MPR: Concerns over job cuts, food hike as CBN says nation not yet out of the woods

• Stakeholders flay MPR hike, say previous increase didn’t stem inflation
• NACCIMA expresses concern, lists impact on businesses
• Real sector heading for extinction, ASBON warns
• FG urged to cut spending, not suffocate masses, businesses
• CPPE: Decision detrimental to investments, economic growth

Despite inflation receding for two consecutive months, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday raised Monetary Policy Rate (MPR) by 50 basis points from 26.75 per cent it was to 27.25 per cent.

However, stakeholders expressed concern about the move, arguing that previous rate hikes have not effectively curbed inflation. They predicted that the real sector will be particularly hard hit, as businesses struggle to access credit and cope with rising production costs.

Reeling out the committee’s decisions in Abuja, CBN Governor Yemi Cardoso insisted that the rate tightening will continue, saying, “We are not out of the woods yet.”

At its 296th meeting in July 2024, the MPC raised the interest rate by 50 basis points to 26.75 per cent from 26.25 per cent.

With the inflation rate decreasing to 32.15 per cent in August from 33.40 per cent in July 2024, Cardoso insisted that a consistent deceleration in two months is not good enough to warrant a halt in the rate.

As the governor of the apex bank highlighted, the recent spike in energy prices is also a major factor.

“The MPC noted that although headline inflation threaded downward due to a moderation of food inflation, core inflation has remained elevated, driven primarily by rising energy prices. The uptrend poses severe concerns to members, indicating the persistent inflationary pressure. Members, thus, reiterated the need to work in close collaboration with the fiscal authorities to address the current upward pressure on energy prices,” he explained.

Cardoso, who expressed the need for the fiscal authorities to increase Nigeria’s daily crude oil production, said that with the Dangote refineries coming on board, there would be less pressure on foreign reserves, moderate transportation costs, and a spillover effect on the country’s external reserves.

The MPC also noted the continued growth in the money supply, recognising the need to curtail excess liquidity in the system and address foreign exchange demand pressures.

With the CBN insisting on not breaking the law through Ways and Means, Cardoso recognised the support the fiscal authorities are currently giving regarding printing money.

He said that while members of the MPC are worried about the rising loans taken by the Federal Government, they are consoled by the fiscal authorities’ decision not to resort to monetary means for such loans.

“Members of the MPC also expressed growing concerns about the fiscal deficit but acknowledged the commitment of the fiscal authorities not to resort to monetary financing through Ways and Means,” he said.

The MPC also raised the Cash Reserve Ratio (CRR) by 50 basis points from 45 to 50 per cent for Deposit Money Banks (DMBs) and 14 to 16 per cent for Merchant Banks. The committee retained the Liquidity Ratio (LR) at 30 per cent and the Asymmetric Corridor at +500/-100 basis points around the MPR.

The apex bank governor said the MPC will continue to work assiduously with the fiscal authorities to reduce inflation.

The Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA) expressed concerns over the CBN’s decision.

In a statement, the National President of NACCIMA, Dele Kelvin Oye Esq., said the decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.

The statement reads: “As President of NACCIMA, I express concern over the CBN’s recent monetary policy rate hike to 27.25 per cent. This decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.

“We urge the CBN to engage with stakeholders for a collaborative approach, considering alternatives like targeted sector support, deficit reduction, and promoting local production.

“A reassessment of strategies is essential to ensure effective economic management and sustainable growth in Nigeria. Dialogue and innovative solutions are crucial for repositioning our economy.”

He further noted, “The increase is 50bps. It is not a material change. The narrative is actually the trend upwards. This confirms that the previous high interest rate has not worked.”

In his response to the rate hike, economist Dr Paul Alaje reasoned that this pronouncement may signal a further rise in inflation in September following a spike in the pump price of Premium Motor Spirit (PMS) to about N1,000 per litre in most states of the country, barring Abuja and Lagos.

He explained, “Inflation is expected to rise in September due to a further PMS hike, which is caused by many factors, including the exchange rate.”

He added that with the increase, interest on borrowed money collected from banks is expected to rise marginally, potentially increasing food prices and essential items as school children resume school.

Alaje maintained that banks would have less to trade with, saying this was done to tame the money supply.

“But why won’t the money supply be high in a high cash-dependent economy with a currency that is vulnerable to devaluation? The real problem here is the weak naira. Everything depends on it. The gain from tightening is often lost to devaluation,” he stated.

He urged the Federal Government to halt deficit financing, peg the naira, and be mindful of continuous rate hikes. He argued that unbridled rate hikes erode jobs and reduce the manufacturing sector’s capacity to operate maximally.

He said reducing Ways and Means to five per cent is not enough and recommended only one per cent.

“The recent findings in economics reveal that monetary tools are insufficient to combat non-monetary induced inflation such as acute supply side shortages in food and others. Thus, policy convergence is important to conquer price instability,” he said.

Financial analyst Umar Abubakar, for his part, said the MPC’s hike in the MPR by an additional 50 basis points is inevitable.

