Onome Amuge
The Central Bank of Nigeria’s recent move to increase its benchmark interest rate, the Monetary Policy Rate (MPR), by 150 basis points to 26.25 percent from 24.75 percent has sparked controversy among business analysts. This decision, marking the third rate hike in less than three months, was made in an effort to control inflation and achieve price stability. However, experts warn that the increased rates may present additional challenges for businesses in the country.
In response to the CBN’s recent decision, Adewale-Smatt Oyerinde,director general of the Nigeria Employers’ Consultative Association (NECA), expressed concerns about the potential consequences for private investment in the country.
Oyerinde explained that the successive increase in policy rates by the CBN would continue to impede investment decisions within the private sector. He noted that borrowing costs for organised businesses had already escalated since March 2024, when the policy rate was initially raised to 24.75 percent, and the new policy rate of 26.25 percent would further burden private investment.
“It is implausible to control the current high inflation by continuously raising interest rate. Implementing tight monetary policy stance when firms’ investment expenditure and household consumption is at the lowest ebb may further incapacitate production and capacity utilization in the already challenged private sector,” he stated.
Oyerinde, drew attention to the complex relationship between interest rates, inflation rates, and exchange rates in the Nigerian economy. Oyerinde argued that addressing the inflation crisis through elevated policy rates is implausible, given the persistent depreciation of the Naira and its contributing effect on inflation.
According to Oyerinde, the continued degeneration of the exchange rate presents significant challenges to businesses and households. He warned that the ongoing depreciation of the Naira would not only continue fueling inflation but would also constrain firms’ investment and household consumption.
The NECA DG cautioned that raising the policy rate under these circumstances could inadvertently escalate the inflationary pressure, as growths in factor costs and commodity prices become increasingly difficult to contain.
Arguing that inflation was better managed before the implementation of the total floating FX regime, Oyerinde suggested that the government should reconsider adopting a guided FX floating regime. This approach, according to him, offers a more dynamic and flexible FX management framework, which has proven effective in comparison to the current system.
By tackling the underlying factors contributing to inflation and implementing a more nuanced FX policy, Oyerinde believes that the Nigerian economy can achieve a better balance between controlling inflation and promoting private sector growth.
Sola Obadimu, the director-general of the Nigerian Association of Chamber of Commerce, Industry, Mines, and Agriculture (NACCIMA), also commented on the implications of the recent hike in the Monetary Policy Rate (MPR) for businesses in the country. According to Obadimu, the decision to increase the MPR poses additional challenges for business managers, who are already navigating a complex economic landscape.
The NACCIMA DG further elaborated on the challenges that businesses face in the wake of the MPR hike. Drawing upon basic economic principles, Obadimu explained that capital is a crucial factor of production, and as the cost of borrowing money increases, so does the overall cost of doing business. This, in turn, could hinder growth, investment, and expansion plans for companies.
Moreover, Obadimu pointed out that banks typically charge interest rates higher than the prevailing inflation rates, following conventional banking philosophy. Combined with the recent MPR hike, this could result in even steeper borrowing costs for businesses seeking loans.
In addition to the increased cost of capital, Obadimu highlighted the compounding challenges posed by rising energy costs, unstable foreign exchange rates, and associated expenses. These factors, along with the revision of minimum wages, contribute to a highly challenging environment for business managers.
Muda Yusuf, founder of the Centre for the Promotion of Private Enterprise (CPPE), in his remarks about the recent MPR hike and its potential impact on investors and the financial system, noted that businesses that have credit exposures to banks are still reeling from the previous hikes, which had pushed interest rates close to the 30 percent threshold.
Yusuf noted that the current Cash Reserve Ratio (CRR) of 45 percent has far-reaching implications for liquidity in the financial system, adding that the combined effects of the CRR and the rate hikes could dampen financial intermediation – a crucial role that banks play in an economy.
Furthermore, Yusuf pointed out that the effectiveness of monetary policy in Nigeria is limited by the country’s level of financial inclusion. With transmission channels still weak, the central bank’s policy decisions may not have the desired impact on the broader economy.
The CPPE founder views the recent rate hike as an additional burden for investors with credit exposures to bank facilities. While acknowledging the central bank’s rigid monetarist stance, Yusuf stressed the need to consider the potential costs to the economy.
“Hopefully, with the positive outlook for domestic refining of petroleum products, we may begin to see a moderation in energy cost and a pass through effect on general price level. This is one silver lining that is on the horizon at the moment,” he stated.
Yusuf also dwelled on the need for immediate fiscal policy interventions to mitigate the negative effects of the current monetary policy approach on the economy. With the Central Bank of Nigeria maintaining a strict monetarist stance, Yusuf believes that complementary fiscal measures are crucial to support businesses and investors during this challenging period.
