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The Organised Private Sector has expressed fears that the interest rate hike of the Monetary Policy Committee of the Central Bank of Nigeria may worsen bad loans in various Deposit Money Banks.
On Tuesday, the MPC for the fifth time this year voted to increase the monetary policy rate, which measures the benchmark interest rate, to 27.25 per cent.
The monetary policy rate is the baseline interest rate in an economy. Every other interest rate used within an economy is built on the MPR.
The Governor of the apex bank, Olayemi Cardoso, announced this at a press briefing after the 297th Monetary Policy Committee meeting in Abuja.
He said the committee members unanimously decided to further tighten monetary policy.
This new rate, a move that stunned the financial markets, is an increase of 50 basis points from 26.75 per cent announced by the apex bank in July 2024.
The new rate reflects an 8.5 per cent increase in interest rates under the current leadership, which took office a year ago and continues the spate of interest rate hikes going as far back as May 2022 when the hawkish monetary policy actions began.
Cardoso said, “The committee was unanimous in its decision to further tighten policy and thus decided as follows, one: raise the MPR to 27.25 per cent.”
However, the MPC retained the asymmetric corridor around the MPR at +500 to -100 basis points and raised the Cash Reserve Ratio of deposit money banks by 500 basis points to 50 per cent and merchant banks by 200 basis points to 16 per cent from 14 per cent and retained the liquidity ratio at 30 per cent.
He added, “The MPC decided to retain the asymmetric corridor around the MPR at plus 500 to minus 100 basis points. It also raised the Cash Reserve Ratio of deposit Money banks by 500 basis points to 50 per cent from 45 per cent and merchant banks by 200 basis points to 16 per cent from 14 per cent and retained the liquidity ratio at 30 per cent.”
According to the CBN, the decision to raise interest rates was premised on recent events in the economy regarding inflation and the stability of the foreign exchange market.
He mentioned the threats of food inflation, flooding in many parts of the country, and rising petrol and energy prices as reasons why further monetary policy tightening should be executed.
Financial experts had anticipated that the CBN would either hold or lower interest rates following two consecutive months of declining headline inflation.
Nigeria’s inflation rate in July slowed to 33.4 per cent from 34.19 per cent in June 2024 and further eased to 32.2 per cent in August.
However, there are fears that Nigeria’s inflation will increase after the two-month deceleration on the back of petrol scarcity and subsequent increase in petrol prices by the NNPCL.
Last month, the NNPCL informed Nigerians of the increase in petrol pump price from N617 per litre to N897 with transport prices increasing as well.
Continuing, the CBN governor stated that the bank has observed a correlation between monthly disbursement from the Federation Account Allocation Committee and liquidity in the banking system stating that it impacts the exchange rates.
Hence, the bank will begin to monitor future disbursement by the FAAC to determine its impact on prices.
He said, “The MPC noted the continued growth in money supply recognising the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures.”
“Members were also concerned about the growing level of fiscal deficit but acknowledged the efforts of the fiscal authorities not to resort to Ways and Means financing. Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impacts on the exchange rates.”
Speaking on the issue of cash insufficiency in most bank’s automated teller machines, Cardoso said the apex bank is working closely to ensure that there is sufficient cash in the system.
According to the CBN governor, banks do not have any excuse not to dispense cash.
He also revealed that N1.4tn will be distributed in the next three months to aid cash flow within the banking system.
“Another N1.4 trillion is likely to be delivered in another three months to aid that whole process of cash within the system,” he said.
OPS reacts
The National President of the Association of Small Business Owners of Nigeria, Dr Femi Egbesola, said it was unfortunate that the increase was coming again when manufacturers and actors in the real sector were still grappling with the high cost of doing business amongst many other challenges.
He said, “This definitely will push up further the cost of doing business and ultimately, the cost of goods and services. The manufacturing sector may contract more as fund liquidity and profitability will surely reduce.
“The banks or financial institutions may witness more bad debts as many lenders may find it difficult to live up to their loan obligations. This will result in banks being averse to lending to the real sector.”
Egbesola noted that the economy may likely contrast further, forcing the actors in the real sector to downsize their production capacities, human resources, expenditure and further exposure to loans.
He added, “We may begin to see more ailing or comatose businesses.
“Our competitiveness in the national, continental and global business will be further challenged as Made-In-Nigeria products will be naturally more expensive than before amongst others.
“It’s time the government becomes more intentional about promoting ease of doing business, supporting and practically intervening in the health, growth, scaling and sustainability of the SMEs and manufacturing sector.”
Meanwhile, the President of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, Dele Oye, expressed concern over the CBN’s recent monetary policy rate hike to 27.25 per cent.
He said, “This decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.
“We urge the CBN to engage with stakeholders for a collaborative approach, considering alternatives like targeted sector support, deficit reduction, and promoting local production.
“A reassessment of strategies is essential to ensure effective economic management and sustainable growth in Nigeria. Dialogue and innovative solutions are crucial for repositioning our economy.”
The NACCIMA boss added that the increase was 50 basis points from 26.75 per cent announced by the apex bank in July 2024.
He added, “The increase is not a material change. The narrative is actually the trend upwards. This is a confirmation that the previous high interest rate has not worked. So instead of high interest rates.”
The Centre for the Promotion of Private Enterprise said the Central Bank of Nigeria’s Monetary Policy Committee’s decision to raise the Monetary Policy Rate to 27.25 per cent was damaging to investment and economic growth.
Director of the CPPE, Dr Muda Yusuf, assessed that the MPC’s decision clashed with most economic players and the private sector’s desire for economic recovery and growth.
“It is quite troubling that at a time when manufacturers, entrepreneurs and other investors in the economy are craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy,” Yusuf said.
The CPPE noted that instead of a tightening of the MPR, “manufacturers and other investors need, at this time, some oxygen and stimulus, not policy measures that would worsen an already suffocating situation.”
He added that “MPR at 27.25 per cent, CRR at 50 per cent and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions.”
The CPPE maintained that the private sector was not responsible for liquidity growth and ought not to pay the price.
The CPPE director cautioned that issues of excess liquidity should be addressed within a causative context as he observed that the “injection of liquidity into the system is largely public sector driven” and as such should be resolved within that context.
Yusuf remarked that stifling the financial conditions to address liquidity issues was not appropriate as Nigeria’s economy was in a floundering mode owing to the slowdown of manufacturing and other subsectors of the industrial sector such as cement, food and beverage, chemicals and pharmaceuticals, trade, ICT and real estate.
He said, “The implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated, possibly well above 35 per cent or more.”
The CPPE stated that the policy decisions of the CBN were “most inappropriate for the prevailing economic conditions and the challenges faced by entrepreneurs in the country” as the operating and production costs of businesses would be further exacerbated.
Further, Yusuf assessed that the increase in CRR to 50 per cent would “constrain financial intermediation with negative consequences for the banking system and the economy.”
But an expert and Professor of Capital Markets, Uche Uwaleke, said the members of the Monetary Policy Committee decided to ease threats in the exchange rate and inflation in the country
“My take on the recent hike in MPR is that in matters like this, the CBN usually has information that may not be at the disposal of the public.
“I want to believe the members of MPC mean well for the economy and have decided to further tighten monetary policy based on strong evidence of major threats to exchange rate and inflation,” he said.
