The Manufacturers Association of Nigeria (MAN) and the Lagos Chamber of Commerce and Industry (LCCI) have criticised the Central Bank of Nigeria (CBN) over the interest rate hike.
On Tuesday, the monetary policy committee (MPC) of the CBN raised the monetary policy rate (MPR), which benchmarks interest rates, from 26.75 percent to 27.25 percent.
In a statement on Thursday, Segun Ajayi-Kadir, the director-general (DG) of MAN, expressed concerns over the negative impact the interest rate hike would have on the manufacturing sector.
He said it would further exacerbate the challenges already faced by manufacturers, including rising production costs and declining consumer purchasing power.
“The decision to raise the MPR to 27.25 percent has far-reaching implications for the manufacturing sector in Nigeria,” Ajayi-Kadir said.
“The continued increase in interest rates, which now totals 15.75 percentage points since May 2022, would compound the challenges faced by the sector, including rising production costs in the face of declining consumer purchasing power.”
He said with borrowing costs now exceeding 35 percent, manufacturers are struggling to maintain competitiveness and expand production capacity.
“With the increase in borrowing costs, manufacturers will now pay over 35% on their credit facilities. Clearly, this will lead to an increase in production costs, higher prices of finished goods, lower competitiveness and production capacity expansion,” he said.
“For instance, over the first six months of the year, manufacturers incurred more than N730 billion in capital expenses due to the continuous rise in interest rates imposed by commercial banks.
“This dilemma hampers innovation, productivity and growth. Moreover, the manufacturing sector is grappling with depressed consumer demand, primarily driven by lower purchasing power.”
‘UNSOLD GOODS HAVE INCREASED BY 42.9% DUE TO WEAK MARKET’
The MAN DG said unsold goods in the manufacturing sector surged by 42.93 percent, reaching N1.24 trillion in the first half of 2024.
He said the growing stockpile of unsold products underscores the difficulties manufacturers face in a weakening market.
Ajayi-Kadir said the broader implications of the challenges threaten not only the manufacturing sector but also the Nigerian economy as a whole, as higher borrowing costs lead to poor access to funds, lower capacities and potential business closures.
‘EXPLORE MORE OF MONETARY/FISCAL POLICY OPTION TO CURB INFLATION’
Ajayi-Kadir urged the CBN to stop the rate hike and “explore more of the monetary-fiscal policy handshake option to curb inflation.”
He expressed concern that the CBN increased the MPR despite the modest improvements in inflation, adding that central banks in other countries were either retaining or reducing rates.
Ajayi-Kadir proposed several measures to mitigate the adverse effects on the manufacturing sector, including a comprehensive review of the impact of rate increases, accelerated disbursement of single-digit loans and the introduction of fiscal measures to ease the importation of essential raw materials.
“Conduct a comprehensive review of the effects of continuous rate hikes on inflation and the real sector over the past five years to guide future decisions, focus on promoting domestic production and economic recovery by allowing time for previous rate increases to take effect before implementing further hikes and strengthen the collaboration between the monetary and fiscal authorities to ensure that they are aligned to support growth,” he said.
“Accelerate the disbursement of the N1tn single-digit loan in the accelerated stabilization and advancement plan for the manufacturing sector to cushion the impact of the high MPR on borrowing costs, introduce fiscal measures that support the importation of essential raw materials and technology at concessionary rates to ease the burden on manufacturers and encourage backward integration and local sourcing to minimize dependence on imports and reduce pressure on foreign exchange reserves.”
Ajayi-Kadir recommended promoting renewable energy and improving infrastructure within industrial hubs to reduce operational costs for manufacturers.
‘REASON FOR RAISING INTEREST RATE NOT SUSTAINABLE ARGUMENT’
Chinyere Almona, LCCI’s DG, said the CBN’s inflation control efforts had yielded some marginal gains but had done little to address the root causes of inflation.
“The marginal drop in the August headline inflation rate to 32.15 percent, down from 33.40 percent in July, is on a good note,” Almona said.
“While this represents a month-on-month improvement, the broader year-on-year comparison still highlights a troubling 6.35 percent increase compared to July 2023, and the interest rate raised to 27.25 percent both presenting a tense business environment.
“The marginal drop in inflation reflects some level of policy impact but is insufficient to address the deep-rooted challenges, particularly in food and core inflation categories.”
She said the CBN’s justification for raising the monetary policy rate due to fears of a petrol price hike is not a sustainable argument.
The LCCI boss urged the government to intervene in the controversies about the pricing dynamics of both imported and locally refined petroleum products arising from the lack of resolution between the Nigerian National Petroleum Corporation (NNPC) Limited and the Dangote Petroelum Refinery.
She identified energy and transportation costs as major contributors to inflation, urging the government to accelerate energy reforms, especially in the power sector.
Almona highlighted the need for stable electricity for manufacturers, as well as small and medium enterprises and advocated a transition to renewable energy sources to reduce production costs.
“Accelerate energy reforms to improve electricity generation, reduce reliance on costly diesel and petrol, and ensure stable power supply for manufacturers and SMEs,” she said.
“The transition to renewable energy sources should be prioritised to reduce production costs.”
The LCCI DG also called for investments in transportation infrastructure, particularly rail and road networks, to lower logistics costs and reduce price volatility in consumer markets.
Almona recommended prioritising the adoption of compressed natural gas (CNG) mobility in the country.
She also stressed the need for transparent foreign exchange management to reduce speculation and stabilise the naira.
“A stable exchange rate will help moderate imported inflation, especially in essential commodities and raw materials needed for local production,” Almona added.
She recommended that the CBN should work with the Nigeria Customs Service (NCS) to fix the import duty exchange rate for a certain period to aid business decisions on importation.
Almona called on the government to take a holistic and sustained approach to tackling inflation, combining the tips on boosting local production, stabilising energy and transportation costs, and ensuring alignment between monetary and fiscal policies.