OPS projects worsening crisis as MPC hikes interest rate again

The Organised Private Sector has declared that the hike in the Monetary Policy Rate of the Central Bank of Nigeria would raise the cost of borrowing from banks, worsen hardship, and increase the cost of production in Nigeria.

On Tuesday, the CBN raised the MPR, otherwise called the interest rate, by 50 basis points to 26.75 per cent from 26.25 per cent to combat inflation.

The decision was made at the 296th Monetary Policy Committee meeting held on July 22 and 23, 2024.

CBN Governor, Olayemi Cardoso, explained that the committee was mindful of the effects of rising prices of items on households and businesses and expressed the bank’s resolve to take necessary measures to bring inflation under control.

He noted that despite the June 2024 uptick in headline inflation, prices are expected to moderate in the near term.

The governor attributed the persistence of food inflation to the prevailing insecurity in food-producing areas and high transportation costs.

He emphasised the need to address these challenges to ensure sustainable food supply and moderate food prices.

“In its consideration, the committee noted the persistence of food inflation which continues to undermine price stability. It was observed that while monetary policy has been moderated, aggregate demand and rising food and energy costs continue to exert upward pressure on price development.

“The prevailing insecurity in food-producing areas and the high cost of transportation of park countries are also contributing to this trend. Members were therefore not oblivious to the urgent benefit of addressing these challenges as it will offer a sustainable solution to the persistent pressure of food prices.

“Also noted in this consideration is the increasing activities of middle names who often finance small border farmers, aggregate hard and move farm produce across the border to live in countries,” Cardoso stated.

The CBN boss pointed out that the country has been recording increased inflows, adding that diaspora returns and capital importation had improved.

“For example, if exchange rates have converged, limiting the arbitrage opportunities is very important. Inflows have increased from $37.93bn between January and May of 2024 to $38.8bn. And net inflows, more importantly actually, grew by 73.4 per cent in May 2024 compared to May 2023.

“So that’s very good news. And something I speak about all the time on the issue of diaspora returns and I’m very pleased to say that at the end of June, this has gone up to $2.34bn in comparison to $1.58bn from the corresponding period last year. Capital importation began between January and June at $2.92bn relative to $1.77bn from the corresponding period last year.”

The MPC also retained the cash reserve ratio of Deposit Money Banks at 45 per cent and merchant banks at 14 per cent, as well as the liquidity ratio at 30 per cent.

Nigeria’s headline inflation rose marginally to 34.19 per cent in June 2024 from 33.95 per cent in May 2024, driven by the continued rise in food and core inflation.

The CBN forecast that the domestic economy will grow by 3.38 per cent in 2024, while the International Monetary Fund projected growth at 3.1 per cent in 2024.

The MPC therefore resolved to sustain collaboration with the fiscal authority to ensure that inflation pressure is subdued. In addition, the committee expressed optimism about the recent stop-gap measures by the Federal Government to bridge the food supply deficit.

OPS kicks

But the Organised Private Sector expressed worry over the hike in interest rate by the apex bank.

The National Vice President of the Nigerian Association of Small-Scale Industrialists, Segun Kuti-George, said the increase would pose greater difficulties. He said this is because the cost of loans, on which many businesses depend, will go up.

He said, “This will increase the cost of production, which will impact profit negatively if absorbed or lead to an increase in prices of the goods if passed on to the consumers.

“I think the CBN needs to be more innovative in their approach and stop depending on interest rate adjustments alone.”

Reacting to the development, the National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Dele Oye, said the decision to tighten monetary policy, though driven by CBN’s intent to curb inflation and stabilise the economy, the approach presents several significant ramifications for businesses, the broader economy, and social stability.

Highlighting the implications of the increment, Oye listed them as increased borrowing costs, inflationary pressures and financial strain on businesses.

Speaking on the alternative approaches to inflation control the CBN and the Federal Government of Nigeria may consider, Oye advised that addressing inflation requires a nuanced approach that balances monetary policy with other economic strategies to encourage growth and stability.

He highlighted, “Structural reforms aimed at improving supply chain efficiency can help mitigate inflationary pressures. Investments in infrastructure, transportation and logistics can reduce the cost of goods and services, thereby controlling inflation without the need to raise interest rates.

“Nigeria’s economy is significantly influenced by its agricultural sector. Policies that support agricultural productivity through subsidies, improved access to financing and technological advancements can stabilize food prices, a major driver of inflation in Nigeria.

“Furthermore, the volatility of the naira has been a persistent issue. Implementing measures to stabilize the exchange rate, such as using part of the current foreign reserves to intervene in the currency market to bring the naira’s exchange rate to under N1000/$ can help.”

On his part, the Director-General of the Nigeria Employers’ Consultative Association, Mr Adewale-Smatt Oyerinde, said, “The upward adjustment of the policy rate will lead to further increase in business lending rate by the commercial banks, which is about 30 per cent at  the moment.”

According to Oyerinde, the implication is that it becomes more difficult for businesses to maintain existing investments and almost impossible for significant new investments to take place.

The NECA DG emphasied that once investment declines, capacity utilisation,  volume of activity, employment and profit would be affected negatively.

Oyerinde  stated that  the persistent use of MPR, which is standing 34.2 per cent to moderate inflation, might yield limited results so long as  the huge depreciation in naira value that has shrunk business activities  in the real  sector  remains unchecked.

Oyerinde, therefore urged the CBN to prioritise an exchange rate management procedure that would address the huge erosion in the naira.

The NECA boss also emphasised the need for a strong and deepened collaboration between monetary and fiscal policies in the management process of the economy.

“The importance of addressing the multifaceted challenges confronting businesses cannot be overstated, even as we brace up to the implementation of the new national minimum wage,” he added.