More Troubles for Manufacturers

The Manufacturers Association of Nigeria has decried the recent monetary policy decision of the Central Bank of Nigeria and appealed the apex bank to reduce the stringent conditions for accessing available development funding windows to the manufacturing sector at single digit interest rate, writes Dike Onwuamaeze

Members of the Manufacturing Association of Nigeria (MAN) are worried about the recent decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to tighten its monetary policy stance on May 24 by increasing the Monetary Policy Rate (MPR) to 13.5 per cent from 11.5 per cent. The MPR has remained at 11.5 per cent since September 2020.

The Governor of CBN, Mr. Godwin Emefiele, who announced the hike in MPR rationalised the increase on the need to dampen the expectation of inflationary pressure in the economy an avert a sharp rise in capital outflow and faster dry-up of foreign credit lines.  

Emefiele said that the MPC felt that tightening would help moderate the inflationary trade-off from the steady growth recovery so far. MPC also feels that tightening would help rein in inflation before it assumes a galloping trend.  Headline inflation (year-on-year) ticked up to 16.82 per cent in April 2022 from 15.92 per cent in March 2022.   This is the third consecutive increase in inflation since the commencement of the year 2022, attributable to the rise in both the core and food components to 14.18 and 18.37 per cent in April 2022 from 13.91 and 17.20 per cent in March 2022, respectively.

He said: “After carefully reviewing the developments of the last two months and the outlook for both the domestic and global economies, as well as the benefits and downsides of each policy option, the committee decided to raise the MPR to rein in the current rise in inflation as members were of the view that the continued uptrend would adversely affect growth.”  

But MAN, in its preliminary position on the MAY 24, 2022, MPC decision stated that this is another level of increase in interest rates on loanable funds, which would 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.

The Position of MAN

The Director General of MAN, Mr. Segun Ajayi-Kadir, who expressed the concerns of the members of the association’s stated clearly that the increase in MPR has widened the journey farther away from the preferred single digit interest rate regime. 

Ajayi-Kadir said: “It is not manufacturing friendly considering the myriad of binding constraints already limiting the performance of the sector. MAN is therefore concerned about the ripple effects of this decision and its implications for the manufacturing sector that is visibly struggling to survive the numerous strangulating fiscal and monetary policy measures and reforms.”

He suggested that the stringent conditionalities for accessing available development funding windows with the CBN would be relaxed to improve the flow of long-term loans to the manufacturing sector at single digit interest rate. 

He advised 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 13.5 per cent MPR, ramp up production and guarantee sustained growth in the overall best interest of the economy.

Implications

The director general of MAN also argued that the current decision would have a telling effect on both the economy and the manufacturing sector. It pointed out that this would spur upward review of existing lending rates dependent obligations of manufacturing concerns, which would drive costs northward.

It would also intensify demand crunch emanating from the heavily eroded disposable income of Nigerians, constrained access of households and individuals to cheap funds and 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.

Moreover, it would exacerbate the intensity of idle capital assets, worsen the already declining profit margin of private businesses and heighten the mortality rate of small businesses.

He said that it would “further reduce capacity utilization, 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.”

LCCI’s Position

Similarly, the Lagos Chamber of Commerce and Industry (LCCI) in its reaction stated that the hike in the interest rates would 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.”

The Director General of the LCCI, Dr. Chinyere Almona, said that “this action also has implications for economic growth, job creation, and revenue generation for the government. 

“When the MPR was 11.5 per cent some credit lenders charged as high as 25 per cent maximum rate to small companies. With the benchmark interest rate at 13 per cent, we may likely have rates climb beyond 30 per cent 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.” 

“In the coming months and into the third quarter, the 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.”

CPPE Applauds CBN

However, the Centre for the Promotion of Public Enterprise (CPPE) has said that the hike in MPR understandable in order to curb inflation but doubted whether it would have expected impact on the inflation.  

The Chief Executive Officer of CPPE, Dr. Muda Yusuf, noted that already, bank lending has been constrained by the high Cash Reserve Ration (CRR) as many operators in the sector claimed that effective CRR is as high as 50 per cent or more for many banks. Moreover, the discretionary debits by the apex bank, the 65 per cent Loan to Deposit Ratio (LDR) and liquidity ratio of 30 per cent. Lending situation in the economy is already very tight.

Yusuf said that the Nigerian economy is not a credit driven economy, unlike what obtained 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.  

He, however, said: “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 per cent of the economy. 

“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.   

“What the recent rate hike means for the economy is 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.  Investors in the fixed income instruments may also benefit from the hike.  There would be some adverse effects on the equities market.”

CBN Support Facility

Perhaps the CBN was mindful of the concerns being expressed by manufacturers and operators of the private sector.

Emefiele said that to support the growth of the manufacturing sector, the bank disbursed the sum of N436.85 billion to 34 new projects under the N1.0 trillion Real Sector Support Facility (RSSF). 

This was utilised for both greenfield (new) and brownfield (expansion) projects under the COVID-19 Intervention for the Manufacturing Sector (CIMS) and the Real Sector Support Facility from Differentiated Cash Reserve Requirement (RSSF-DCRR). Cumulative disbursement under the RSSF for the financing of 402 real sector projects across the country, whichcurrently stands at N2.10 trillion. 

The CBN also “disbursed N55.34 billion, under the 100 for 100 Policy on Production and Productivity (100 for100 PPP), to 44 projects, comprising 24 in manufacturing, 17 in agriculture, 2 in healthcare, and 1 in the services sector.

In the domestic economy, data on key macroeconomic variables indicate that the recovery of output growth will continue, probably at a more subdued pace, considering the unfolding domestic and external shocks to the economy.”