Echoes from Nigeria’s Aggressive Monetary Policy Tightening
As the Monetary Policy Committee meets today, Obinna Chima writes that further raising interest rate will put more burden on businesses and dampen entrepreneurial spirit
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) would commence its 294th meeting today. The two-day meeting, which is the second under the Mr. Olayemi Cardoso-led Central Bank of Nigeria (CBN) comes 25 days after the committee in a hawkish move raised the Monetary Policy Rate (MPR), the benchmark interest rate, by 400 basis points to 22.75 per cent, from 18.75 per cent.
The MPC, which surprised the market, also adjusted the asymmetric corridor around the MPR to +100/-700 basis points from +100/-300 basis points. Additionally, the central bank equally raised its Cash Reserve Requirement (CRR) to 45 per cent, from 32.5 per cent, and retained the Liquidity Ratio at 30 per cent.
Cardoso had explained that the decisions of the MPC members were centred on the current inflationary and exchange rate pressures, projected inflation, as well as rising inflation expectations. He had also said members acknowledged the trade-off between the pursuit of output growth and taming inflation, but were convinced that an enduring output expansion was possible only in an environment of low and stable inflation.
Unfortunately, few days after, the inflation figures for February 2024, were released, which showed that the Consumer Price Index used to gauge inflation moved to 31.70 per cent, higher than the 29.9 per cent recorded in January.
According to the National Bureau of Statistics (NBS), Food inflation rate in February, stubbornly inched higher to 37.92 per cent on a year-on-year basis. The rise in food inflation on a year-on-year basis was attributed to increases in prices of bread and cereals, potatoes, yam and other tubers, fish, oil and fat, meat, fruit, coffee, tea, and cocoa.
Indeed, while the decisions at the last MPC meeting appear to have calmed the turmoil in the foreign exchange market, where the naira exchange rate has since appreciated from about N1,800/$1 as at when the committee last met, to about N1,400/$1, as at the weekend, business operators and borrowers have been confronted with tougher times.
For instance, the 400 basis points interest rate hike meant that on the average, a borrower could get bank loan at about 35 per cent interest rate. What this means is that considering time value of money, the borrower might end up paying back as much as the principal amount he borrowed as interest rate, which is a burden to borrowers and businesses.
Today, companies in the debt market are finding it extremely difficult to raise funds because of the pricing.
For the banking sector, the 45 per cent CRR meant that for every N100 they received, N45 would be frozen by the central bank. That is, banks now have to keep more of their deposits in CBN’s reserve, thereby reducing the amount they can lend out.
Also, the adjustment in the asymmetric corridor implies that banks can only use about 25 kobo of every N1 they receive as deposit.
Clearly, the restrictive monetary policy posture of the central bank has put unfair burden on certain sectors of the economy and is weighing heavily on interest rate sensitive sectors of the economy such as construction, manufacturing and other highly leveraged businesses. Tight monetary policy and a higher interest rate environment could as well result in increased unemployment and slower economic growth.
Financial results released so far on the Nigerian Exchange Limited (NGX), mostly by blue-chip companies such as Nestle Nigeria Plc, Nigerian Breweries Plc, MTN Communications Plc, have been poor, due to the adverse effects of government policy, which could be worsened by the MPC’s decision. Clearly, all the indices are squeezing business owners and the current monetary policy regime does not favour entrepreneurship.
For households, with food inflation around 38 per cent, a lot of them are struggling to feed as wages remains flat, which prompted the recent protest in some cities in the country,
While it appears foreign portfolio investors (FPIs), who typically are excited to rush to any high interest rate environment for fixed income instrument are flocking in, there is need for both the fiscal and monetary authorities to give some incentives and attract foreign direct investors (FDIs).
Just like Governor of Edo State, Mr. Godwin Obaseki, recently predicted, the interest rate increase by the CBN would have adverse effects on businesses and the economy.
“The next few months will be difficult because the policies rolled out by CBN will unfortunately not support growth in our economy. The interest rate is already high and jacking it up will not allow small businesses access to credit to make them grow.
“We must focus on the fundamentals which is increasing production, making sure our citizens produce what we consume and depend less on imports. Our economic and monetary policies should not be determined by exchange rate alone.
“The issue of increasing the cash reserves in a bid to tighten liquidity is going to be detrimental to our economy. We should focus on fiscal issues to enable us to grow our economy, not panic about the interest rate. Creating jobs should be a priority for us as a nation.” he said.
To the Chairman, Bank Directors Association of Nigeria, Mr. Mustapha Chike Obi, the fight against inflation could impede GDP growth.
He noted that banks are currently saddled with meeting up with targets given to them by the federal government to build a $1 trillion economy in the next eight years.
He said the policies deployed by the CBN to fight inflation might affect GDP growth.
This ,he said, was because the banks needed to raise capital in order to meet up with the target of the federal government.
He said: “The administration informed us that they want a $1 trillion economy within eight years, part of that is that we have to raise more capital, because the capital we have in banks today cannot support a $1 trillion economy.
“All of us are going to raise capital to meet the objective within a year or two to meet the President’s objective which we endorse.
“However, the CBN governor took a policy that is inflation fighting and as you know it is the opposite of GDP growth.”
To the Chief Executive Officer, Emerging Africa Group, Dr. Toyin F Sanni, start-ups and MSMEs, which are the real engine of growth of any economy, are presently bearing the brunt of the higher interest rate regime and restrictive monetary policy.
She, however, advised the federal government to focus on policies that would encourage local production of goods and services as well as to aggressively drive exports so as to increase foreign currency inflows to the country.
“Policies that discourage our massive propensity to import should be introduced, while encouraging productivity, both in terms of tax incentives,” Sanni added while speaking at the ThinkBusiness Africa Monthly breakfast meeting in Lagos.
Also, the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, noted that aggressive monetary tightening would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy, because the increases were quite significant.
Yusuf noted that the decisions of the MPC, which were consistent with the typical policy response of the central banks globally, failed to reckon with domestic peculiarities of the Nigerian economy.
According to him, the key drivers of Nigeria’s inflation were largely supply-side variables.
The CPPE chief executive added: “Over the last two years, there had been persistent monetary policy tightening, yet there has not been any significant impact on the inflationary pressures. If anything, the general price level had been continuously on the increase.
“We recognise that the primary mandate of the CBN is price stability, but numerous headwinds had posed significant risks to this critical objective. Some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, global supply chain disruptions and the surge in ways and means finance. The hike in MPR or CRR would not change these variables.
“Already, bank lending has been constrained by the high CRR, which was until the latest review, 32.5 per cent, although many operators in the sector claim that effective CRR is as high as 50 per cent for many banks via the discretionary debits by the apex bank.
“The credit situation in the economy is already very tight, with lending rate ranging between 25 and 30 per cent. The Nigerian banks are yet to live up to their financial intermediation role because of these constraining factors.”
In his contribution, the President, Manufacturers Association of Nigeria, Mr. Francis Meshioye, pointed out that the Nigeria economy is in a dire state and that policymakers, more than ever before, needed to be intentional about growing the manufacturing sector.
According to Meshioye, there is no country considered as developed that does not give priority attention to the manufacturing sector.
“There is no gainsaying the fact that manufacturing is pivotal to galvanising and sustaining the economic growth and development of Nigeria.
“The government needs to come to the realisation that a win for the manufacturing sector is a win for the economy and by extension a better life of the citizenry,” he added.
Therefore, as the MPC meets today to continue its war on double-digit inflation, it must also consider the effects on unemployment in the country, the poor state of the economy as well as businesses that are barely struggling to survive. Further raising interest rate may lead to the collapse of more business and threaten financial system stability.
