From Uche Usim, (Abuja), Merit Ibe and Chinwendu Obienyi
In a move to tame raging inflation in Nigeria, currently at 20.52 percent, the Central Bank of Nigeria (CBN) Governor, Mr Godwin Emefiele, on Tuesday announced a hike in the Monetary Policy Rate (MPR) (lending rate) 150 basis points from 14 to 15.5percent .
This is the highest rate adopted by the CBN after it held the Minimum Rediscounted Rate (MRR) at 15 per cent on August 17, 2003.
Emefiele also warned Deposit Money Banks to meet their Cash Reserve Requirement by Thursday, September 29, or risk being shut out from the foreign exchange market by Friday.
He further called on the government and Nigerians generally to rise up and make strong cases for domestic airlines who have been continually denied landing slots in various countries, a development that fractures the Bilateral Air Service Agreement (BASA) signed between Nigeria and foreign nations.
Emefiele made the disclosures at a media briefing to mark the end of the 287th Monetary Policy Committee meeting held on Tuesday in Abuja.
On the potency of raised lending rates reining in inflation, Emefiele said: “Time tested monetary policy proves this. If you don’t raise rates because it will retard growth, not doing so will still retard growth as long as inflation keeps going up”.
On the CRR, being a percentage of a bank’s total deposit that must be maintained with the CBN, Emefiele said the CRR was previously held at 27.5 per cent, but was increased to a minimum of 32.5 per cent by the MPC.
He added that the apex bank will not relent in enforcing the CRR aimed at mopping up excess liquidity in the banking system.
He said, “What we have done at this meeting, we said we move CRR by five per cent to a minimum of 32.5 per cent. That we move MPR by 150bp that means over the last four months, we moved MPR by about 400 basis points. Let’s not forget that inflation rate in Nigeria at 20.52 per cent is still higher than our policy rate which means we are still lagging behind.
“We have increased the CRR and we expect that this decision at this meeting must achieve the effect that the MPC thinks it should achieve.
“What is the message? We expect that all the banks in Nigeria must fund their accounts by Thursday within 48 hours because we will debit them for CRR. We will take their CRR to a minimum of 32.5 per cent which means we are going to take liquidity out of their funds by Thursday.
“If any bank fails to meet up with these expectations, the decision of the MPC is that we may need to preclude those banks from foreign exchange market on Friday and onwards until they meet this target.
But responding to the rate hike, Dr Muda Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE) said the increases in rate between May and now, has not dropped the inflationary situation. That is pointing out that to tackle this problem of inflation, it is not about increase in interest rates. The more we increase rates, the more pressure on investors. The maximum lending rate now is getting close to 30 percent, so how do we get the economy to work in that kind of situation. With this additional increase of the MPR, the CRR is at 32.5percent. Already, the financial sector is very tight in terms of liquidity . The 27.5percent of the CRR before is one of the highest in the world. It’s not as if this will solve the problem of inflation. Because the key drivers of inflation are illiquidity in the forex market, increase in energy cost , transportation cost, insecurity which is affecting food inflation, even the way the CBN is funding deficit is a serious issue.
The CBN did not address these issues before increasing rates. So, investors who have borrowed will bear the brunt. Luckily MSMES don’t even have the opportunity to borrow. Rather than ease the burden of investors and businesses, the CBN is adding to the problem. It’s an unfortunate outcome.
The beneficiaries will be those in the financial market, treasury bill, bond market, money market. But the stock market will be a victim as a result of the policy.
If the returns to money market is improving,the performance of the stock market will drop. .
The increased rate will also affect the financial intermediation that is the rate at which the bank can lend. When the CRR is now 32.5 percent, where will the banks get the money to lend. That means for every 1million you get , 32.5 is going directly to the CBN. So it’s a big issue that will disrupt a lot of plans by businesses.
It will hurt investors and the economy. The cost to the economy is going to be far more than the benefits.
The Nigerian economy is not a credit driven economy, unlike what obtains in many advanced economies which have much higher levels of financial inclusion, robust consumer credit framework and strong correlation between interest rate and aggregate demand. The level of financial inclusion in the Nigerian economy is still quite low, access to credit by households and MSMEs is still very challenging, and the informal sector accounts for close to 50 percent of the economy.
Private sector bank credit as a percentage of GDP is less than 20 per cent in Nigeria. It is over 100 per cent in South Africa and over 200 per centin the United States. This underscores the variabilities across economies; thus, policy responses have to be different.
