26.25% interest rate: Private sector fears loan repayment crisis

Members of the Organised Private Sector and economists have expressed fear over the latest hike in the nation’s benchmark interest (Monetary Policy Rate) by the Monetary Policy Committee, saying the decision could significantly hamper economic operators’ ability to repay their loans.

At the end of its 295th meeting on Tuesday, the Governor of the Central Bank of Nigeria, Olayemi Cardoso, who also doubles as the chairman of the MPC, announced the decision of the committee.

The MPC raised the interest rate by 150 basis points to 26.25 per cent from 24.74 per cent.

Tuesday’s MPR hike became the third consecutive rise in the benchmark interest rate this year.

Since February when the MPC resumed, the policymakers have increased the MPR by 750 basis points.

The MPR was increased by 400 basis points from 18.75 per cent to 22.75 per cent in February. It was increased by 200 basis points to 24.75 per cent in March.

In a press briefing held after the MPC meeting on Tuesday, Cardoso defended the decision to hike the MPR again.

Cardoso said, “The key focus of the MPC at this meeting remained to achieve price stability by effectively using tools available to the monetary authority to rein in inflation. Members observed that while year-on-year headline inflation in April 2024 rose moderately, the month-on-month measures of headline, food and core all declined significantly. This follows a decline (month-on-month) of headline and food measures in March 2024, suggesting that the recent tight monetary policy stance of the Bank is beginning to yield the desired outcomes.”

Cardoso added, “For the first time since October, we have seen a relatively significant moderation in the rate of increase and that is working. I believe very strongly that the tool that the central bank is using is working. I have said it before, there is no magic wand, these are things that need to take their own time. I’m confident and the figures show that we are beginning to get some relief and I believe in a couple of more months, we will see some positive reports on the effects of what the CBN is doing.”

The MPC has maintained a hawkish stance as it battles inflation amid a challenging economic climate.

As of April, Nigeria’s inflation rate had risen to 33.69 per cent. The April 2024 headline inflation rate showed an increase of 0.49 per cent points when compared to the March 2024 headline inflation rate, according to the National Bureau of Statistics.

The NBS said that on a year-on-year basis, the headline inflation rate was 11.47 per cent points higher compared to the rate recorded in April 2023, which was 22.22 per cent. Food Inflation was 40.53 per cent in April 2024.

On the continued volatility of the naira, Cardoso said the MPC linked the development to the free market system.

“Members further observed the recent volatility in the foreign exchange market attributing this to seasonal demand, a reflection of the interplay between demand and supply of a freely functioning market system. The committee also noticed the marginal increase in the foreign reserve between March and April 2024,” he said.

However, members of the OPS and economists on Monday opposed the rake hike, saying it would worsen the business and economic environment as well as worsen the loan repayment crisis.

CBN figures showed that the non-performing loans in the banking sector stood at over N1.5tn in 2023.

The non-performing loans ratio was below the maximum prudential requirement of 5.0 per cent of banks last year. It declined from 5.0 per cent in June 2022 to 4.1 per cent in 2023, according to an MPC report in September last year.

The CBN report read in part, “The non-performing loans ratio remained below the maximum prudential requirement of 5.0 per cent. It declined from 5.0 per cent in June 2022 to 4.1 per cent in 2023.”

Meanwhile, the National Vice Chairman of the Nigerian Association of Small-Scale Industrialists, Segun Kuti-George, condemned the MPC interest rate hike.

Kuti-George said it was insensitive to keep raising the interest rates at a time when many businesses were relying on credit to survive.

He said, “That is the only thing they know. The only thing they know is to increase the interest rate. As long as the industrial sector cannot access cheap funds, we are joking. We cannot be talking about economic development.”

Also, the President of the Lagos Chamber of Commerce and Industry, Gabriel Idahosa, who also opposed the rate increase, accused the CBN of using the wrong metric to fight inflation.

Idahosa said, “The CBN is like a farmer that does not have any other tool. So, they are stuck with one tool. We just came out of a consultation session and this was the issue. The CBN is driving a metric that is not related to the problem.

“The problem is the cost of production. It has nothing to do with interest rates. It is not advisable to keep raising the interest rates, but they have run out of ideas and they don’t want to be seen to do nothing.”

