CBN policy is killing domestic productivity,deepening economic recession, say analysts

By Julius Alagbe

The Central Bank of Nigeria (CBN) seemingly uncoordinated policies are choking domestic productivity and the recent benchmark interest rate hike signals a deepening of economic recession, analysts have said.

Since Godwin Emefiele assumed office as CBN Governor, it has been observed that the apex bank has been dolling out some policies that are not in tandem with desired growth while the nation continues to witness financial instability across board.

With the new rate analysts predict that there will be slower recovery for the economy for the rest of the year, as productive capacities of key sectors are expected to fall on the back of inadequate and stable measures by the policy makers. The expectation is anchored on increase cost of capital that will characterize the nation’s operating environment in the year as a result of hike in benchmark interest rate.
It may be recalled that the economy has slipped into recession as it recorded consecutive negative growth according to data made available by Nigeria Bureau of Statistics. Among the listed down-sides to monetary policy committees decision’s upward rate adjustment is that cost of funds for private project will be raised beginning from the third quarters of the year.
This has tendency to give rise to a decline in productive capability in the real sector. Meanwhile, stakeholders are already weary that both local productivity and consumption will be threatened because of lack of support for the base economy.

According to some pundits, deposit money banks in the economy may return to strong betting in the fixed income market segment due to lack of profitable and or sufficient projects to support.
“We should be expecting more job losses as companies are face with myriad of challenges from financing to operations”; says Ogochukwu Ndubuisi, Lead Consultant at LS intelligence.
“Interest rate hikes will deepen consumer woes”, Renaissance Capital noted. The firm is of the opinion that when lending rate is increased, consumer confidence falls.
It is expected that upward adjustment in borrowing rate will impact companies’ cost of production. Then, it is safe to say that manufacturing firms and other cottage industries will have tough time in 2016 as devaluation shock and high financing cost will pressure profitability.

The torrent of criticisms that trail the apex bank policy misfit seems to be consensual at the moment. Quite a number of experts agreed that CBN is using MPR adjustment to cover failure of new FX regime to attract foreign inflow.
Some pundits said it will build unnecessary pressure on the street as it happened at a time when the economy was under performing; and unemployment has continued to be on the rise. The consensus among market analysts is that expectation of high cost of capital could trigger the need for further jobs cut as witnessed in the second quarter of the year.

“At the moment, unemployment is unprecedentedly high. What will the hike in underlying rate do to us? Private investment will bolt; cost of production is expected to jerk up. Businesses will look up to personnel expenses as a way to reduce operating cost”, SCP Professional LLC remarked.
“We expect the Nigerian consumer to come under further strain in the second half of 2016 as the naira weakens, petrol prices rise and interest rates increase”; says Renaissance Capital.
Demand for fast moving consumer goods has been on a decline as reflected in companies’ revenue performance. Decline in revenue performance underpins key productive sectors. FMCG, retailing and banking segments continue to perform below estimate. In the market space, this has led to serious business rivalry as companies jostle for market share.

Unfortunately, while competitive rivalry among companies continues prices are moving up except in the Telecom segment. Basic household goods and staples have increased by more than 50% in the last fourteen months. The consumer sentiment of the majority of Nigeria’s households has been negative for five years, says Renaissance capital. This is according to the consumer confidence index which has been negative since third quarter of financial year 2011.

Renaissance capital said it found Nigeria’s consumer confidence to be correlated with the petrol price, FX rate, interest rates, and oil output. The firm is of the opinion that Naira weakness implies that consumer confidence will fall.
“In import-dependent Nigeria, where all fuel and one-quarter of the food consumed are imported, it comes as no surprise to us that consumer confidence and the more market-driven parallel FX rate are negatively correlated.
This correlation tells us that a weaker naira dampens consumption, as consumer goods become expensive. As we see the naira weakening further in the short term, consumer confidence is likely to worsen and consumption fall.
According to Rencap, rising petrol prices will worsen consumer confidence. Fuel’s importance in Nigeria’s economy cannot be understated.

Not only is it necessary for vehicles that transport passengers and distribute goods, it also powers houses and factories. So, when fuel prices increase, the share of disposable income leftover for other goods and services falls. It was gathered that one of the major reasons for MPC decision is to use increase interest rate to complement FX policy back flip.
The new FX regime have started proving to be a disaster for the economy as Emefiele seems to be afraid to incur wrath of President Muhammadu Buhari.
Mr. Tunde Adesina, a Lagos based Policy analysts also said that government just shot herself in the legs. He observed that fiscal year 2016 budget performance outlook would be worst than what the nation ever recorded.
FG has indicated interest to borrow from Euro bond market this quarter. The need to borrow to finance the deficit side cannot be ruled out.
“In my opinion, CBN is aware that foreign investors are down-playing the nation’s sovereign investment as rating agencies continue to downgrade financial instruments from here”, Mr. Jide Famodun said.