be stable and predictable. These are some of the headwinds the CBN must tackle in addition to taming the rising inflation.
The concerns of the organised private sector that raising MPR may worsen access to credit, and could cause a decline in the competitiveness of the manufacturing sector should not be waved aside.. The new policy will also exacerbate the high cost of doing business and worsen the competitiveness of Nigerian products in the global market. This is already evident in the poor demand of our products in the international market.
According to the World Trade Organisation(WTO), in 2022, while South Africa’s manufacturing export value was $46billion, that of Nigeria was $3billion. This is 15 times greater than Nigeria’s export value for the same period. Similarly, the National Bureau of Statistics (NBS) report confirmed that Nigeria’s export value plummeted by 166 per cent from N2.07trillion in 2019 to N778.44billion in 2023. Therefore, the exorbitant lending rate announced by the CBN in recent years is said to have contributed to a sharp decline in the share of export to non-oil exports from 82.4 per cent to 24.8 per cent in 2019 and 2023, respectively.
The latest hike in the monetary policy rate will likely worsen the situation. Besides, it will increase the volume of the non-performing loans of banks, thereby leading to high cost of servicing loans. This may pose a threat to financial stability of the manufacturing companies, disruption of production value chain and low capacity utilisation. Last year, MAN said about 776 companies in the country closed shop due to rising operational costs. In all, the CBN should weigh the impact of the new policy on the economy.