- Decision detrimental to investment, economic growth – Experts
- How money printing, oil prices crash harmed economy – Cardoso
- Nigerians grappling with harsh realities of inflation – Akpabio
The further tightening of the Monetary Interest Rate to tame elevated inflation by the Central Bank of Nigeria 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.
The Governor of CBN, Yemi Cardoso, had announced the MPC’s decision to raise MPR by 50 basis points as well as the Cash Reserve Ratio by 50 basis points from 45% to 50% for Deposit Money Banks and from 14% to 16% for Merchant Banks at the end of its 297th meeting in Abuja on Tuesday.
However, the committee left the Liquidity Ratio at 30% and Asymmetric Corridor is still +500/-100 basis points around the MPR, in order to combat the nation’s stubborn inflation.
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 in particular, face heightened difficulty accessing affordable financing, limiting their growth potential.
Economic experts cautioned that the decision to further increase the country’s Monetary Policy Rate by 50 basis points from 26.75% to 27.25% could hurt the nation’s economic growth.
Reacting to the MPC’s decision and its implications on the nation’s business environment, an Abuja based economist and executive director, African Centre for Leadership Strategy & Development (Centre LSD), Monday Osasah, said Nigeria faces the risk of economic slowdown following the latest announcement.
“These measures will likely lead to higher loan rates for businesses and individuals, potentially slowing economic growth through reduced spending and investment. The liquidity ratio remains at 30%, suggesting no further liquidity squeeze beyond the CRR hike, while the asymmetric corridor around the MPR will encourage cautious lending by banks.
“Overall, these policies could stabilize the financial system but at the risk of economic slowdown due to tightened credit conditions and increased costs for borrowers,” he said.
He added that, “In case you don’t understand, the MPR was raised by 3.8% meaning interest rate for businesses and individuals has increased, they hope to reduce spending and borrowing in the economy.
“CRR increased means that they increased the amount that banks must keep with the CBN, this money cannot be used for lending and reduces liquidity in the market, reducing money available for banks to lend. Hopefully, it controls inflation
“These are rate levels that promote industrial contraction and stifle economic growth.
“Interest on loans with this decision has increased. If your return on investment cannot accommodate the interest you have to pay, please don’t go for any bank loan,” he warned.
Also reacting, the Chief Economist at SME Professional, Paul Alaje, identified four key developments that will occur as follow; “Inflation is expected to rise in September as a result of a further PMS price increase as caused by many factors including exchange rate; interests on borrowed money collected from banks are expected to increase marginally; Banks will have less to trade with. This is done to tame money supply. But, why won’t money supply be high is a high cash dependent economy with a currency that is vulnerable to devaluation? And the real problem here is the weak Naira. Everything depends on it. The gain from tightening is often lost to devaluation.”
To help alleviate the crisis, Alaje also offered four key recommendations as, “Stop deficit financing; peg the naira; be mindful of the continuous rate hikes. They have crowned out growth and employment; and reduced ways and means of financing to 1%.”
He noted that, “The recent findings in economics reveal that monetary tools are insufficient to combat non-monetary induced inflation such as acute supply side shortages in food and others. Thus, policy convergence is important to nation states to conquer price instability.”
Also, the Centre for the Promotion of Private Enterprise has described the decision of the Monetary Policy Committee of the CBN to increase monetary policy rate as inimical to the nation’s development and economic growth.
The Chief Executive Officer of CPPE, Muda Yusuf, stated this while reacting to the MPC’s decision on Tuesday.
Exposing his mind in a statement, Yusuf said, “It is quite troubling that at a time when manufacturers, entrepreneurs and other investors in the economy are craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy. The latest policy choice of the apex bank is at variance with the mood of most economic players and the desire to promote economic recovery and growth. What manufacturers and other investors need at this time is some oxygen and stimulus, not policy measures that would worsen an already suffocating situation.
“MPR at 27.25%; CRR at 50% and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions.”
He noted that, “The second quarter GDP numbers showed clearly that the economy was still in a floundering mode as many critical sectors of the economy slowed. These include manufacturing and other subsectors of the industrial sector such as cement, food and beverage, chemicals and pharmaceuticals, trade, ICT and real estate. The road transport, motor assembly, publishing and motion pictures sectors contracted during the quarter. The Aviation, Oil Refining, textile, livestock and quarry and minerals sector were still in recession. Tightening financial conditions in the circumstances does not seem appropriate.”
He called on the CBN not to make the private sector pay the price of liquidity growth which they were not responsible for.
“Issues of excess liquidity should be addressed within a causative context. The injection of liquidity into the system is largely public sector driven, as rightly noted by the CBN Governor. Therefore, the focus of resolving it should be within that context. Stifling the financial conditions to address liquidity issues is detrimental to investment and growth of the economy,” he stated.
