Implication for businesses of Nigeria’s 295th MPC decision

OLUWATOSIN OLADETAN

Oluwatosin Oladetan, (MBA, ACCA, PMP, NIM, FMVA, BIDA, SPY-SP, TRCN ), a business and corporate strategist, financial analyst, project manager, process improvement and engineering professional, is a Volunteering Contributing Analyst 

The central bank of any nation is pivotal to the economic outlook of that sovereign state. Central banks, through their regulatory influence on banking financial institutions, are able to contagion positive or negative effects on all other sectors of the economy through foreign exchange management (external reserve maintenance, safeguard of the international value of the legal tender currency), national custodian of wealth (act as banker and provider of economic and financial advice to the federal government, ensure monetary and price stability), and economy management (ensure monetary and price stability, issue legal tender currency). The Nigerian inflation rate has been on an uphill drive for sixteen consecutive months since December 2022, peaking at 33.69 percent in April 2024. If this increase continues and does not decline in the coming months, Nigeria is gradually creeping into a hyperinflationary sovereign state. Over the last year, the major driver of heightened inflation is the cost of food and non-alcoholic beverages such as Garri, Fufu, rice, beans, bread, palm oil, palm kernel oil, dried fish, and cow leg, among others, which have increased by over 100 percent when compared to May 2023.

Inasmuch as one of the objectives of the CBN is to ensure price stability and a persistent increase in the interest rate, as we have seen from the decisions of the 295th Monetary Policy Committee of the Central Bank of Nigeria (CBN), which was held on May 20th and 21st, 2024, to raise the Monetary Policy Rate (MPR) by 150 basis points from 24.75 percent to 26.25 percent, retain other parameters at their current state, such as the liquidity ratio at 30 percent, the cash reserve ratio of deposit money banks at 45 percent, and retain the asymmetric corridor around the MPR to +100/-300 basis points. The decision was primarily driven by the decline of the month-on-month inflation rate on headlines, food, and core (headlines less food and energy) in April as well as in March. The MPC also asserted that these fantastic results are only short-lived if core issues on logistics, distribution, storage, security, exchange rate volatility, and exchange rate pass through effect on traders’ consumption.

Do not get me wrong; I am not saying that increasing the interest rate is the wrong decision for the monetary policy committee to make to tap into the effect of inflation. In fact, to achieve quicker results, the increase should be much greater than was recommended, as there is a higher propensity to consume now than to save for the future. The average returns on a savings account are not sufficient to cover the cost of bank charges such as stamp duty, transaction processing fees, value-added tax, and short message service (SMS) fees on each electronic transaction. The hike in interest rates has allowed hot money to find new safe havens in Nigerian Treasury Bills, FGN Savings Bonds, Federal Government Notes, and other risk-free and low-risk instruments issued over the last few months in the Nigerian financial market. Despite the average annual yield on these instruments being above 20 percent, it is still far below the year-on-year inflation rate of 33.69 percent. This implies the marginal propensity to consume is significantly higher than the marginal propensity to save now and consume later, as more naira will be required to cover the cost of the same good and service one year from now.

The Nigerian real estate sector has a lot of companies and industries struggling to stay afloat due to the negative macroeconomic outlook over the last year. A lot of organisations and institutions in Nigeria across several industries have ceased operations, gone bankrupt, liquidated, and some have even delisted from the Nigerian Stock Exchange. This trend is likely to continue for companies that are financing their capital with a greater portion of debt than equity. Organisations that have been provided with a debt facility by deposit money banks and other funding institutions would have received notification of an increase in their cost of debt financing from their financiers due to the upward spike in monetary policy rates. The debt financing rate is usually the monetary policy rate (reference rate) adjusted for quantitative and qualitative credit factors. This is not to say that the negative outlook of the Nigerian real sector is strictly due to the higher cost of debt financing and other factors such as the unsustainable federal government budget deficit, high national cost of debt servicing, poor infrastructure, high cost of energy, poor distribution network, bad roads, and other factors that have consistently made Nigeria rank as low as 131 out of 200 nations in the global ease of doing business index.

The earlier the fiscal arm of Nigeria sits up to adjust the true issues pertaining to security, agriculture, transport infrastructure, and structured finance to quicken results in the areas highlighted above, the better and the higher the chance of a smile at the end of the tunnel.

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