By Clara Nwachukwu
The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), yesterday, warned of negative impacts on the private sector, arising from the increase of interest rate to 24.75% by the Central Bank of Nigeria (CBN).
This is just as the Founder, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, is worried about the risk the rate hike poses on financial intermediation and the escalating financing cost to the real economy.
Similarly, Director, the Centre for Economic Policy Analysis and Research, Prof. Ndubisi Nwokoma, believes accumulated rate hike by 600 basis points will drive undue pressure by banks on the CBN’s Standing Lending Facility and increasing cost of funds generally.
MPC decisions
Yesterday, the CBN’s Monetary Policy Committee (MPC) at the end of its 294th meeting in Abuja, again raised the Monetary Policy Rate (MPR) by 200 basis points from 22.75 to 24.75%.
Addressing journalists on the outcome of the meeting, the CBN Governor, Olayemi Cardososo, also announced an adjustment of the asymmetric corridor of +100/-300 basis points.
However, while the Cash Reserve Ratio (CRR) of Deposit Money Banks was retained at 45%, the merchant banks’ was jerked up from 10 to 14%. The Liquidity Ratio was left at 30%.
Mr. Cardoso explained that in taking the decisions, MPC members weighed various options, including continuing with the tightening cycle, or holding the rates to see further impact of last month’s hike.
But after reviewing the balance of risks, members voted in favour of further tightening measures to curb a hyperinflationary trend, which hit 31.70% last month according to the National Bureau of Statistics (NBS).
“Considerations of the Committee at this meeting focused on the current inflationary pressures and the need to anchor inflation expectations as well as ensure sustained exchange rate stability,” the CBN Governor said.
He added that these measures were necessary “to bring inflation under control to ensure that the purchasing power of ordinary Nigerians is restored in the short to medium term.”
NACCIMA’s concerns
In a statement signed by its President, Dele Oye, NACCIMA said the increase in MPR to 24.75% and CRR to 45% will have severe consequences on private businesses in Nigeria.
The Association’s concerns stem from four key issues surrounding the CBN’s rate hike:
- Increase in the Cost of Borrowing: Existing loans will incur higher interest rates, raising the cost of capital for businesses. This scenario discourages entrepreneurial activities and expansion plans, which are vital for economic growth and job creation.
- Restricted Credit Availability: With the increase in the CRR, banks’ ability to lend is further curtailed. This exacerbates the challenges faced by the private sector, which is already grappling with limited access to finance.
- Pass-Through Effects on Inflation: As businesses incur higher interest costs, they are left with no option but to pass these costs on to consumers through increased prices for goods and services, which can contribute to inflation rather than curb it.
- Stifling Economic Growth: Tightened monetary conditions may lead to a reduction in investment and consumption, which are essential drivers of economic growth. This could potentially stifle the economic recovery and dampen the prospects for prosperity.
Against this backdrop, NACCIMA urged the apex bank to, among others, aim for a refined and focused strategy that directly tackles liquidity challenges in the public sector, while minimizing pressure on the private sector.
Specifically, it recommends that:
- The CBN should pursue a more nuanced and targeted approach, focusing on mechanisms that specifically address the liquidity issues in the public sector without placing undue burden on the private sector.
- Additionally, policy directions should be clear and communicated on a quarterly basis, with a robust stakeholder engagement strategy to ensure that the views and concerns of the private sector are considered in policy formulation.
These measures were necessary to bring inflation under control to ensure that the purchasing power of ordinary Nigerians is restored in the short to medium term.
Other experts’ views
For Prof. Nwokoma, there is a need for an incremental approach to foster economic growth while addressing inflation.
According to the professor of economics, the current economic challenge in Nigeria has gone beyond inflation to stagflation, necessitating a consideration of growth concerns in future MPC meetings.
Stagflation, a scenario of slow economic growth, inflation, and rising unemployment, requires a nuanced policy response, he said in his statement.
He noted that a hike in the benchmark interest rate by 200 basis points would bring the total increase to 600 basis points within a month.
He continued: “Much as tightening is necessary at this time in view of elevated inflation, MPC should tighten policy incrementally and in a measured manner that optimises the CBN’s policy tool kit without undue reliance on the monetary policy rate.
“The decision by the MPC to increase the MPR by 200 bps makes it a total of 600 bps in just one month if one adds the 400 bps delivered in February,” he added
Added to a high CRR of 45%, Mr Nwokoma argued that “This development is now driving undue pressure by banks on the CBN’s Standing Lending Facility and increasing cost of funds generally.
“The CBN should recognise that the challenge currently facing the Nigerian economy is not just inflation but stagflation, and to this end the CBN should equally have regard to growth concerns in future meetings of the MPC.”
On his part, Mr. Yusuf called for more attention on economic growth, job creation and production as means of tackling inflation.
He insisted that such a balancing act is important for the economic recovery process, even as he commended the CBN’s commitment to tackling inflation.
He said: “There are contextual issues of weak transmission mechanism, weak financial inclusion, risk to financial intermediation and the escalating financing cost to the real economy.
“The economy needs as much attention to economic growth, job creation and production as it deserves for tackling inflation. This balancing act is critical for the economic recovery process.”