According to him, “The implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated, possibly well above 35% or more. It is made worse by the increase in CRR to 50% and retention of asymmetric corridors of +500 and -100.”
Expressing the centre’s stand against the CBN’s decision, he said, “We believe that the policy decisions of the CBN are most inappropriate for the prevailing economic conditions and the challenges faced by entrepreneurs in the country. The operating and production costs of businesses would be further exacerbated by the latest monetary policy tightening. The increase in CRR to 50% would constrain financial intermediation with negative consequences for the banking system and the economy.”
‘CBN may further raise MPR by 50bps in November’
Meanwhile, researchers at Cordros Securities Limited have predicted that the MPC of the CBN may further increase the country’s monetary policy rate by 50 basis points at its next meeting scheduled for November 25-26, 2024.
The researchers stated this while reacting to the MPC’s decision to raise MPR by 50bps to 27.25% at the end of its 297th meeting in Abuja on Tuesday.
According to a report produced by the securities house in response to the MPC’s September meeting, Cordros Researchers said, they expect further hike in rate in November as energy cost would drive up inflation rate in the coming months. Thus, bearing in mind that the CBN is fighting inflation with interest rate, the prospect of further hike is imminent.
“We foresee the recent increase in PMS prices exerting upward pressure on inflation in the near term, potentially offsetting the usual deflationary effects of the harvest period. This inflationary outlook may prompt the MPC to implement further rate hikes, given its commitment to ensure price stability. As a result, we expect a 50bps increase in the MPR at the next meeting scheduled for 25-26 November,” they stated.
Reacting to the September MPR rate hike, the Cordros Securities researchers stated that they had expected the Committee to pause interest rate following decline in inflation rate in the past two consecutive months.
“Prior to the MPC meeting, we anticipated that the MPC would keep the policy rate at the current level following the consecutive decline in headline inflation over the last two months.
“We also highlighted that the intensification of global monetary easing could reduce the need for defensive rate hikes by the MPC, thus supporting a pause in the tightening cycle. However, the MPC unanimously voted to raise the MPR further by 50bps to 27.25% on the back of the elevated inflationary pressures evidenced in the sustained increase in core inflation despite the decline in food prices.
“The Committee also noted the sustained money supply growth and the unabating demand pressure in the FX market, which has supported the volatility of the naira. Specifically, the Committee highlighted the strong correlation between FAAC releases and liquidity levels in the banking system, as well as the corresponding impact on the exchange rate. This supported the further tightening of monetary conditions in a bid to mitigate the negative effect of FAAC releases on the stability of the exchange rate while supporting price stability.
“Precisely, the MPC voted to raise the CRR for Deposit Money Banks to 50.0% (previous: 45.0%) and 16.0% (previous: 14.0%), respectively. Meanwhile, the Committee retained other parameters, including the asymmetric corridor around the MPR (+500bps/-100bp) and the liquidity ratio (30.0%).
“The Committee noted the global trend towards monetary easing, which is expected to loosen global financial conditions and possibly reduce downside risk to global growth. The Committee also expects global inflation to continue to moderate but will remain above banks’ target levels, underpinning a cautious approach to lowering interest rates.
“Similarly, we expect the Federal Reserve in the US, the ECB, and the BoE to implement further rate cuts before the year ends as inflationary pressures ease and data points converge towards target levels.”
Addressing the impact of the latest hike of rates on the fixed income market, they noted that the decline in stop rates at the recent NTB and bond auctions indicates that the market may not have fully adjusted to the last hike in the Monetary Policy Rate (MPR), leading investors to seek to lock in existing yields before any potential upward adjustments.
“While we anticipate that the outcome of this meeting will generate further bearish sentiment across the mid-to-long end of the yield curve, tomorrow’s NTB auction should provide clearer insights into the direction of yields in the secondary market.
“Overall, we expect moderate increases in bond yields; however, this reaction may be muted due to the weak transmission of interest rate changes to fixed income yields observed recently. As we approach the next MPC meeting, investors are likely to start factoring in another potential rate hike, particularly given the mildly hawkish tone expressed by the CBN Governor during this meeting.”
On the equities market, they stated that, “Since the July MPC meeting, domestic investors have limited participation in the market due to elevated fixed income yields, even as they remain the dominant players in the market (84.9% as of August 2024).
“Consequently, the All-Share Index year-to-date return has declined to +31.8% (July: +34.4%) as of 24 September. Following the MPC meeting, we expect the hawkish tone to further amplify risk-off sentiment in the domestic market.
“However, we do not anticipate significant shifts in trading patterns, as investors maintain a cautious approach and a limited appetite for stocks. As such, we believe investors will continue to rotate into sectors less affected by higher rates, such as financials (banks), which benefit from increased margins on loans as interest rates rise.
“Additionally, any price dip in strong-performing stocks could offer attractive buying opportunities as the current rate-tightening cycle may be approaching its peak. Therefore, we expect investors to closely monitor subsequent Treasury bills and bond auctions to gauge the movement of yields in the fixed-income market.”
