Interest rate hike: Job losses, crisis loom, warns OPS

Members of the organised private sector have described the latest hike in the nation’s benchmark interest rate as an unfortunate development, saying it will worsen business crisis, job losses and slow down economic growth.

They spoke against the backdrop of the Monetary Policy Committee’s hike of the Monetary Policy Rate from 16.5 per cent to 17.5 per cent despite a slight drop in the inflation rate in December 2022.

The decision was taken at the MPC’s first meeting of 2023, with the committee citing fears of a fresh rise in inflation as its reason.

The development came exactly one month before the 2023 general election scheduled to hold on February 24.

During the last MPR meeting in November 2022, the CBN hiked the benchmark interest rate to 16.5 per cent as it stepped up efforts to curb inflation which rose to 21.09 per cent in October 2022.

The National Bureau of Statistics had reported that prices decelerated to 21.34 per cent in December from the 21.47 recorded in November 2022

However, following the Central Bank of Nigeria’s increase of the MPR in November 2022, Maximum Lending Rate rose to 29.13 per cent in December from 28.14 per cent recorded in November.

Prime Lending Rate also rose from 13.17 per cent in November to 13.85 per cent in December.

But, the CBN Governor, Godwin Emefiele, told a news conference on Tuesday that the decision was taken to address inflation.

The governor said loosening the MPR would negate the objective of damping pent-up aggregate demand which fueled inflation.

He said the MPC chose to raise the MPR to moderate general prices.

The CBN, however, retained all other parameters, keeping the asymmetric corridor at +100/-700 basis points around the MPR.

The CBN also retained the Cash Reserve Ratio at 32.5 per cent while the liquidity ratio was kept at 30 per cent.

This was the fifth time the CBN would increase the interest rate contrary to the advice from manufacturers and some key stakeholders.

The CBN said previous increases were beginning to yield results with the slight drop in the inflation rate recorded in December 2022.

However, the apex bank argued that there was a need to keep tightening its monetary policy.

The apex bank had increased the MPR from 11.5 per cent recorded earlier last year to 16.5 per cent in four consecutive rate hikes in 2022.

Experts had warned that increasing the MPR would be harmful to the economy.

OPS reacts

The Nigerian Association of Small Scale Industrialists; Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture; Nigeria Economic Summit Group and the Nigerian Employers Consultative Association faulted the interest rate hike by the MPC.

The National Vice President of the Nigerian Association of Small Scale Industrialists, Segun Kuti-George, described the decision to increase the benchmark borrowing rate as one that would birth unintended consequences for the productive sector.

He said, “It’s like in economics when you are trying to solve a problem, you are creating another one. So what you do is, you weigh the pros and the cons and see which one will be higher, and then you make your decision.

“The banks will have more funds to give out, but the price will also be high. It will drive up the cost of production again. The cost of production being driven up means an increase in prices, which will have the tendency to drive up inflation. However, if the prices of products are not competitive, it means people will be patronising more imported goods than they are patronising Nigerian goods.”

Also, speaking with The PUNCH, the Director-General of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Olusola Obadimu, stated that the decision would indirectly cause a cost-push inflation that would defeat the primary reason behind the rate hike in the first place

Obadimu said, “The effort is geared towards taming inflation. The logic is based on a sort of cascading effect. If the central bank charges higher rates to commercial banks, the truth is that commercial banks, in turn, will increase the rates at which they lend to businesses and individuals.

“So, it will now achieve the opposite effect because the cost of money will go up and cost-push inflation will still stand. It is reactive but it doesn’t really work out that way. When you raise rates, you have raised the cost of money, because if you take a loan, you are buying money, the interest rate is the cost of money. When it goes up, whoever is using a loan to do any productive activity will add the cost of inputs and it will result in cost-push inflation. It will be difficult to achieve the desired effect.”

Also, a professor of Capital Market and Chairman of the Chartered Institute of Bankers of Nigeria, Abuja Branch, Prof Uche Uwaleke, said the hike in the MPR by another 100 basis points to 17.5 per cent was not cheering news for struggling businesses as well as output growth in general.

He said, “In view of the pause in inflationary pressure, declining GDP growth, the ongoing implementation of cash withdrawal limit which will ultimately reduce money supply, and the fact that the supply-side factors are major inflation drivers in Nigeria, I had expected the MPC to maintain status quo.

“Following this development, it is expected that the banks will re-price their loans which may further jeopardise their risk assets and worsen asset quality.

“It is obvious that the CBN is heeding the advice of the IMF at the just concluded World Economic Forum where the global financial body urged Central Banks not to pause their aggressive monetary stance.

“While doing so helps the central banks to pursue their primary mandate of price stability, it leaves global economies vulnerable to economic recession.

