BUSINESSES in Nigeria will have to cope with a higher cost of sourcing funds as the Central Bank of Nigeria (CBN) has raised the monetary policy rate (MPR) from 18 per cent to 18.5 per cent.
The CBN governor, Godwin Emefiele, announced the decision on Wednesday after the policy-setting committee meeting at the CBN headquarters in Abuja.
The development is the third consecutive time the apex bank would be raising the MPR, which determines the interest on lending by financial institutions to borrowers.
Commercial banks as a result of this development, would have to hike lending rates to customers, which may eventually end up higher than 30 per cent.
Also, commercial banks are not unlikely to review upward interest rates on debts that borrowers had collected from them due to this development.
“This is not healthy for businesses to thrive. This has shown that the economy is in dire need of overhaul since it has failed to support funds for businesses. How can businesses survive with this kind of rate hike? CBN has been doing this without results,” a development consultant, Celestine Okeke.
Okeke stressed that it was becoming more expensive to do business in Nigeria, saying, “Those who borrowed money would pay higher. Nigeria’s stocks are expected to experience low yield as a result of the rate hike.”
While data has shown that constant rate hikes have not curbed inflation, experts urged the monetary authorities to change their strategy to tackle the country’s inflation.
“Both the monetary and fiscal authorities have to find a lasting solution to the rate hike. It is negatively affecting small and medium-scale enterprises, and it is not a good development for the economy,” a business analyst with Arise Television said while reacting to the MPR hike.
Meanwhile, in a flash note published on April 16, 2023, professional services company, KPMG Nigeria, argued that inflation is cost-pushed and need not be tackled by the monetary authorities through rate hikes.
“The reversal of inflation in March after a seeming slowdown in February reinforces our view that the determinants of inflation in Nigeria are largely cost-push factors which are out of control of monetary authorities,” the note said.
Also, in a report titled, ‘Report Card: CBN’s New Naira Policy and Interest Rate Hikes’, a research consultant with Kwakol, Basil Abia, highlighted reasons why the rate hikes by the MPC have not affected inflation.
“The CBN’s aggressive push to contain Nigeria’s high inflation by deploying monetary tightening as part of its monetary policy through repeated interest rate hikes has not yielded the intended result. Inflation continues to rise unabated, mostly because the monetary tightening approach is not the right way to contain Nigeria’s supply-side or cost-push inflation.
“It is important to note that Nigeria’s inflation is driven by supply-side concerns that raise the cost of production and, inadvertently, consumer prices.”
As explained by analysts, the interest rate has a ripple effect throughout the economy, affecting the Nigeria stock market, bond market, lending rate, consumer and business spending, and asset prices, among others.
If the benchmark interest rate is lower, they said, the lending rate will be lower, making borrowing attractive to people. In turn, there’s more money to spend. Conversely, if the interest rate is high, lending becomes expensive, and there’s less to spend.
This affects manufacturers as borrowing costs for production become more expensive.
According to experts, banks respond to interest rate changes. At the moment, commercial banks charge rates between 20 per cent and 35 per cent on funds they lend out, according to findings.
“The increase in the MPR portends worrisome negative consequences for the manufacturing sector,” Ajayi Kadir of the Manufacturing Association of Nigeria (MAN), said in a note.
Kadir said the rate hike would increase borrowing costs for businesses beyond the extant double-digit rate, which he said discourages new investments.
He explained that it would lead to increased factor costs, which feed into high product prices, thus making the country’s manufacturing industry unproductive.