Businesses operating in Africa’s largest economy are in for harder times after the Central Bank of Nigeria (CBN), on Wednesday, raised interest rates for the seventh straight time to a record 18.5 percent.
Credit to the private sector has been slowing since the CBN started aggressive rate hikes in May 2022 in a bid to curtail rising inflation. With the current rate, the CBN has raised its benchmark or anchor rate by 700 basis points from 11.5 percent in April 2022.
According to the CBN’s recent data on monetary aggregates, private sector credit extension (PSCE) grew 16 percent year-on-year (y/y) in February 2023. The growth is a deceleration from the 18 percent y/y registered the previous month.
“It appears that the Monetary Policy Committee’s (MPC) aggressive stance has begun to filter through to private sector credit extension. Supportive of this is the fact that on an annualised basis, PSCE grew by just +0.2 percent year-to-date in February 2023,” analysts at FBNQuest said.
“We are not happy that the interest rate hike is constraining credit,” Godwin Emefiele, the CBN governor, said. “There might be a reduction in the level of aggression in taming inflation.”
Nigeria’s inflation accelerated to 22.22 percent in April 2023 compared to 22.04 percent in March 2023.
“It just intensifies the difficulties in the sector because the banks will respond by raising interest rates. And what that means is that manufacturers will see a reduction in profits because costs are increasing or production is reducing because they cannot pass price to consumers as it would affect the manufacturer,” Gabriel Idahosa, deputy president of Lagos Chamber of Commerce and Industry, said.
On how manufacturers are coping since the persistent rate hikes, Idahosa said those that are able to survive are able to generate enough cash flows from their distributors and customers’ deposits, making them not to borrow significantly.
“But those that do not have distributors and customers’ deposits always struggle with paying high interest rates which means their profit margins are low, reducing their production capacity,” he said.
Segun Kuti-George, national vice president of the Nigerian Association of Small Scale Industrialists, said some manufacturers have closed shop, producing under capacity and layed off their staff. “They are just trying to cope.”
Emefiele said the rate hike decision was taken by 10 out of 11 members present at the meeting. The MPC also kept unchanged the asymmetric corridor at +100/-700 basis points around the MPR, retained Cash Reserve Ratio at 32.5 percent and liquidity ratio at 30 percent.
“We expect a further rise in finance costs of Small and Medium Enterprises with floating interest rates. However, we do not foresee any impact on the fixed income yields in the immediate due to the huge system liquidity,” said Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest.
Uche Uwaleke, professor of capital market at the Nasarawa State University Keffi, said the hike in MPR to 18.5 percent is not in the interest of output growth. “Access to credit for MSMEs is further stifled. Besides, it may do little to halt the upward trend in inflation as recent experience has shown.”
He said any significant moderation in inflation rate can only come from dealing with supply side factors and structural issues fuelling rising prices such as insecurity, electricity and fuel challenges.
For Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, the MPC has not provided empirical evidence to support their position that inflation rate would have reached 30.8 percent but for the continued rate hikes.
“It is curious as to what extent the persistently aggressive interest rate hikes have helped to moderate inflation rate which is largely cost pushed with excess money supply arising mostly from Ways and Means Financing,” he said.
He pointed out that in the past months, the CBN’s naira redesign policy and the attendant scarcity contributed to inflation.
“The persistent interest rate hike while not really addressing inflation continues to hurt credit growth,” he said. “To effectively tackle inflation, a combination of tools must be deployed including fiscal measures, which unfortunately have been inflationary such as the recently introduced new and higher excise taxes on various items.”
Adeola Adenikinju, a member of the MPC, in his personal statement at the MPC meeting in March, noted that composite Purchasing Managers’ Index (PMI) declined by 9.0 percent, industry PMI fell by 10.8 percent, agriculture PMI fell by 9.2 percent, and services PMI decreased by 8.6 percent. In addition, industry employment PMI fell by 13 percent, and overall business expectations sank by a huge -40.7 percent from -5.0 percent in January 2023.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said the persistent hike in the MPR will continue to put pressure on operating costs of investors who are exposed to bank credits. “The stress would vary according to their exposure; high cost of funds is detrimental to investment growth, business sustainability, profitability, competitiveness and shareholder value.”
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Data from the CBN showed that credit to the private sector grew by 3.13 percent to N43.06 trillion in April 2023 from N41.75 trillion in March 2023. Year to date (between January 2023 and April 2023), it grew by 3.65 percent to N43.06 trillion from N41.54 trillion.
The MPC noted available data and forecasts for key macroeconomic indicators suggest that the economy will continue to grow in 2023 but at a subdued pace. However, insecurity, high energy costs, and the rising cost of debt servicing would remain drivers of economic shocks.
Emefiele said upticks in headline inflation are largely due to non-monetary factors outside CBN’s purview. However, the committee noted that loosening or holding would undermine the gains achieved through previous rate hikes, as the economy remains confronted with the risk of higher inflation in the near term. Additionally, loosening would widen the negative real interest rate margin and lead to further FX depreciation.
“Tightening was necessary to offset the adverse impact of rising inflation on real income. The MPC believes that tightening would demonstrate confidence in the effectiveness of its monetary policy to combat elevated inflation and discourage further build-up of aggressive demand,” said analysts at Coronation Research.
