According to the Manufacturers Association of Nigeria (MAN), the latest interest rate rise by the Central Bank of Nigeria (CBN) will likely accelerate the impending economic downturn in the manufacturing sector. The association released a statement on Thursday saying it will have a detrimental effect on their business activities by raising the cost of borrowing, which will, in turn, hinder investments in the sector, resulting in low manufacturing efficiency, decreases in utilization of capacity, and a drop in manufacturing job opportunities, leading to insecurity along with social vices.
Several other factors contribute to the manufacturing sector’s lack of competitiveness, including a high cost of production that raises the price of commodities as well as an inventory of unsold products; a drop in overall productivity and per capita income; low taxes along with high product prices because of rising factor costs; and a rise in the cost of living. This is attributed to the CBN Monetary Policy Committee’s decision on Wednesday to raise the Monetary Policy Rate (MPR), which is also known as the benchmark interest rate of the country, from 18% in March to 18.5% in May 2023
10 of the 11 member Committee present, approved the price hike.
With the aim of combating the rising inflation in the country’s economy, it raised interest rates seven times since May of last year. From its previous level of 11.5 percent in April 2022, the CBN has increased the MPR by 700 basis points to its current level. Ten of the eleven members present at the meeting voted in favour of raising the rates. According to CBN governor Godwin Emefiele, the MPC maintained the Cash Reserve Ratio at 32.5% with the Liquidity Ratio at 30%. The MPC also maintained the asymmetric gap at +100/-700 basis points around the MPR.
The annual rate of inflation in Nigeria increased in April to 22.22 percent from March 22.04 percent. Segun Ajayi-Kadir, the director-general of MAN, said that the organization has been advocating for single-digit lending rates to help manufacturers gain access to capital that will improve the industry’s overall performance. He stated that the CBN’s continued rate hikes show that it is either unconcerned with the misery of the productive sector or is unable to figure out a more inventive policy combination that will reflate the sector.
Ineffective policy won’t tackle the sector’s challenges.
He stated that they are convinced that the monetary authority is unaware of the reality that the ineffectiveness of the fiscal authority’s enforcing policy to tackle the inflationary threat is due to these challenges that include low output, primarily linked to the instability of macroeconomic factors, as well as an inconsistent and disappointing fiscal policy regime. Others include bad management of exchange rates, exogenous shocks, exploitative regulation, difficult and expensive operating environments, and inconsistent industrial strategies. Manufacturers argue it is evident that the steady rise in MPR is not resulting in the expected expansion of the economy, which remains vulnerable and beset by several obstacles to expansion.
Since the economy is in such dire straits, the authority should reevaluate its policy mix, focusing on the impact of a high MPR on the manufacturing sector and the wider economy. A severe lack of liquidity in the economy caused growth in Nigeria’s manufacturing sector to slump to its lowest level in three years during the first quarter. The industry saw actual growth of 1.61 percent in the first quarter of 2023, according to data from the National Bureau of Statistics, down from 2.83 percent in the fourth quarter of 2022 and 5.89 percent in the same period last year.
Cash crisis had a substantial impact on the country’s GDP.
Moreover, the cash shortage was felt throughout the entire economy. For this reason, Gabriel Idahosa, the vice president of the Lagos Chamber of Commerce and Industry, stated that the cash crisis had a substantial impact on the country’s Gross Domestic Product (GDP). Manufacturers, he added, were especially hard hit because of the high upfront expenditures of things like raw materials and inventory. It should come as no surprise, that they have such an effect on producers. Therefore, MAN stresses the significance of liberalizing conditionality and increasing the size of specific funding windows for companies to take advantage of.