Following the Monetary Policy Committee (MPC) meeting held on February 27th, the Centre for the Promotion of Private Enterprise (CPPE) expressed concerns that the decisions made during the meeting will negatively impact the real sector of the economy, adding to the existing macroeconomic challenges. Reacting to the possible negative impacts of the raised monetary policy rate (MPR), Muda Yusuf, the Director/Chief Executive Officer of CPPE, warned that the increase of MPR by 400 basis point to 22.75% from 18.75%, along with the rise of the Cash Reserve Ratio (CRR) to 45% from 32.5%, could significantly jeopardize the ability of banks to effectively facilitate financial transactions within the country.
Yusuf argued that the significant increase would limit banks’ ability to aid economic growth and investment, specifically in the real economy sector. He pointed out that while the decision aligned with common Central Bank practices worldwide, it did not take into account unique domestic factors. Nigeria’s inflation is primarily influenced by factors related to the supply side and the methods used by the Central Bank of Nigeria (CBN) to finance its operations. Despite consistent efforts to tighten monetary policy over the past two years, inflationary pressures have remained largely untamed.
Interest rates for loans now in the range of 25-30%.
While acknowledging that the CBN is charged with the responsibility of maintaining price stability, he however, pointed out that there are many challenges that are threatening this important duty. These challenges include rising commodity prices affecting energy costs, security issues affecting agriculture, and disruptions in global supply chains. Yusuf observed that the increase in Way and Means finance granted by the CBN have contributed to the inflation problem over the years, pointing out that increasing the MPR or CRR would not alleviate the situation.
He pointed out that the high Cash Reserve Ratio, which stood at 32.5% until the recent review, has already limited bank lending. This has led to a very restricted credit environment, with interest rates for loans falling in the range of 25-30%. He expressed that Nigerian banks have not fully embraced their role as financial intermediaries due to these limiting conditions. Unlike many advanced economies, the Nigerian economy does not heavily rely on credit for growth and development.
Impact of monetary policy on the economy is still minimal.
The financial inclusion rate in Nigeria remains alarmingly low, making it difficult for households and small businesses to access credit while nearly half of the economy is made up of the informal sector. Bank credit from the private sector only accounted for 14% of the GDP in Nigeria in 2022, whereas it was significantly higher in other countries such as South Africa at 59%, Egypt at 30.9%, Botswana at 30%, the United States at 51.6% and the United Kingdom was at 130%. This highlights the differences between economies, necessitating unique policy actions, according to him.
According to Yusuf, the impact of monetary policy on the Nigerian economy is still minimal, emphasizing that price levels in Nigeria are not influenced by interest rates but rather driven by supply-side factors. According to him, the recent sharp rise in MPR to 22.75% will lead to an increase in the credit costs for a limited number of private sectors reliant on bank loans. This will result in higher operating expenses, product prices, and profit margins, particularly during difficult business conditions. Additionally, the equity market may suffer negative consequences as a result of the increase in rate.
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Furthermore, he said CBN must fast-track the enhancement of capitalization to develop finance institutions. This will pave the way for a financing option with favourable terms for small businesses and the real sector. In order to combat rising inflation, he highlighted the necessity for the government to tackle certain critical issues. Some of the key points to focus on are resolving security issues that are hindering farming operations, maintaining changes in the forex market to steady exchange rates and lower fluctuations, and increasing forex inflows. At the same time, measures should be taken to improve forex liquidity, encourage forex inflow, and fix underlying issues to help local businesses thrive.
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