The transmission effects of monetary policy on the economy are therefore still very weak. In the Nigerian context, price levels are not interest sensitive. Supply side issues are much more profound drivers of inflation.
The new MPR hike means that the cost of credit to the few beneficiaries of the bank credits will increase which will impact their operating costs, prices of their products and profit margins. The equities market may be adversely impacted by the hike.
Also commenting, the Director General, Lagos Chamber of Commerce and Industry (LCCI), Chinyere Almona, observed that the recent hike in the Monetary Policy Rate (MPR) by the Monetary Policy Committee of the Central Bank of Nigeria (CBN) and the trend around the rising inflation rates across many economies globally, is well understood that the hike was meant to control the rising inflation rate feared to assume a galloping trend.
“We have consistently pointed at factors responsible for the rising inflation including an epileptic supply of Premium Motor Spirit (PMS), high cost of Automotive Gas Oil (AGO/Diesel), electricity tariff hikes, insecurity, and the illiquidity crisis in the foreign exchange market. These factors have continued to put pressure on the cost of production translating to higher prices or cost-push inflation. These headwinds must be tackled head-on for the inflationary pressure to be tamed sustainably.”
The hike in the interest rates will normally mean less credit to the private sector and that can translate to reduced investment and constrained production in the economy, at least in the short term. This action also has implications for economic growth, job creation, and revenue generation for the government. When the MPR was 11.5% some credit lenders charged as high as 25% maximum rate to small companies. With the benchmark interest rate higher now, we may likely have rates climb beyond 30% for SMEs.
While we agree with the proposition that a lower interest rate in Nigeria compared with higher rates in developed economies would lead to capital flight, we must restate our recommendation that interest rate hikes will not on their curb inflationary pressures. The supply-side challenges like insecurity, forex scarcity, and uncertainties from the inconsistent policy environment must be tackled to curb the rising inflation. This is the more sustainable solution to the rising inflation in Nigeria.
Tthe CBN should expand its targeted intervention schemes to support the productive sectors of the economy to reduce the cost of production. Beyond the role of price stability, the CBN must pay attention to sustaining economic growth that can create jobs and boost government revenues. Again, we reiterate that hikes in rates alone will not tackle the near-galloping inflation trend in Nigeria. We need interventions to boost the supply of goods and services, build critical supportive infrastructure, and resolve the illiquidity crisis in the forex market.
The Director General of the Manufacturers Association of Nigeria (MAN) , Segun Ajayi-Kadir.
The increase in MPR is not manufacturing friendly considering the myriad of constraints already limiting the performance of the sector.
It has widened the journey farther away from the preferred single digit interest rate regime and would lead to leaner contribution to the gross domestic (GDP).
The association is concerned about the ripple effects of the decision and its implications for the manufacturing sector that is visibly struggling to survive the numerous strangulating fiscal and monetary policy measures and reforms.
It portends another level of increase in interest rates on loanable funds, which will no doubt upscale the intensity of the crowding out effect on the private sector businesses as firms have lesser access to funds in the credit market.
It will spur upward review of existing lending rates dependent obligations of manufacturing concerns, which will drive costs Northward, intensify demand crunch emanating from the heavily eroded disposable income of Nigerians, constrained access of households and individuals to cheap funds.
“It will lead to rising cost of manufacturing inputs, which will naturally translate to higher prices of goods, low sales and enormous volume of inventory of unsold products.
“Exacerbate the intensity of idle capital assets, worsen the already declining profit margin of private businesses and heighten the mortality rate of small businesses.
“Further reduce capacity utilisation, upscale the rate of unemployment, incidences of crime and insecurity as the capacity of banks to support production and economic growth is heavily constrained.
“Reduce the pace of full recovery of the real sector, make manufacturing performance to remain lackluster and of course lead to leaner contribution to the GDP.
The association is hopeful that the stringent conditions for accessing available development funding windows with the CBN by manufacturers will be relaxed to improve the flow of long-term loans to the sector at single digit interest rate.
The association expects that MPC will ensure that future adjustments of MPR takes into consideration the trend of core inflation rather than basing decision on headline and food inflation. “This will no doubt shield the sector of the backlashes from the increase MPR, ramp up production and guarantee sustained growth in the overall best interest of the economy.”
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