By Abiola Olawale
Economists and financial experts across Nigeria have begun to lament the decision of the apex bank of the country, the Central Bank of Nigeria (CBN) to increase the benchmark interest rate to 24.75%.
This was as the Governor of the CBN, Olayemi Cardoso, disclosed at the end of the 294th MPC meeting held in Abuja, that the apex bank has increased the benchmark interest rate by 200 basis points to 24.75 percent, up from the 22.75 percent figure in February.
Furthermore, the `apex bank retained the Cash Reserve Ratio (CRR) at 45%- unchanged from its last meeting but increased the CRR of merchant banks from 10% to 14% while retaining the liquidity ratio at 30%
In his submission, Cardoso said the increase in the interest rate is part of the CBN’s efforts to tackle inflation and exchange rate fluctuations.
The New Diplomat reports that the CBN, in February, raised the MPR to 22.75% from 18.75% and CRR to 45% while holding the liquidity ratio steady at 30%.
Since the CBN’s February MPC meeting, there has been a notable appreciation and stabilization in the exchange rate between the US dollar and the naira. During the interval between the last MPC meeting and the present, the exchange rate momentarily peaked at N1800/$ in the parallel market but has since settled around 1400/$.
However, despite a few positives, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) has expressed concern over CBN’s MPR hike to 24.75%, warning of negative impacts on Nigeria’s private sector.
In a statement on Tuesday, the president of the association, Dele Oye, said the increase in MPR to 24.75% and Cash Reserve Ratio (CRR) to 45% will have severe repercussions on private businesses in the country.
According to Oye, the private sector has been sidelined from the decision-making process of the apex bank.
He also explained that this policy could inadvertently cause inflation, with businesses likely to increase the prices of goods and services to offset the higher borrowing costs.
According to him, the apex bank’s rate hike will increase the cost of borrowing, adding that existing loans will incur higher interest rates, raising the cost of capital for businesses.
He added that with the increase in the CRR, banks’ ability to lend is further curtailed. This exacerbates the challenges faced by the private sector, as businesses incur higher interest costs, they are left with no option but to pass these costs on to consumers through increased prices for goods and services, which can contribute to inflation rather than curb it.
Meanwhile, the association advised the CBN governor to aim for a refined and focused strategy that directly tackles liquidity challenges in the public sector, while minimizing the strain on the private sector.
The president emphasized the need for clear policy directions communicated quarterly and a strong strategy to engage stakeholders, ensuring the private sector’s input in policy making.
The statement reads in part: “Our recommendation is that the CBN should pursue a more nuanced and targeted approach, focusing on mechanisms that specifically address the liquidity issues in the public sector without placing undue burden on the private sector.
“Additionally, policy directions should be clear and communicated quarterly, with a robust stakeholder engagement strategy to ensure that the views and concerns of the private sector are considered in policy formulation.”
Also, the director of the Centre for Economic Policy Analysis and Research, Prof. Ndubisi Nwokoma, called for an incremental approach to foster economic growth.
Nwokoma said a hike in the benchmark interest rate by 200 basis points would bring the total increase to 600 basis points within a month.
“Much as tightening is necessary at this time given elevated inflation, MPC should tighten policy incrementally and in a measured manner that optimizes the CBN’s policy tool kit without undue reliance on the monetary policy rate.
“The decision by the MPC to increase the MPR by 200 bps makes it a total of 600 bps in just one month if one adds the 400 bps delivered in February,” he said.
This is in addition to a high CRR of 45 percent representing sterilized bank deposits.
Nwokoma added: “This development is now driving undue pressure by banks on the CBN’s Standing Lending Facility and generally increasing the cost of funds.
“The CBN should recognize that the challenge currently facing the Nigerian economy is not just inflation but stagflation, and to this end, the CBN should equally have regard to growth concerns in future meetings of the MPC,” he said.
The Founder of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said the nation’s economy needed more attention for economic growth, job creation, and production as it tackles inflation.
Yusuf added that the balancing act was important for the economic recovery process. The CPPE commended the commitment of the CBN to tackle inflation but noted that the limitations of monetary policy needed to be recognized.
“There are contextual issues of weak transmission mechanism, weak financial inclusion, risk to financial intermediation, and the escalating financing cost to the real economy.
“The economy needs as much attention to economic growth, job creation, and production as it deserves for tackling inflation. This balancing act is critical for the economic recovery process,” Yusuf said.
