Private sector foresees higher inflation, massive job cuts

The hike in Nigeria’s Monetary Policy Rate, also known as interest rate, from 22.75 per cent to 24.75 per cent by the Central Bank of Nigeria will further accelerate the country’s inflation and lead to massive job cuts across the country, private sector operators stated on Tuesday.

The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, and the Nigerian Association of Small Scale Industrialists explained that the increase in MPR would worsen he private sector’s ability to access affordable credit.

While they described the interest rate hike as a move that would come with unintended negative consequences, the Lagos Chamber of Commerce and Industry said the MPR hike was a price that businesses would have to pay, given the current state of the economy.

The CBN again increased the MPR to 24.75 per cent from 22.75 per cent despite concerns about economic hardship.

The CBN Governor, Yemi Cardoso, announced this after the second Monetary Policy Committee meeting for the year in Abuja on Tuesday.

He said the new rate was focused on reducing current inflationary pressures and ensuring sustained exchange rate stability.

“All 12 members of the committee decided to further tighten monetary policy by raising the MPR by 200 basis points to 24.75 per cent from 22.75 per cent. Adjust the asymmetric corridor around the MPR to +100 to -300 from plus 100 to -700 basis points,” he noted.

With inflation at 31.70 per cent, Cardoso declared that the new MPR was part of moves to tackle the country’s inflation.

The bank had, during its previous meeting, raised the MPR significantly by 400 basis points to 22.75 per cent from 18.75 per cent.

It also made changes to the asymmetric corridor around the MPR, setting it at +100/-700 basis points from +100/-300 basis points

The CBN increased the Cash Reserve Requirement to 45 per cent from 32.5 per cent, and maintained the Liquidity Ratio at 30 per cent.

Although the apex bank said it took the decision to fight inflation, the benchmark interest rate had been 22.75 per cent since the last MPC meeting that was held on February 26 and 27, 2024.

Briefing journalists on Tuesday, Cardoso, who chaired the MPC, also stated that the Cash Reserve Ratio of Deposit Money Banks was retained at 45 per cent, while the CRR of merchant banks was reviewed upward from 10 per cent to 14 per cent.

He disclosed that the liquidity ratio was left unchanged at 30 per cent.

Cardoso said the MPC noted the increase in food inflation from 35.41 per cent to 37.9 per cent as part of the consideration of the committee for revealing the interest rate.

“From our perspective, the key thing is to be fully focused on our core mandate to fight inflation and stablise the economy. The purchasing power of the average person should be restored to the level it should be,” he said.

The apex bank’s governor added that the economy would be stabilised by the end of the year.

“Things should moderate from May and the inflation rate should come down by the end of the year,” he stated.

Justifying the reasons for the hike, the former Lagos State Commissioner for Finance explained that the MPC was faced with the option of either progressing with its tightening cycle or holding to observe the impact of the previous rate hike and adjustment of the Cash Reserve Requirement.

He added that the MPC’s decision to tighten the economy was based on economic data and market analysis to fulfil its price stability mandate.

“With respect to growth, yes, there appears to be a trade-off of some sort. We expect the tightening to be short term, not long term. The right response to the policy will influence MPC’s decision to take growth into consideration

“Consequently, at this meeting, the MPC was faced with the option of either progressing with its tightening cycle or hold, to observe the impact of the  previous rate hike and adjustment of the Cash Reserve Requirement. After reviewing the balance of risks and the near-term inflation outlook, members were convinced of the need to progress with the tightening cycle,” he stated.

Cardoso, allaying fears of a continuous rate hike, assured that the current spate of monetary policy tightening measures by the CBN would not be long drawn and would be relaxed once there were substantial improvements in the economy in terms of inflation and exchange rate.

According to the CBN governor, the committee does not expect a long-drawn interest rate tightening and as the reforms being implemented take effect, there will be relaxation in MPR.

He said, “While the increase in interest rate may have tendencies toward strangulating the economy, with the foreign exchange rate coming down, that also helps to moderate it overall.

“And as I said earlier, you would expect that this would not be too long drawn; at least I would hope so. We are getting towards a situation where the exchange rate is moderating, and we are expecting it to moderate and then it finds a level that, quite frankly, is sustainable. This would involve huge collaboration with the fiscal side because a lot of that cannot just rely on the monetary side alone.”

The CBN boss stated that the considerations of the committee at the meeting focused on the current inflationary pressures and the need to anchor inflation expectations as well as ensure sustained exchange rate stability.

“These considerations underscore the importance of the CBN’s commitment to the price stability mandate and the need to urgently bring inflation under control to ensure that the purchasing power of ordinary Nigerians is restored in the short to medium term,” he said.

The apex bank governor mentioned that members of the MPC noted the continued rise in headline inflation, driven largely by food prices because of supply shortages and the high cost of logistics and distribution.

He added that they called for immediate action against insecurity in the country while commending the government for its resolve to address the increasing hunger level in Nigeria.

“The committee, therefore, was of the view that addressing food insecurity is key to containing current inflationary pressures. On this note, members commended the ongoing efforts of the Federal Government towards addressing food insecurity.

