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Evaluating impact of 13% MPR on manufacturing inputs

The Manufacturers Association of Nigeria (MAN) and other members of the Organised Private Sector (OPS) have said that the recent hike in the Monetary Policy Rate (MPR) by the Monetary Policy Committee of the Central Bank of Nigeria (CBN) from 11.5 per cent to 13 per cent would affect the cost of inputs and other containments in the country’s manufacturing sector. TAIWO HASSAN reports


There is no doubt that Nigeria’s domestic economic conditions in Q1 2022 and other related challenges, especially those associated with the prevailing international financial and economic environment, are making the country’s Gross Domestic Product (GDP) to experience volatilities in all fronts. For instance, the numerous headwinds in the country’s economy, which have put pressure on the economy has forced CBN to tighten its policy despite the significant risks it posed to price stability.


Furthermore, the challenges such as surge in commodity prices and impact on energy cost, spike in domestic liquidity from electioneering-related spending and global supply chain disruptions are key pointers that poses significant risks to critical CBN objectives in the areas of increasing risks to price stability and the policy tightening trend.


MAN’s position on MPR


At CBN’s Monetary Policy Committee (MPC) meeting held recently in Abuja, the committee decided to deepen its stance by increasing the Monetary Policy Rate (MPR) to 13 per cent from 11.5 per cent, which was fixed in September 2020.


According to the Director-General of MAN, Mr. Segun Ajayi-Kadir, the key rationale for upscaling MPR stems from the need to curb the rising inflation rate that recently peaked at 16.8 per cent, ensure relative stability and sustain economic growth in the face of the high-level uncertainties in the global economy.


He noted that MPC, however, retained the asymmetric corridor of +100/-700 basis points around MPR; Cash Reserve Ratio (CRR) at 27.5 per cent, while liquidity ratio was also retained at 30 per cent. Ajayi-Kadir said this was another level of increase in interest rates on loanable funds, which would no doubt upscale the intensity of the crowding out effect on the private sector businesses as firms have lesser access to funds in the credit market.


He stressed that it would spur upward review of existing lending rates dependent obligations of manufacturing concerns, which would drive costs northward. Also, he said, it would intensify demand crunch emanating from the heavily eroded disposable income of Nigerians, constrain access of households and individuals to cheap funds.


Also, the director-general added: “It will llead to rising cost of manufacturing inputs, which will naturally translate to higher prices of goods, low sales and enormous volume of inventory of unsold products. Adducely, it will exacerbate the intensity of idle capital assets, worsen the already declining profit margin of private businesses and heighten the mortality rate of small businesses.


“The hierarchy of the country’s manufacturing sector pointed out that it would further reduce capacity utilisation, upscale the rate of unemployment, incidences of crime and insecurity, as the capacity of banks to support production and economic growth is heavily constrained.”


He concluded that it would reduce the pace of full recovery of the real sector, make manufacturing’s performance remain lackluster and, of course, lead to leaner contribution to  GDP. Ajayi-Kadir explained: “Clearly, the increase in MPR has widened the journey farther away from the preferred single digit interest rate regime. It is not manufacturing friendly, considering the myriad of binding constraints already limiting the performance of the sector.


“MAN is therefore concerned about the ripple effects of this decision and its implications for the manufacturing sector that is visibly struggling to survive the numerous strangulating fiscal and monetary policy measures and reforms. “Consequently, manufacturers are hopeful that the stringent conditionalities for accessing available development funding windows with CBN will be relaxed to improve the flow of long-term loans to the manufacturing sector at single digit interest rate.


“The expectation is that MPC will ensure that future adjustments of MPR takes into consideration the trend of core inflation rather than basing decision on headline and food inflation. This will no doubt shield the sector from the backlashes of the 13 per cent MPR, ramp up production and guarantee sustained growth in the overall best interest of the economy.”


However, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Chinyere Almona, stressed that the recent hike in MPC was well expected by the Chamber following recent fundamentals in the economy.