How money printing, oil prices crash harmed economy – Cardoso
However, the Governor of the CBN has again blamed the monetary policies of his predecessor, Godwin Emefiele, for the current economic situation of the country.
Cardoso stated this at a press briefing on Tuesday at the end of the 297th meeting of the Monetary Policy Committee in Abuja.
Emefiele was CBN governor from June 4, 2014 to June 9, 2023.
After Emefiele’s suspension, President Bola Tinubu appointed Cardoso as CBN chief in September 2023.
Cardoso’s appointment was immediately confirmed by the Senate.
The MPC under Cardoso in the last year has raised the interest rate by 8.5%, from 18.75% in September 2023, to 27.25% 12 months later.
Under Cardoso, the naira, which exchanged for around ₦700/$1 in September 2023, now sells for over ₦1,600/$1.
Asked whether the monetary policies of the apex bank including multiple interest rate hikes and the collapse of the foreign exchange windows are working considering the economic hardship Nigerians are facing, the CBN boss blamed his predecessor’s policies for the monetary situation of the country.
“You can’t divorce the situation that has taken place with what happened in the last one year,” Cardoso said while the economy on average was growing at 1.2% during Emefiele’s tenure, the money supply was growing at 12.6%.
“This was an inherent distortion,” he said.
“We came into a very loose money supply situation between 2017 and 2023 and witnessed the pumping of liquidity into the system.
“In 2015, the money supply was about N19trn, and in 2023, it was N54trn. That’s a huge increase, a very huge increase. And then a substantial amount of that was through ways and means.
“So, essentially, the printing of money resulted in a huge amount of money chasing the same amount of goods or a relative amount of goods. I think that context is very important to have,” he explained.
Known as the Ways and Means, the apex bank offered short-term financing to the Federal Government to cover its budget shortfalls.
“Let’s not forget that we had a situation where global oil prices collapsed in 2015. With that collapse, unfortunately, and it is a fact of life, Nigeria is a monolithic economy.
“So, you are dependent for everything on oil, and as a result of the collapse of oil prices, the foreign exchange began to dwindle and it is important to understand that within this period, the response to that was lesser foreign exchange and fixing of foreign exchange prices and that also harmed the economy to no end,” he added.
Cardoso also said “attempt to harmonise the multiple exchange rates has brought about results” and Nigerians “no longer have multiple windows.”
He said the exchange rate is now more flexible and people can “transact their businesses through willing buyer, willing seller, as opposed to a situation where multiple exchange rates discourage and not allow that to happen.
“I accept the fact that many outside are finding things very difficult but I want to say that the things we are doing are set to put the economy of this country on a trajectory where we shouldn’t go back and see some of the inefficiencies we’ve seen in our system over the recent past. These, I believe are short-term pains and I believe we will get out of the situation we are in now.
“Though I accept that they may be tough but we have no choice but to deploy these tools to reign in the excess liquidity in the system, the high inflation and encourage portfolio investors who have taken flight to come back and take interest in Nigeria,” he added.
Nigerians grappling with harsh realities of inflation – Akpabio
Also, the Senate President, Godswill Akpabio, has said that the citizens are struggling to survive as a result of the courageous economic reforms of President Bola Tinubu.
In a welcome address to fellow Senators on Tuesday, marking their return from the annual recess, Akpabio noted that the National Assembly is fully aware of the economic struggles citizens face, including inflation, high living costs, and market volatility.
He expressed sympathy for Nigerians enduring these challenges but maintained that the current economic situation is not the fault of the Tinubu administration.
He, thereafter, sympathized with Nigerians for the harsh economic situation but claimed that the situation was not caused by the Tinubu-led administration.
He said, “In the face of rising economic pressures, our fellow citizens have been grappling with the harsh realities of inflation, soaring living costs, unpredictable markets and economic indices.
“The challenges have tested the very fabric of our society, and we stand together to express our deepest empathy for every Nigerian who may be buried in the brunt of the current reforms as a result of the need to reposition the economy for most of our country and take us out of the doldrums and the messy situation we met when we assumed office in 2023. We want Nigerians to know that their struggles are not lost on this side.”
He assured that the upper chamber would respond to the economic challenges of the country.
Akpabio said, “Our security duty, as your earnest representatives, remains to respond with the audacity and compassion that the current situation deserves.”
He, however, commended the president for the courageous reforms being carried out on the nation’s economy which, according to him, have started yielding fruits.
He stated, “Amidst these trials, we have also seen commendable strides in various sectors from the executive arm of government led by President Bola Tinubu. Our agricultural initiatives are beginning to bear fruits. The strides made in infrastructure can be seen by all, even starting from the federal capital territory.
“These glimmers of hope pave the way for a brighter future. The hard-won gains will not overshadow the pressing issues that still loom large before us.”
