The high cost of loans offered by depository banks, which is in double digits, has continued to hamper business growth in the country.
Recently, the Central Bank of Nigeria (CBN) and the Monetary Policy Committee (MPC) at its 285th meeting, with the Chairman announcing the committee’s unanimous decision to amend its convention. The MPC, for the first time in two and a half years, raised the monetary policy rate (MPR) by 150 basis points to 13.0% from 11.5%, while maintaining the reserve ratio ratio (CRR) at 27.5%, the asymmetric corridor at +100/-700 basis points around the MPR while the liquidity ratio was maintained at 30.0%.
With this, he showed that the interest rate of banks will increase. Stakeholders believe that the interest rate regime in Nigeria has not been very encouraging. According to them, the cost of funds in Nigeria, usually in the double digits, has always been one of the main challenges in the manufacturing sector, with a direct impact on the cost of production and the competitiveness of the sector.
In its semi-annual review of the economy, July-December 2021, the Manufacturers Association of Nigeria (MAN) said: “However, despite the expansionary monetary scenario, inadequate and high-cost loanable funds continued to be a major challenge for manufacturing in the country.
“The situation has had diminishing consequences on investment, capacity utilization, manufacturing output and employment. As a result, in the second half of 2021, the interest rate charged to manufacturers increased to 24%, compared to 22% recorded in the same half of 2020; thus indicating an increase of 2 percentage points over the period. It also increased by 5 percentage points compared to the 19% recorded in the previous half.
“The sector lending rate averaged 21.5% in 2021 compared to 20.75% in 2020. It is therefore important that the monetary authority considers improving accessibility to the various financing windows of the CBN and to anchor a buoyant monetary policy that would moderate current lending rates to encourage investment and productivity in the manufacturing sector.
The Founder and Managing Director of the Center for Promoting Private Enterprise (CPPE), Dr. Muda Yusuf, said that given the many headwinds that had posed significant risks to the national economy, the rising MPR from 150 basis points to 13% by the MPC was not a surprise.
He listed those challenges to include soaring commodity prices and the impact on energy costs, a surge in domestic liquidity due to campaign-related expenses, and global supply chain disruptions.
He noted that already, bank lending has been constrained by the high CRR as claimed by many in the sector, the discretionary debts of the apex bank, the loan to deposit ratio (LDR) of 65% and the liquidity ratio. by 30%. The lending situation in the economy is already very tight.
He explained that the transmission effects of monetary policy on the economy are still very weak, saying that in the Nigerian context, price levels are not sensitive to interest rates. Supply-side issues are much deeper drivers of inflation.
The Managing Director of Lancelot Ventures Limited, Mr. Adebayo Adeleke pointed out that apart from the scarcity of the dollar, the cost of funds in Nigeria is high in Nigeria compared to many countries in Sub-Saharan Africa (SSA).
He noted that the high cost of borrowing remained a major challenge for the country’s manufacturing sector, seeking low interest rates in Nigeria to boost manufacturing and other sectors of the economy.
“A low interest rate regime will encourage blue-chip companies to undertake new investments, thereby boosting aggregate demand and economic growth,” Adeleke said.
Reacting to the increase in MPR, the Chief Executive of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Chinyere Almona, said that “rising interest rates will normally mean less credit to the private sector and this can result in reduced investment and limited output 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 lenders charged a maximum rate of 25% to small businesses. With the benchmark interest rate at 13%, we could probably see rates climb beyond 30% for SMEs.
According to Almona, while we agree with the proposition that a lower interest rate in Nigeria compared to higher rates in developed economies would lead to capital flight, we must reaffirm our recommendation that Interest rate hikes will not curb inflationary pressures.
“Supply-side challenges such as insecurity, currency scarcity and uncertainties related to the inconsistent political environment must be addressed to curb rising inflation. This is the most sustainable solution to rising inflation in Nigeria.
While stakeholders noted that the lower the price of funds, the better the country’s prospects for generating production, job creation and greatly improved government revenue conditions.