The Centre for the Promotion of Private Enterprise (CPPE) has condemned latest rate hikes by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN).
At the end of its two day meeting which ended on Tuesday, the MPC, led by the CBN Governor, Olayemi Cardoso, increased Monetary Policy Rate (MPR) from 18.75% to 22.5% and Cash Reserve Ratio (CRR) from 32.5% to 45%.
Commenting on the new rates, the CPPE said in statement signed by Muda Yusuf, its chief executive officer that the increase would hurt the real sector of the economy which is already contending with numerous macroeconomic challenges.
He explained further that this poses a major risk to the financial intermediation role of banks in the Nigerian economy.
He said: “The increase would constrain the capacity of banks to support economic growth and investment, especially in the real sector of the economy because the increases are quite significant.”
He noted that while the decision was consistent with the typical policy response of central banks globally, it failed to reckon with domestic peculiarities.
“The key drivers of Nigeria inflation are largely supply-side variables, and the CBN ways and means financing. Over the last two years, there had been persistent monetary policy tightening, yet there has not been any significant impact on the inflationary pressures. If anything, the general price level had been continuously on the increase.”
While the Centre recognized price stability as the primary mandate of the CBN, it said numerous headwinds had posed significant risks to this critical objective.
According to the centre, some of these include the surge in commodity prices and impact on energy cost, disruptive effects of insecurity on agricultural output, and global supply chain disruptions.
The statement further read: “The surge in ways and means finance also makes the CBN a culprit in the inflation predicament over the past few years. The hike in MPR or CRR would not change these variables.
“Already, bank lending has been constrained by the high CRR which was until the latest review, 32.5% (many operators in the sector claim that effective CRR is as high as 50% for many banks), the discretionary debits by the apex bank.
“The credit situation in the economy is already very tight, with lending rate ranging between 25 -30%. The Nigerian banks are yet to live up to their financial intermediation role because of these constraining factors.”
It is also noted that 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.
On the flip side, 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% of the economy.
Comparatively, private sector bank credit as a percentage of GDP was 14% in 2022 in Nigeria which is considered low. It was 59% in South Africa, 30.9% in Egypt, 30% in Botswana, 51.6% in the United States and 130% in the United Kingdom.
According to the Centre, these underscore the variabilities across economies; thus, policy responses have to be different.
“The transmission effects of monetary policy on the Nigeria economy are still very weak. In the Nigerian context, price levels are not interest sensitive. Supply side issues are much more profound drivers of inflation.
“The new dramatic increase in MPR to 22.5% hike means that the cost of credit to the few private sector that have exposure to bank credits will increase which will impact their operating costs, prices of their products and profit margins, amidst very challenging operating conditions. The equities market may also be adversely impacted by the hike,” it said.
CPPE further charged the apex bank to accelerate the process of increased capitalization of the development finance institutions to create a concessionary financing window for the real sector and the small businesses.
