The further tightening of the Monetary Interest Rate to tame elevated inflation by the Central Bank of Nigeria (CBN) may create more hurdles for the manufacturing sector and other debtors of commercial banks with a possible consequential negative growth rate effect on the economy.

Rising from its 294th meeting of the Monetary Policy Committee (MPC) on Tuesday, the central bank announced an increment in interest rate benchmark by 200 basis points to 24.75 percent from 22.75 in a continued chase to tame Nigeria’s stagflation that has seen food inflation rise to 37.92 percent in February 2024.

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.

The high cost of funds presents a significant challenge to businesses and the economy. For businesses, it translates to increased borrowing expenses, which can strain their financial resources and hinder investment in expansion, innovation, and hiring.

Small and medium-sized enterprises (SMEs), in particular, face heightened difficulty accessing affordable financing, limiting their growth potential.

The MPC also adjusted the asymmetric corridor around the MPR to +100/-300 basis points, while retaining the Cash Reserve Ratio of Deposit Money Banks at 45 percent. It also adjusted the Cash Reserve Ratio of Merchant Banks from 10.0 per cent to 14 per cent, and retained the Liquidity Ratio at 30 per cent.

Governor of the central bank Olayemi Cardoso who announced the decisions of the MPC meeting yesterday in Abuja said the “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.”

However, he said he doesn’t expect the tightening rates to be long-drawn.

The CBN governor also disclosed that his office refused to validate the outstanding $2.4 billion Forex forward transactions because they were ineligible for forex allocation.

Cardoso made the remark on Wednesday in reaction to airline operators who said they lied in their claim of settling all FX backlog to its members.

Cardoso said the central bank relied on the report by Deloitte Consultants to refuse approval for the applications. Deloitte Consultants had produced an audit report that revealed that most of the transactions did not qualify for payment.

“In some cases, some allocations were made without being requested. You also had some where they had no naira and they allocated foreign exchange. It was for that reason that we refused to validate those particular transactions. Because, apart from the fact that documentation was not satisfactory, many cases were outright illegal,” the CBN governor said, while responding to questions from journalists at the end of this month’s meeting of the MPC of the bank.

He said law enforcement agencies are now looking into the transactions that are not valid to be paid.

However, he said if there is any information to the contrary, the CBN management would reconsider its stand in due course.

“Other transactions have been settled. And as of today, the valid transactions – as far as the Central Bank of Nigeria is concerned – have been taken care of. We are also not unmindful of the fact that there may be some stakeholders who over some time may have had a backlog in one form or the other,” he stated.

Cardoso said his administration has done what it could to make the FX market as transparent and liquid as possible.

In reaction to the outcome of the MPC meeting, economic experts said much as tightening is necessary at this time because of the elevated inflation, MPC should tighten policy incrementally and in a measured manner that optimises the CBN’s policy tool kit without undue reliance on the monetary policy rate. 

Professor of capital market and former commissioner of finance in Imo State, Uche Uwaleke, said the development is now driving undue pressure by banks on the CBN’s Standing Lending Facility and increasing 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 should equally have regard to growth concerns in future meetings of the MPC,” he stated.

Rate Hike To Limit Banks’ Lending To Businesses —- Experts

Analysts have expressed concern that the latest hike in benchmark interest rate will see deterioration of the lending books of banks and would also have a negative impact on growth in the country.

According to analysts, the MPC is trading growth for stability with its latest moves.

In line with the expectations of analysts, the MPC had for the second consecutive time this year raised the benchmark interest rate from 18.75 per cent to 22.75 per cent, and now 24.75 per cent.

Commenting on the latest hike, managing director and chief executive of Arthur Steven Asset Management Limited, Mr Olatunde Amolegbe, noted that he had expected the committee to continue with its hawkish stance.

According to him, the MPC is reading effectiveness to its massive rate movement of last month, given that the naira had begun to strengthen and this is expected to slow the rate of growth in inflation rate in subsequent months.

“I suspect that is why they kept applying the same measures this month albeit at a relatively less hawkish level. The rate increase will, of course, continue to attract foreign portfolio investors (FPIs) at a high rate as we have seen in recent weeks, which will continue to boost supply to the forex market and ensure price stability.

“It is also possible that local investors move towards fixed income instruments rather than speculating in the forex market which could reduce inordinate demand and strengthen the Naira further,” he said.

He, however, noted that ‘the flip is that finance cost increases sharply for industries with negative impact on production, unemployment and economic growth.”

Meanwhile, Amolegbe whilst stating that the CBN is trading growth for stability at this point, said, “The point at which this needs to be reversed is anybody’s guess. As costs such as interest rates rise, the probability of default or non-performance loans (NPLs) also tends to rise. “This, also coupled with rising inflation and lower consumer purchasing power, might mean higher NPL levels in the books of banks.”

This was also the view of the chief executive of the Centre for Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, who stressed that the hike would mean a higher cost of credit to the real sector.

He said, “The new dramatic increase in MPR means that the cost of credit to the few private sectors that have exposure to bank credits will increase, which will impact their operating costs, prices of their products and profit margins, amidst very challenging operating conditions.”

Noting that in the Nigerian context, price levels are not interest sensitive, Yusuf said supply side issues are much more profound drivers of inflation.

According to him, the hike would further pose a risk to the financial intermediation role of financial institutions in the country.

“The increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.

“Already, bank lending has been constrained by the high CRR, with many operators in the sector claiming that effective CRR is as high as 50 per cent for many banks. The Nigerian banks are yet to live up to their financial intermediation role because of these constraining factors,” he concluded.