As Nigerians are baffled over the recent hike of interest rate from 26.25% to 26.75% by the Central Bank of Nigeria (CBN), the Manufacturers Association of Nigeria (MAN) and frontline economist and member of the Presidential Economic Coordination Council (PECC), Bismarck Rewane have stood at divergent positions as to how the decision will affect the country’s ailing economy.
The 296th meeting of the Monetary Policy Committee (MPC) of the CBN, which held on July 22-23, 2024, focused on analysing recent economic developments. The committee identified high foreign exchange rates, increasing energy costs, and food insecurity as challenges posing potential risks to price stability.
In response to these, the CBN has again increased the Monetary Policy Rate (MPR) by 50 basis points from 26.25% to 26.75%. The MPC widened the asymmetric corridor around the MPR from +100 to -300 basis points to +500 to -100 basis points. Additionally, the MPC decided to maintain the Cash Reserve Ratio (CRR) for deposit money banks at 45% and for merchant banks at 14% and retained the Liquidity Ratio at 30%.
Reacting to the development, MAN said the hike in interest rate would heighten the distress in the manufacturing sector as it would further reduce the purchasing power of consumers.
In a statement to The Nigerian Economy on Wednesday, MAN noted with concern that, despite the continuous increase in MPR over the past two years resulting in a weighty 1,475 basis point hike from 11.5% in May 2022 to 26.25% in May 2024, inflation has remained persistently high, reaching a staggering 34.19% in June, the highest since March 1996.
“Clearly, the new rate will further constrain the growth of the manufacturing sector, as the purchasing power of consumers, production levels, competitiveness and sales will face further decline,” MAN said in the statement signed by its director-general, Segun Ajayi-Kadir.
Ajayi-Kadir continued: “Manufacturing sector in Nigeria plays a vital role in the country’s economy. However, it is facing multitude of challenges that threaten its sustainability and contribution to economic growth. Therefore, the continued increase in the cost of borrowing, which is one of our major challenges, will escalate production costs and consequently the prices of finished goods, with consequential effect on unemployment and social instability.
“It will further compound the prevailing low consumer demand, capacity utilization and profitability and stifle capacity to make new and further investments, innovation and curtail opportunities for the growth.”
The association insisted that the interest hike would further restrain access to capital, judging from the fact that only 16% of total commercial bank credit was disbursed to the manufacturing sector in the first quarter of the year.
This will reduce the flow of investments into the sector and funds required for retooling, upgrading facilities and procurement of new technologies.
“It is noteworthy to state that the worrisome trend occasioned by increase in cost of borrowing is corroborated by the report of NBS, to the effect that manufacturing investment declined significantly in the second quarter of the year. This drop underscores the critical link between domestic investment confidence and foreign investor sentiment. In addition, the share of manufactured exports in non-oil exports also declined from 21.4% in Q4 2023 to 15.1% in Q1 2024,” MAN stressed.
However, Rewane Bismarck who is also the Chief Executive Officer of Financial Derivatives said, the increase in interest rate will reduce the pressure on Nigeria’s foreign exchange.
While speaking on Channels Television on Tuesday, Rewane argued that the real deal is the MPC’s adjustment of the Asymmetric corridor around the Interest rate to +500/-100 from +100/-300 basis points.
He noted that this move would increase the cost of banks’ borrowing and deter borrowing from CBN to buy foreign exchange.
He added that the decision will boost Foreign Portfolio inflows in Nigeria.
He said: “The interest rate increase is 50 basis points. The real deal is the Asymmetric corridor adjustment. What this means is that banks have been borrowing from the Central Bank to buy foreign exchange from the Central Bank. Before they were borrowing at 26%.
“As of today, they will be borrowing at almost 32%. That difference is almost 5-6%. It means the cost of borrowing has gone up astronomically, this means a deterrent to borrowing from the CBN to buy FX.
“That should reduce pressure on the foreign exchange rate. It is a subtle way of telling banks to stop robbing Peter to pay Paul.”
Recall that the CBN raised interest for the fourth time in 2024 to 26.75% amid efforts to tackle core and food inflation which stood at 34.19% and 40.87%, respectively.