According to her, the Chamber had also noted the trend around the rising inflation rates across many economies globally. Almona said it was well understood that the hike was meant to control the rising inflation rate feared to assume a galloping trend soon.


She noted: “CBN has always maintained that Nigeria’s high inflation rate was due to non-monetary factors outside its purview. We have consistently pointed at factors responsible for the rising inflation,


including an epileptic supply of premium motor spirit (PMS), high cost of automotive gas oil (AGO/Diesel), electricity tariff hikes, insecurity and the illiquidity crisis in the foreign exchange market. “These factors have continued to put pressure on the cost of production, translating to higher prices or cost-push inflation.


“These headwinds must be tackled head-on for the inflationary pressure to be tamed sustainably. The hike in the interest rates will normally mean less credit to the private sector and that can translate to reduced investment and constrained production in the economy, at least in the short term.


This action also has implications for economic growth, job creation and revenue generation for government. “When the MPR was 11.5 per cent some credit lenders charged as high as 25 per cent maximum rate to small companies. With the benchmark interest rate at 13 per cent, we may likely have rates climb beyond 30 per cent for SMEs. While we agree with the proposition that a lower interest rate in Nigeria compared with higher rates in developed economies would lead to capital flight.


LCCI’s recommendation


Notwithstanding, the LCCI director general stressed the need to restate its recommendation, saying that interest rate hikes woukd not curb inflationary pressures. Almona explained:”The supplyside challenges like insecurity, forex scarcity and uncertainties from the inconsistent policy environment must be tackled to curb the rising inflation.


This is the more sustainable solution to the rising inflation in Nigeria,” she said, adding that “in the coming months and into the third quarter, CBN should expand its targeted intervention schemes to support the productive sectors of the economy to reduce the cost of production. Beyond the role of price stability, CBN must pay attention to sustaining economic growth that can create jobs and boost government revenues.


“Again, we reiterate that hikes in rates alone will not tackle the neargalloping inflation trend in Nigeria. We need interventions to boost the  supply of goods and services, build critical supportive infrastructure and resolve the illiquidity crisis in the forex market.”


CPPE’s stance


Commenting, the Chief Executive Officer (CEO) of Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said that the outcome of the MPC meeting of May 24, 2022, was not unexpected, having regard to the intense inflationary pressures, the increasing risks to price stability and the policy tightening trend by the global central banks. According to him, “the primary mandate of CBN is price stability.”


Yusuf noted that the numerous headwinds had posed significant risks to this critical CBN’s role. These include the surge in commodity prices and impact on energy cost, spike in domestic liquidity from electioneering-related spending and global supply chain disruptions.


“The hike in MPR by 150 basis points to 13 per cent by MPC is therefore understandable. But whether this would significantly impact on the inflation is a different matter. Already, bank lending has been constrained by the high CRR (many operators in the sector claim that effective CRR is as high as 50 per cent or more for many banks), the discretionary debits by the apex bank, the 65 per cent Loan to Deposit Ratio (LDR) and liquidity ratio of 30 per cent. Lending situation in the economy is already very tight.


“The Nigerian economy is not a credit-driven economy, unlike what obtains in many advanced economies, which have much higher levels of financial inclusion, robust consumer credit framework and strong correlation between interest rate and aggregate demand. The level of financial inclusion in the Nigerian economy is still quite low, access to credit by households and MSMEs is still very challenging and the informal sector accounts for close to 50 per cent of the economy.


“The transmission effects of monetary policy on the economy is therefore still very weak. In the Nigerian context, price levels are not interest sensitive. Supply side issues are much more profound drivers of inflation.

What the recent rate hike means for the economy is that the cost of credit to the few beneficiaries of the bank credits will increase, which will impact their operating costs, prices of their products and profit margins. Investors in the fixed income instruments may also benefit from the hike.

There would be some adverse effects on the equities market.”

Last line

Adverse effects of CBN’s monetary policy on manufacturing and production would be inimical to consumers in all ramifications.

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