THESE are hard times for Nigerians who are buffeted on all sides by elevated inflation, steep prices of commodities, acute shortage and rise in the pump price of petrol, and the sudden cash squeeze, no thanks to the Central Bank of Nigeria’s naira redesign policy. Amidst this, the decision of the Monetary Policy Committee of the Bank to increase the Monetary Policy Rate, ostensibly to tame inflation, appears ill-timed.
At its 289th MPC meeting, the CBN raised the MPR or benchmark lending rate by 100 basis points from 16.5 to 17.5 per cent, the fifth consecutive time it would do so. To justify the action, the CBN argued that the gains of the previous hikes should not be lost and because inflation reduced in December. CBN Governor Godwin Emefiele said the committee voted to keep the asymmetric corridor at +100 and -700 basis points around the MPR. He stated that the MPC voted to keep the Cash Reserve Ratio at 32.5 per cent, as well as the Liquidity Ratio at 30 per cent.
The CRR is the share of a bank’s total customer deposit that must be kept with the central bank in the form of liquid cash, while banks’ liquidity ratio is the proportion of deposits and other assets that they must maintain to be able to meet short-term obligations. In November, the MPC raised the benchmark lending rate to 16.5 per cent, aiming to control inflation and ease pressure on the naira.
The National Bureau of Statistics said the inflation figure dropped to 21.34 per cent in December, down slightly from a 17-year peak of 21.47 per cent in November. It followed 10 consecutive monthly increases. Food inflation, a main driver of headline inflation, dropped to 23.75 per cent from 24.13 per cent a month earlier.
Emefiele stated that the committee welcomed the recent deceleration in inflation, noting that the persistence in the benchmark rate increase had started to yield the expected decline in inflation.
The maximum lending rate increased to 28.14 per cent in November 2022 from 28.06 per cent reported by the CBN in October 2022, while interest on savings deposits closed November 2022 at 3.93 per cent, the highest in the year. Also, the interest rate on treasury bills increased to 6.5 per cent in November, the highest in 2022.
Businesses need a lot of credit facilities to survive, but in an environment where the lending rate is astronomical, many enterprises, especially small and medium-scale, might find it extremely difficult to survive as their products will remain uncompetitive and the cost of production and the sale prices to consumers will remain high.
Many SMEs have shut down and others are likely to follow the same pattern as those that took loans at a certain percentage will now have to pay more. SMEs rely on diesel-fired generators, but the pump price is so high with a litre selling for between N780 and N800. Whereas it came down in Europe, it has remained high in Nigeria.
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Experts say the gap between the CBN’s lending rate and the prime lending calls for concern, stressing that the spread between the rates should not be more than 10 per cent. In a situation where it is more than 100 per cent, it means there is a serious rent-seeking activity in the banking sector, which erodes the nation’s resources. They point out that the Nigerian economy in 2022 did not witness major improvements to warrant a hike in bank lending to the real sector, stressing that the hike in prime lending might lead to increase in the cost of doing business in the country.
Emefiele had admitted that the hike in MPR would increase the cost of borrowing, especially in non-priority sectors of the economy. He, however, added that lending to priority sectors, which had been identified, to boost growth and generate employment, would remain at a single-digit interest rate of 9.0 per cent.
Conversely, the Centre for the Promotion of Private Enterprise said the hike would hurt investors in the real economy, adding that the implication was that lending rates would increase for investors who were indebted to the banks; increase operating and production costs; and ultimately, depress economic growth.
The interest rate is one of the key tools deployed by central banks to manage the flow of money and productivity in their respective countries. A change in the interest rate could have an effect on macroeconomics and other key economic indicators like consumer spending and borrowing. In Nigeria, the tool allows the CBN to effect changes in broad monetary policies designed to facilitate the government’s fiscal plan.
Ordinarily, by hiking the interest rate, it is expected that borrowing will become more difficult, and consumers will have less money to spend. By implication, amid lower demand among consumers, manufacturers of goods will be wary of raising prices. In effect, all of this will combine to reduce inflationary pressure, but the hike may also fail to tame inflation if other macroeconomic indicators go wrong. A hike in interest rate is often considered a manufacturers’ nightmare as it stifles productivity and expansion.
A hike in interest rate slows down productivity, as manufacturers struggle to keep machinery in operations and pay salaries. Those who look forward to borrowing for expansion and production will have to shelve such ideas in the face of the high cost of accessing funds.
Before the pandemic, it was zero interest rate in Japan; the Bank of Japan pegged the rate at 0.545 per cent in January.
To solve some of the problems, development banks should be encouraged to lend at a single digit with stringent tracking. The situation on the ground in Nigeria does not support the argument that inflation has gone down. It is an artificial imposition. Petrol scarcity is a major driver of inflation and the continuing rise in food prices suggests that the Nigerian economy may worsen in the months ahead. ,
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