“There is nothing the MPC could have done to help the situation. The rate reduction will even be more dangerous. Reducing the rate means manufacturers can decide to take enough dollars and hoard it. There will be more propensities to borrow, increasing the money supply and leading to inflation as more money will chase fewer goods.

“The MPC will continue to hike the rate until the inflation figure is stable. But there is no sign of that happening any time soon. An increase in the price of petrol will worsen inflation. When the figure for September comes in, I expect a spike because the prices of basic food items are going up.”

Economist and investment specialist Dr Vincent Nwani said that an economy that operates efficiently when interest rates rise, especially government-controlled rates like the MPR, would naturally slow down credit to the private sector and the money supply because investors and borrowers would reduce their borrowing rates.

“Normally, interest rate increase is used to fight/control inflation and by and large, the CBN’s decision is simply a way to forestall the implications of the recent rise in fuel prices and the anticipated impacts of payment of the new minimum wage.

“However, Nigeria being what it is, the reverse is always the case with us, as over the last year, we have seen several increases in the MPR from as low as 18 per cent to what we have now, and none of those increases has moderated inflation or any other macroeconomic aggregate.

“The constant raises hurt businesses with further diminished access to already scarce credit as well as a sharp increase in production costs. This current increase simply means access to credit will narrow even more, leaving the real sector in dire straits.”

The Chief Executive Officer (CEO) of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, lamented that at a time when manufacturers, entrepreneurs, and other investors in the economy were craving a breath of fresh air, the CBN chose to further constrict the noose on them by resorting to tightening monetary policy.

He said the apex bank’s latest policy choice is at variance with the mood of most economic players.

“What manufacturers and other investors need at this time are oxygen and stimulus, not policy measures that would worsen an already suffocating situation. MPR at 27.25 per cent; CRR at 50 per cent and asymmetric corridor at +500 and -100 are very difficult monetary conditions to bear for most businesses, given the prevailing macroeconomic and structural conditions.”

Yusuf said Q2’s GDP numbers clearly showed that the economy is still floundering. Many critical sectors slowed during the quarter, including manufacturing and other subsectors such as cement, food and beverage, chemicals and pharmaceuticals, trade, ICT, and real estate.

“The road transport, motor assembly, publishing and motion pictures sectors also contracted while the aviation, oil refining, textile, livestock and quarry and minerals sectors are still in recession. Tightening financial conditions in these circumstances is not appropriate,” he said.

He pointed out that the private sector should not be made to pay the price of liquidity growth for which it is not responsible, and issues of excess liquidity should be addressed within a causal context.

“The injection of liquidity into the system is mainly public sector driven, as rightly noted by the CBN Governor. Therefore, the focus of resolving it should be within that context. Stifling the financial conditions to address liquidity issues is detrimental to the investment and growth of the economy.

“The implications of the latest MPC decision for investors are quite concerning as cost funds would be further exacerbated, possibly well above 35 per cent or more. We believe that the policy decisions of the CBN are most inappropriate for the prevailing economic conditions and the challenges entrepreneurs face. This monetary policy tightening would further exacerbate the operating and production costs of businesses,” he said.

Former chairman of the Manufacturers Association of Nigeria (MAN), Apapa branch, Frank Ike Onyebu, was shocked at CBN’s decision. He said there is no need for the continuous increase as it is not working.

“Some of the formulas that work abroad will not work here because we’re not a production country, only a consuming one. We have told them that no matter how much the interest rate is raised, it will not bring down inflation, and as we can all see, it has not worked. Let us try other tactics, such as drastically reducing abnormally high government spending. Instead of cutting their spending, they are squeezing the neck of the masses,” he said.

He said the government should improve the real sector and called for an industrial revolution. “Countries in Asia have turned their situation around by revamping their real sector; why can’t we copy those? One cannot think of a growing economy when people are battling hunger. Consumer demand is at its lowest, and even necessities are now luxury items for many. People cannot afford food; forget shelter and clothing, yet the CBN keeps hiking MPR.”

He lamented that the real sector has been nosediving for a while, and policies like these will only worsen their situation. “Credit will become even more unaffordable; manufacturers can no longer borrow. At a 35 per cent interest rate, what business can one do to give you that kind of return?

“Manufacturers would rather put that money in the bank and earn interest. This hike is killing real sector investments, and until the government realises this, we will keep going around in circles. Manufacturing is a long-term project and needs realistic rates with a long tenor to stay afloat or even do business, not what is happening in Nigeria right now,” he said.

For his part, Femi Egbesola, the National President of the Association of Small Business Owners in Nigeria (ASBON), regretted that this current hike would force the economy to contract further while inflation continues to skyrocket.

He said, “When inflation goes up, it means the livelihood and wellbeing of average Nigerians will worsen because disposable income will further erode and will be unable to cater for basic needs. Manufacturers will further downsize production, workforce and expenditure because doing business with this extremely high interest rate is impossible.

“Which business has so much profit that can pay this interest rate? Even foreign investors will shy away from doing investments in manufacturing companies. In normal climes, manufacturing outfits run operations with bank money and what this means is that we’re simply working for the banks when we take loans from them.”