The latest increase in Nigeria’s benchmark interest rate by the Monetary Policy Committee (MPC) has sparked significant concern among members of the Organised Private Sector (OPS) and economists.
They warn that the decision could severely impact economic operators’ ability to repay their loans.
Following the MPC’s 295th meeting, Central Bank of Nigeria (CBN) Governor and MPC Chairman, Olayemi Cardoso, announced a hike in the Monetary Policy Rate (MPR) by 150 basis points, raising it to 26.25% from 24.74%. This marks the third consecutive increase in the benchmark interest rate this year, totaling a 750 basis point rise since February.
Cardoso defended the decision, emphasising the MPC’s focus on achieving price stability and curbing inflation. He noted that while year-on-year headline inflation rose moderately in April 2024, month-on-month measures of headline, food, and core inflation declined significantly, indicating the effectiveness of the Bank’s tight monetary policy stance.
Despite these measures, Nigeria’s inflation rate continued to climb, reaching 33.69% in April, according to the National Bureau of Statistics (NBS). This reflects a 0.49% increase from March and an 11.47% rise compared to April 2023. Food inflation stood at 40.53% in April 2024.
The MPC also addressed recent volatility in the foreign exchange market, attributing it to seasonal demand and the dynamics of a freely functioning market system. Cardoso acknowledged a marginal increase in foreign reserves between March and April 2024.
However, the rate hike has drawn sharp criticism from the OPS and economists. They argue that the increase will exacerbate the business environment and heighten the loan repayment crisis. According to CBN figures, non-performing loans in the banking sector exceeded N1.5 trillion in 2023, with the non-performing loans ratio declining from 5.0% in June 2022 to 4.1% in 2023.
Segun Kuti-George, National Vice Chairman of the Nigerian Association of Small-Scale Industrialists, condemned the rate hike, calling it insensitive during a time when many businesses rely on credit to survive. Gabriel Idahosa, President of the Lagos Chamber of Commerce and Industry, criticized the CBN’s approach to fighting inflation, arguing that it does not address the root causes related to the cost of production.
Dele Oye, National President of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, highlighted the lack of engagement between the CBN and private sector players in formulating monetary policies. He emphasized the need for a clear and articulated fiscal policy to guide businesses and support economic stability.
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, expressed concern that most economic operators have not recovered from previous rate hikes, with interest rates nearing 30%. He pointed out that the current Cash Reserve Ratio of 45% significantly affects liquidity in the financial system.
Former CBN Assistant Head of Research, Prof. Jonathan Aremu, acknowledged that the CBN might have additional information guiding its decisions but noted that the hike would negatively impact businesses seeking loans for production. Prof. Akpan Ekpo, former Vice-Chancellor of the University of Uyo, criticized the MPC’s decision, arguing that Nigeria’s inflation is not demand-driven and that continuous rate hikes would marginally impact inflation while creating more economic problems.
In response to the criticisms, Cardoso reiterated the strength and resilience of Nigeria’s banking sector, emphasizing the necessity of ongoing bank recapitalization to prepare for a $1 trillion economy.
He defended the MPC’s decision as a necessary step to achieve macroeconomic balance and control inflation, with food inflation identified as a major driver of the current inflationary pressure.
The International Monetary Fund (IMF) has projected global growth at 3.2% for 2024 and 2025, with Nigeria’s growth revised upward to 3.3% from 3.0% in 2024. Cardoso assured that the CBN remains committed to ensuring the soundness and stability of the banking system amid these economic challenges.