“Some of these measures include the provision of various palliatives, the release of grains from the strategic reserves, the distribution of seeds and fertilisers, as well as farm implements for dry season farming.

“The committee, therefore, called for the full implementation of the Federal Government’s agricultural policies and programmes to improve food supply and further advised for broader fiscal consolidation, particularly in the improvement of tax collection and tax-to-GDP ratio.

“The committee noted with satisfaction the level of stability achieved in the foreign exchange market in the last few weeks. This, in the view of members, reflects the impact of the bank’s recent policy actions and reforms, as well as increased transparency in the market.”

According to Cardoso, the committee noted the efforts of the bank in offsetting verified foreign currency obligations, an action that will greatly enhance investor confidence and attract foreign investments to Nigeria.

The MPC also reviewed developments in the banking system and noted that the industry remained safe, sound and stable.

The committee, thus, called on the bank to sustain its surveillance and ensure compliance of banks with existing regulatory and macroprudential guidelines.

It also enjoined the bank to expedite action on the recapitalisation of banks to strengthen the system against potential risks in an increasingly globalised world.

Cardoso noted that the key drivers of inflationary pressures remained the strong exchange rate pass-through to domestic prices; rising cost of transportation; high cost of energy and other production inputs; lingering insecurity, especially in food-producing areas; and legacy infrastructure deficits.

Data from the National Bureau of Statistics showed that real GDP grew by 3.46 per cent in the fourth quarter of 2023, compared with 2.54 per cent in the previous quarter.

The apex bank governor hinted that disruptions to the global supply chain, associated with pockets of geopolitical tensions, continued to pose a key concern to monetary policy.

“Global inflation has, however, continued to decelerate in 2024 but is expected to remain above the long-run objectives of major central banks. The interest rates of advanced economy central banks are, thus, expected to remain high in the short to medium term before commencing a descent.

“Consequently, global financial conditions may remain tight through 2024. Accordingly, the committee will continue to monitor developments in the global and domestic economies to ensure that inflationary expectations are anchored to restore and sustain macroeconomic stability,” Cardoso said.

The CBN stated that the next MPC meeting would be held on May 20-21, 2024.

NACCIMA raises concern

The  National President, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Dele Oye, said the group was deeply concerned with the manner in which the apex bank had continued to raise interest rates.

“The NACCIMA, representing the collective voice of Nigerian businesses across commercial, industrial, and agricultural sectors, is deeply concerned by the central bank’s approach to curbing inflation and managing excess liquidity through broad-based policy tools that inadvertently impose constraints on the private sector’s ability to access affordable credit.

“Our position, as detailed in our previous communication (Ref: NACC/NP22/23/1249 dated March 13, 2024), remains that the focus of the CBN’s policies should be recalibrated towards addressing the excess liquidity primarily stemming from the public sector’s borrowing habits and expenditure.

“The private sector, which has been effectively sidelined in the bank lending market due to the crowding-out effect, now faces even more severe repercussions,” he stated.

Oye noted that the recent rate hikes, while aimed at controlling inflation, were likely to have many negative consequences.

He outlined them to include an increase in the cost of borrowing, adding that “existing loans will incur higher interest rates, raising the cost of capital for businesses. This scenario discourages entrepreneurial activities and expansion plans, which are vital for economic growth and job creation”.

Oye averred, “Restricted credit availability: With the increase in the CRR, banks’ ability to lend is further curtailed. This exacerbates the challenges faced by the private sector, which is already grappling with limited access to finance.

“Pass-through effects on inflation: As businesses incur higher interest costs, they are left with no option but to pass these costs on to consumers through increased prices for goods and services, which can contribute to inflation rather than curb it.

“Stifling economic growth: Tightened monetary conditions may lead to a reduction in investment and consumption, which are essential drivers of economic growth. This could potentially stifle the economic recovery and dampen the prospects for prosperity.”

He recommended that the CBN should pursue a more nuanced and targeted approach, focusing on mechanisms that specifically address liquidity issues in the public sector without placing undue burden on the private sector.

“Additionally, policy directions should be clear and communicated on a quarterly basis, with a robust stakeholder engagement strategy to ensure that the views and concerns of the private sector are considered in policy formulation.

“In summary, while NACCIMA acknowledges the CBN’s mandate to maintain price stability, we urge a re-evaluation of the current policy measures to foster a more conducive environment for private sector-led economic growth.

“We remain committed to engaging with the CBN and the Ministry of Finance to find sustainable solutions that will ensure the economic well-being and prosperity of all Nigerians,” he noted.

Also speaking, the Director-General of NACCIMA, Sola Obadimu, remarked that the hike in MPR had put a strain on the inventory of businesses.

“Goods can no longer go out because people are buying less. Inventories are building up and there is nothing anybody can do. A distributor can’t take stock from you when the ones he has taken have not been bought.

“This move would naturally increase the cost of doing business and if the cost of doing business is increased because you can’t sell below your production cost, your stock would move slower and then your inventory will grow. Consumers are overwhelmed; they don’t have money to buy things anymore.

“Their wages are declining daily because there are other charges like the cost of utility and others. So, it is going to have an adverse effect on the real sector,” Obadimu stated.

