Recession looms over MPC new rates

BY EMEKA EJERE

There are strong indications that the Nigerian economy may be on its way to another recession unless serious steps are taken by the nation’s monetary and fiscal authorities to assuage the likely effects of the recent hike in the benchmark interest rate.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) had on Tuesday backed the raising of the Monetary Policy Rate (MPR) from 11.5 percent to 13.5 percent in anticipation of an aggressive accretion of inflation.

This is the first time the apex bank is raising the interest rate in two years, having pursued an expansionary monetary policy in the last 24 months. According to the CBN governor, Godwin Emefiele, the MPC had to increase the monetary policy rate by 150 basis points to prevent the looming inflation.

The apex bank also retained the asymmetric corridor around the MPR at +100 /-700 basis points, Cash Reserve Ratio (CRR) at 27.4 percent, and Liquidity Ratio at 30 percent.

It has been a season of rate hike across the world economies after the U.S. Federal Reserve raised its benchmark interest rate two weeks ago to a target rate range of between 0.75% and 1%, the largest hike in 22 years. The decision follows a 0.25 percentage point increase in March, the first increase since December 2018.

But the Manufacturers Association of Nigeria (MAN) and other stakeholders have criticised the hiking of the MPR, saying it will compound the problem of manufacturers in the face of acute foreign exchange scarcity and energy crisis.

This is coming at time the World Bank is raising concerns that Russia’s war in Ukraine and its impact on food and energy prices, as well as the availability of fertilizer, could trigger a global recession.

World Bank President, David Malpass told an event hosted by the U.S. Chamber of Commerce on Wednesday that Germany’s economy, the world’s fourth largest, had already slowed substantially because of higher energy prices, and said reduced production of fertilizer could worsen conditions elsewhere.

Malpass, who observed that developing countries were being hit even harder, given shortfalls of fertilizer, food stocks and energy supplies, said “the idea of energy prices doubling is enough to trigger a recession by itself.”

Nigeria’s output grew by 3.1 per cent in real-time in the first quarter of 2022 but the expansion is below the 4.2 per cent annualised growth projected by the federal government in its yearly budget framework

Africa’s largest economy slipped into recession in the second and third quarters of 2020 but began an aggressive growth toward the mid-last year. But the growth has since slowed down, leading to a downward sloping growth in the past two to three quarters.

The growth peaked at 5.01 per cent in Q2, 2021 and slowed down to 4.03 per cent the following quarter. The last two quarters were 3. 98 per cent and 3.11 per cent respectively.

Analysts believe that with the general elections and rising political risks, Nigeria would need to double up to meet the 3.4 per cent growth forecast of the International Monetary Fund (IMF). The Fund had in April, on account of bullish oil prices, upgraded the country’s growth projection by 0.7 percentage points from the earlier 2.7 per cent estimate.

But reversing the downward sloping growth has become even more doubtful with the increase in MPR which has left the manufacturers and other real sector players lamenting.
The implications

President of the MAN, Mansur Ahmed, in his reaction said the rate hike would compound the plight of manufacturers, especially the small-scale segment of the productive sector.
Ahmed said, “Commercial loans are already beyond the reach of manufacturers, especially the small and medium manufacturers. The continuous rising in food prices is worrisome. Then, exchange rate continues to go up. Where are we going as a country? The CBN leadership will have to do something about it.”

Ahmed, who is not unaware that the continuous rising of inflation locally and internationally had necessitated the move, noted that it was unfortunate that Nigeria was not reaping the gains of high oil prices in the current oil boom.

Also reacting, the Director General of MAN, Segun Ajayi-Kadir, noted that the increase in MPR, which has widened the journey farther away from the preferred single digit interest rate regime, would lead to leaner contribution of the real sector to the GDP.

The MAN boss pointed out that the association was concerned about the ripple effects of the decision and its implications for the manufacturing sector that is visibly struggling to survive the numerous strangulating fiscal and monetary policy measures and reforms.
“It will lead to rising cost of manufacturing inputs, which will naturally translate to higher prices of goods, low sales and enormous volume of inventory of unsold products”, Ajayi-Kadir said.

On his part, Deputy President of the Lagos Chamber of Commerce and Industry (LCCI) Gabriel Idahosa, described the development as an inevitability, considering the recent upward inflationary trend.

“It was actually expected because inflation has gone up to 16 per cent. The CBN target is 13 per cent, so we have lost the downward trending inflation rate that has been on for quite a number of months. By last week, the financial community expected the CBN to increase the interest rate, starting with the one just announced. It was predictable.”

He said the lending rate increase would give rise to more hardship due to the higher cost of borrowing that would apply to all sectors of the economy.

Similarly, the Director-General of the Nigerian-American Chamber of Commerce, Sola Obadimu, condemned the decision by the CBN. He further stated that indiscriminate increase of lending rate by the CBN would inevitably drive up the cost of doing business.“

There is no way you can effectively operate business at such rates. All these things have been talked about a million times by the private sector because realistically, you can’t get loans at the bank at the rate (13 per cent). It’s just another input in the range of factors that affect the cost of doing business.”

He said the government had continuously shown apathy to the plight of the private sector through unyielding taxation and several other policies.

“I think industry and enterprise are generally being killed gradually. If you’re an employer of labour, government is indirectly telling you, who asked you to employ people? There is no effort at all to support the growth of businesses.

“There is multiplicity of taxes by various agencies of government. Some private sector operators are determined to stay in business, some are winding up, some are relocating. That trend will continue. It’s complete apathy to private enterprise.”

Meanwhile, the Centre for the Promotion of Private Enterprises (CPPE) has said that an upward review of benchmark interest rate was expected given several global realities.
Founder and Chief Executive Officer of the centre, Dr. Muda Yusuf, in a chat with Business Hallmark noted that “the hike in MPR by 150 basis points to 13 per cent by the MPC is therefore, understandable.”

Speaking with Business Hallmark, Yusuf acknowledged that the outcome of the MPC meeting was not unexpected considering the intense inflationary pressures, the increasing risks to price stability and the policy tightening trend by central banks globally.

According him, numerous headwinds had posed significant risks to price stability, which is the critical objective of the apex bank.
Some of these headwinds, he said, “include the surge in commodity prices and impact on energy cost, spike in domestic liquidity from electioneering related spending and global supply chain disruptions.”

“The hike in MPR by 150 basis points to 13% by the MPC is therefore understandable. But whether this would significantly impact on the inflation is a different matter.

“Already, bank lending has been constrained by the high CRR [many operators in the sector claim that effective CRR is as high as 50% or more for many banks], the discretionary debits by the apex bank, the 65% Loan to Deposit Ratio [LDR] and liquidity ratio of 30%. Lending situation in the economy is already very tight.

“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.

“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.

“The transmission effects of monetary policy on the economy is therefore still very weak. In the Nigerian context, price levels are not interest sensitive. Supply side issues are much more profound drivers of inflation.

“What the recent rate hike means for the economy is that the cost of credit to the few beneficiaries of the bank credits will increase which will impact their operating costs, prices of their products and profit margins.

“Investors in the fixed income instruments may also benefit from the hike. There would be some adverse effects on the equities market.”