The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has again raised the Monetary Policy Rate (MPR) by 150 basis points to 26.25 per cent from the previous 24.5 percent. With a higher MPR, the banks will charge higher rate on loans to cover costs. The CBN governor, Olayemi Cardoso, said the new MPR will tame inflation and achieve price stability. The headline inflation for June was 34.19 per cent, the highest since March 1996, according to the National Bureau of Statistics (NBS). The inflation rate for July, expected anytime soon, may even surpass the June inflation figure.
Apart from reducing inflationary pressures, the MPC decision, according to Cardoso, is based on the expectation that efforts to create a stable foreign exchange market will yield the needed results in the coming months. However, the hike in interest rate has not yielded the desired results. Instead, it has led to the closure of many manufacturing firms with its attendant job losses and low profitability. Expectedly, the latest hike in interest rate has elicited reactions. Consequently, some experts have enjoined the monetary authority to review some of its key monetary policies, especially the hike in interest rate.
They opined that the new lending rate may not achieve the desired objective with rising inflation. Besides massive job cuts in the productive sector of the economy that relies heavily on bank loans for their funding needs, other business services are groaning under higher interest rates charged by banks.
The Manufacturers Association of Nigeria (MAN) and the Lagos Chamber of Commerce and Industry (LCCI) have bemoaned the continuous hike in MPR by the CBN. Unfortunately, the frequent hikes in the last two years, from 11.5 per cent in May 2022 to 26.25 per cent in May 2024, has worsened inflation rate rather than tame it. Contrary to the claims by the CBN governor the economy had witnessed a surge in foreign investment inflows, the NBS figures indicated that manufacturing investments declined significantly in the second quarter (Q2) 2024. The drop in foreign investment underscores the critical linkage between domestic investment and foreign investors’ confidence in the economy.
For instance, in the first half of 2023, MAN said its members borrowed about N1.8trillion from banks at a staggering interest rate in order to remain in business. Undoubtedly, the latest interest rate is bound to constrain the growth of the manufacturing sector and worsen the purchasing power of consumers, production levels and competitiveness. Sales are already facing serious decline. In the face of rising energy cost, unstable forex rates and associated borrowing costs, running businesses in the country has become very challenging.
This will escalate production cost and stifle the capacity of businesses to invest. It will also increase the cost of finished goods. The situation is responsible for the recent nationwide hunger protests. If not quickly reviewed downwards, the latest interest hike may impose additional burden on investors. Indeed, most business operators with credit exposures have not even recovered from the previous hike of 24.75 per cent. Currently, the interest rate charged by banks is within 30 per cent threshold. This is not good for businesses. Even the CRR rate of 45 per cent and the liquidity ratio of 30 per cent will have dampening effects on financial intermediation. There is urgent need for fiscal policy support which will ameliorate the effect of the new interest rate hike.
The government should drastically reduce the interest rate. The new hike in MPR will significantly hamper business operators’ ability to repay loans. Without any reduction in interest rate, the Organised Private Sector will find it difficult to remain in business. The non-performing loans (NPLs) in the banking sector stood at over N1.5trillion in 2023. The NPLs ratio for was below the maximum prudential requirement of 5 per cent of banks last year. It reportedly declined from 5 per cent in June 2023 to 4.1 per cent in December 2023.
All things considered, we believe that the CBN is using the wrong metric to fight inflation. Therefore, the CBN should engage private sector players in the formulation of monetary policies. The absence of a clearly articulated fiscal policy in some of its key decisions is becoming apparent. It is a challenge to economic planning and growth. Without a definitive fiscal framework, businesses will be left in a state of uncertainty and unable to make informed decisions.
The leadership of the CBN should provide a roadmap for economic stability and growth. In addition, the CBN should apply an import duty exchange rate that is lower than the official rate for at least a specified time-frame. This will help business owners plan better. As inflation rate continues to rise in spite of various interventions by the CBN, more proactive decisions and multifaceted action plans have become imperative to stabilise prices of goods.
Also, transparency in the forex market is key to shoring up the value of the naira, currently experiencing a free fall. There is need to prioritise forex and credit allocation to key sectors of the economy and stabilise the naira. This will help to strike a balance between addressing macroeconomic challenges and supporting the growth and sustainability of the manufacturing sector. Let the CBN collaborate with the fiscal authorities in implementing some policies.