LCCI reacts

Speaking with The According, the President of the Lagos Chamber of Commerce and Industry, Gabriel Idahosa, described the rate hike as a price that businesses would have to pay, given the current state of the economy.

He described the economy as ‘a house on fire’ owing to several policy missteps on the part of erstwhile CBN Governor, Godwin Emefiele.

Asked if the increase in interest rate would have a negative effect on the borrowing capacity of organised businesses, Idahosa said, “It is a no-brainer. Of course, it will. But this is a CBN that has been trying to put out fires caused by Emefiele and the rest.

“So, they have to first of all reduce the rate of the burning. It is a high price to pay. Once it is raining, either you have a lot of umbrellas or you take an aircraft and fly above the clouds, but if you don’t have a jet, then your option is limited to using an umbrella.”

Negative consequences

On his part, the National Vice Chairman of the Nigerian Association of Small Scale Industrialists, Segun Kuti-George, worried that the interest rate hike would come with unintended negative consequences.

According to Kuti-George, when businesses are forced to borrow at higher rates, the cost of production will consequently increase. This, he said, will inevitably trigger an increase in the price of products.

Kuti-George said, “This is why it is said in economics—other things being equal, because things are usually not equal. As you are trying to solve a problem, you are creating another. So, what you are left to do is consider the cause and effect and see which one is more tolerable.

“As the CBN is raising interest rates, what they have at the back of their mind is to stimulate investments and draw more money from circulation into the investment net. But, as they are trying to solve that, the interest rate at which people borrow money will also go up.

“This will be unattractive for businesses. That means the cost of funds will go up on the part of the entrepreneurs. It means the cost of production is going higher, and so will the price of goods and services. Already, inflation is over 30 per cent. It is bound to go higher.”

The Chief Economist of SPM Professionals, Paul Alaje, explained that the implication of the raised benchmark interest rate from 22.75 per cent to 24.75 per cent was that the money supply would further reduce and the lending rate was expected to go up.

He said, “The central bank is hoping that with these policies, inflation would nose dive; however, I do not think these policies would have an effect on inflation in the short run because the real driver of inflation is food inflation, as reported by the Nigerian Bureau of Statistics.

“So, if inflation does not reduce in the short run, what are the other factors that can make it come down? The rebound of the naira in the parallel and official markets is what will account for the immediate reversal of inflation from where it is to where we want it to be.

“So, I am expecting inflation to come down by June to about 25 per cent. We could manage to take the naira back to about N1,100 and stabilise between April and the end of June, coming down from 31 per cent to about 25 to 26 per cent, which would be an improvement.”

Alaje noted that due to the increase in monetary policy, more businesses would find it very challenging to borrow money.

He added, “If this increase is not properly managed, it is going to have a negative impact on investment, and if investment is bad, businesses won’t be able to borrow money from banks to stabilise or to create new jobs or render services.

“So, by implication, unemployment is expected to increase. If unemployment increases and the fiscal side is not able to respond, this is another kettle to fish.”

In the same vein, the Managing Director of Cowry Asset Management Limited, Johnson Chukwu, said that with the interest rate increase, the lending rate would further increase.

He stated, “This increase also means that liquidity in the private sector will be constrained and tightened. The tightening of liquidity, inasmuch as it has a positive impact on the exchange rate, is likely going to have an adverse effect on productive activities.”

On his part, a professor of capital markets at Nasarawa State University, Uche Uwaleke, said, “Much as tightening is necessary at this time given elevated inflation, MPC should tighten policy incrementally and in a measured manner that optimises the CBN’s policy toolkit without undue reliance on the monetary policy rate.

“The decision by the MPC to increase the MPR by 200 bps makes it a total of 600 bps in just one month if one adds the 400 bps delivered in February. This is in addition to a very high CRR of 45 per cent representing sterilised bank deposits.

“This development is now driving undue pressure by banks on the CBN’s standing lending facility and increasing the cost of funds generally. The CBN should recognise that the challenge currently facing the Nigerian economy is not just inflation but stagflation and to this end, it should equally have regard to growth concerns in future meetings of the MPC.”

‘MPR hike ineffective’

Speaking with The According, an economist at the Nigerian Economic Summit Group, Faith Iyoha, described the frequent rate hikes by the MPC as an ineffective tool to combat the country’s inflation.

She said the increase in MPR would have a negative impact on productivity, a development that would consequently cause a decline in Nigeria’s gross domestic product.

She reasoned, “They have not rejiggered the Monetary Policy Rate to be effective in curbing inflation or signaling direction. Inflation will continue to go up. They are only putting pressure on the market because interest rates will increase.

“It means productivity will become difficult. GDP growth will be constrained because the interest rate will be high. That will further put pressure on the market. It means productivity will be low. Prices will go up. It’s like going around in circles.

“It may lead to overheating of the economy. That is to say, the tightening may be too much for productivity and it will lead to a decline in GDP. There is always a relationship between prices and productivity. You cannot say you are tackling inflation without leaning on the side of productivity. You will definitely lose because you are disincentivising business people from producing.”