“For Nigeria, it goes without saying that a high interest rate environment is inimical to economic growth, job creation and the stock market.”

NESG, NECA speak

Also reacting to the development, the Director General of Nigeria Employer’s Consultative Association, Mr Wale Oyerinde, said that the decision of CBN was ill-timed.

“The CBN’s decision to raise the MPR to 17.5 per cent on the premise of further tightening the monetary policy is ill-timed. We believe that it is apt for the Monetary Policy Committee to further investigate closely and proffer other alternative measures in addressing the rising inflation rate, rather than further stifling the growth trajectory of the economy.”

“It is obvious that with the lingering scarcity and increase in fuel prices, which has its attendant impact on rising prices of goods, and most especially the transportation cost, the anticipated effect of the increase in MPR is already defeated, if not worsened. At a time of challenging global growth, providing policy measures to stimulate the economy would have been appropriate. This increase will further strangulate the real sector that is already challenged with the high cost of doing business”

Also speaking, a facilitator with the Nigerian Economic Summit Group, Dr Ikenna Nwaosu, faulted the apex bank for raising the interest rate.

He submitted that the central bank had not given enough justification for the interest rate adjustments.

He said, “It is not surprising, it has been predicted. But it shouldn’t have happened, they should have put in sufficient monetary policy measures to drive the interest rates downwards. The CBN has not given justifications for the interest rate adjustments.”

Economists react

Some economists have also reacted to the development. A professor of Economics, Kaduna State University, Seth Akutson, said, “If inflation is higher than the interest rate, it will discourage investors. The CBN is not doing this on its own. It has to flow with the market. Inflation is not something that the CBN can control on its own. All the arithmetic involving the monetary policy rate is to ensure that they flow with inflation or else the economy will suffer for it.”

A senior Economics lecturer at the Lagos Business School, Dr Bongo Adi, however, disagreed.

He said, “I don’t think this will have any significant impact on the interest rate. It is not likely to have any expected impact.

“Has the past increment succeeded in reducing inflation? Inflation rate has come down in places like the US, but not necessarily because of this hawkish monetary policy stance.

Also speaking on the increase of the interest rate by the apex bank, a senior lecturer in the Department of Economics, School of Management and Social Sciences, Pan-Atlantic University, Dr Olalekan Aworinde, said, “If the investors are not able to approach the banks for the purpose of investment, it will reduce the level of investment; and once the level of investment reduces, the level of output will also be affected.”

Also speaking on the development, a professor of Economics at the Olabisi Onabanjo University, Ago Iwoye, Ogun State, Prof Sheriffdeen Tella, disagreed with the apex bank’s reason for increasing interest rates.

He said, “There is no basis for increasing the interest rate. They say it is to curb inflation but as an economist, I don’t see how this would reduce inflation. People don’t save in Nigeria because of interest rate, they only save when they have excess.

 “The real interest rate is still negative given the inflation rate of 21 per cent. So, if the rate is to encourage saving, it cannot do so. Rather, it adds to the cost of borrowing and consequently the cost of production, which is not good for investment and production. What caused inflation in Nigeria is more than the interest rate. The shortage of products aided by high exchange rates and prices of petrol; they are actually fuelling inflation.”

The CBN governor has also defended its huge borrowing to the Federal Government through the Ways and Means Advances.

The Ways and Means Advances is a loan facility through which the CBN finances the shortfalls in the government’s budget.

According to Section 38 of the CBN Act, 2007, the apex bank may grant temporary advances to the Federal Government regarding temporary deficiency of budget revenue at such rate of interest as the bank may determine.

The PUNCH recently reported that the FG borrowed N6.31tn from the CBN through Ways and Means Advances in 10 months.

This pushed the government’s borrowing from the CBN from N17.46tn in December 2021 to N23.77tn in October 2022.

The N23.77tn owed to the apex bank by the FG is not part of the country’s total public debt stock, which stood at N44.06tn in the third quarter of 2022, according to the Debt Management Office.

The public debt stock only includes the debts of the Federal Government, the 36 state governments, and the Federal Capital Territory.

Defending the CBN’s high borrowing to the Federal Government, Emefiele said, “The CBN is the banker to government and lender of last resort. Since 2015 when this administration came on board, we have seen two recessions, and at least two global crises and we have been confronted by the COVID-19 pandemic. In 2020, crude price came down beyond $20 per barrel, and revenues from crude sales dropped badly.

“We as CBN, lender of last resort, it would be irresponsible for us to sit and allow the government, economy and the people to suffer. What we did by lending to the government was normal and it is also done in any part of the world particularly when countries face crises. That is why I am appealing to those exaggerating the import of what we did to take it easy on us.”


Leave a Reply

Your email address will not be published. Required fields are marked *