By Stanley Onyeka, Lagos and Tochukwu Bliss, Abuja
“What manufacturers and other investors need, at this time, is some oxygen and stimulus, not policy measures that would worsen an already suffocating situation,” is the immediate industry reaction to the Central Bank of Nigeria (CBN’s) further hike in interest rate.
Yesterday, the Monetary Policy Committee (MPC) of the CBN, unanimously agreed to tighten policy further still in its bid to tame defiant inflationary pressure.
The 11 members of the Committee, which attended the MPC meeting for September, decided to:
- Raise the MPR by 50 basis points to 27.25% from 26.75%.
- Retain the asymmetric corridor around the MPR at +500/-100 basis points.
- Raise the Cash Reserve Ratio of Deposit Money Banks by 500 basis points to 50% from 45% and Merchant Banks by 200 basis points to 16% from 14%.
- Retain the Liquidity Ratio at 30%.
This comes as central banks in the United States, United Kingdom and others had commenced monetary easing, as global financial conditions are expected to ease gradually and hopefully offset the downside risks to the recovery of global growth.
CBN Governor, Olayemi Cardoso, who read the communique on behalf of the Committee, explained that the decision followed “a review of the upside risks to price development and the downside risks to the recovery of output growth.”
According to Mr Cardoso, who also chairs the MPC, “the Committee opted to tighten policy further, to safeguard the gains already accrued in moderating inflationary pressure.”
The anticipated benefits are to:
Strengthen the recent disinflationary trend and manage inflation expectations given the upside risks to inflation; Stabilise the Naira; and,
Narrow the negative real rate of return.
This decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.
High cost of business
However, industry experts disagree with Mr Cardoso and the MPC, saying it will lead to further rise in the cost of doing business, in an already very challenging environment.
The Centre for the Promotion of Private Enterprise (CPPE), said the MPC’s decisions are “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.
CPPE Director, Muda Yusuf, opined that “The implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated, possibly well above 35% or more.”
For Dr Yusuf, “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.”
He argued that “MPR at 27.25%, CRR at 50% and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions.”
According to him, “What manufacturers and other investors need, at this time, is some oxygen and stimulus, not policy measures that would worsen an already suffocating situation.”
Agreeing, the President, Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), Dele Oye, 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.
Cordros Capital believes the MPC decisions will impact the Fixed Income market, and “will generate further bearish sentiment across the mid-to-long end of the yield curve.”
This, it noted is because “The decline in stop rates at the recent NTB and bond auctions indicates that the market may not have fully adjusted to the last hike in the Monetary Policy Rate (MPR), leading investors to seek to lock in existing yields before any potential upward adjustments.”
Contributory factors
But Mr Cradoso insisted that the MPC had assessed the upside risk to inflation in the near term, including increase in flooding across the country, insecurity in food-producing areas, and the hike in the price of premium motor spirit (PMS), popularly called petrol.
He said “the MPC acknowledged the federal government’s efforts to improve food supplies through the duty-free import window for food commodities.
“Additionally, the Committee was optimistic that the domestic supply of refined petroleum products from the Dangote Refinery could potentially moderate transportation costs and its passthrough effect on food prices in the short to medium term.”
“Furthermore, the Committee highlighted the positive impact of the Dangote Refinery, which potentially reduces foreign exchange (FX) demand for fuel imports and supports the overall balance of payment.
“The Committee also noted the sustained accretion in the FX reserves in the near-recent weeks.”