Speaking further, Idahosa queried the MPC insisting that the move might not tame the rising inflation.

On his part, the National President Nigerian Association of Chambers of Commerce Industry Mines and Agriculture, Dele Oye, criticised the CBN for not engaging private sector players in the formulation of monetary policies.

Oye further stated that the absence of a clear and articulated fiscal policy for 2024 presents a significant challenge because “without a defined fiscal framework, businesses are left in a state of uncertainty, unable to make informed one-year or medium-term strategic decisions.”

He added, “Despite our numerous letters and expressed public concerns regarding the current monetary policies, we have received only one formal response. This lack of consistent dialogue hampers our ability to provide informed feedback and support to our member businesses.”

The NACCIMA president also expressed dismay that the previous MPC interest rate hikes had neither successfully curbed inflation nor stabilised the naira.

He predicted that given the persistent inflationary pressure, another rate increase could be on the horizon.

He, however, cautioned that “such a decision should ideally be supported by a comprehensive fiscal policy that provides a clear roadmap for economic stability and growth.”

Meanwhile, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, expressed worry that most economic operators with credit exposures to the banks have not recovered from previous hikes as interest rates were already within the neighbourhood of the 30 per cent threshold.

Yusuf further argued that the extant Cash Reserve Ratio of 45 per cent has profound liquidity effects on the financial system.

According to him, both measures (MPR and CRR) have dampening effects on financial intermediation, which is the primary role of banks in an economy.

He said, “The monetary policy transmission channels are still very weak, given the level of financial inclusion in the economy. This limits the prospects of monetary policy effectiveness.

“Meanwhile, the new rate hike is an additional cross to be borne by investors who have exposures to bank credit facilities. Naturally, a rigid monetarist disposition by the Central Bank is expected.  But we need to reckon with the costs to the economy.”

He added, “Also, the monetary policy transmission channels are still very weak, given the level of financial inclusion in the economy. This limits the prospects of monetary policy effectiveness. Meanwhile, the new rate hike is an additional cross to be borne by investors who have exposures to bank credit facilities. Naturally, a rigid monetarist disposition by the Central Bank is expected.  But we need to reckon with the costs to the economy.

“Hopefully, with the positive outlook for domestic refining of petroleum products, we may begin to see a moderation in energy cost and a pass-through effect on the general price level. This is one silver lining that is on the horizon at the moment. Necessary fiscal policy supports are urgently needed to compensate for the adverse impact of extreme monetarism on the economy.”

A former Assistant Head of Research, at CBN, Prof Jonathan Aremu, said the hike would hurt businesses seeking to borrow funds for their operations.

He, however, said the MPC might have more information at its disposal for its decision.

He said, “First of all, the CBN has more information than every other person has because some people borrow money to go and buy foreign exchange and that puts the pressure on the exchange rate. if the CBN discovers that such a thing is happening, that means they have to discourage people from doing it

“Secondly, the implication of the borrowing public that is using it for production, definitely it is going to have a negative effect. Then again, I am sure that the CBN would have looked at the macroeconomic policy objective, particularly the four items which are: productivity, external balance, inflation, and unemployment.”

Also speaking, a former Vice-Chancellor of the University of Uyo, Prof Akpan Ekpo, faulted the MPC’s decision to hike the interest rates again against the backdrop of an inflationary pressure that is not demand-driven.

According to the economist, the continuous hikes will have a marginal impact and will end up creating more problems for the economy.

Ekpo said, “I don’t know why they still feel that Nigeria’s inflation is mostly demand-driven; that when you increase MPR, it is like you want to fight inflation from the demand side.

“And our inflation is not demand-driven and I think they also want to attack people to bring funds. This is because the MPR is like an anchor rate, banks use that to give loans, and once you do that you are also increasing the cost of funds.”

Meanwhile, Cardoso has said the banking sector is strong and resilient.

The CBN governor, who said the ongoing recapitalization of banks is necessary, said it would help the lenders to prepare for the $1tn economy.

“The committee noted with satisfaction that the banking system remains safe, sound and stable despite the challenges confronting the economy.  It commended the recent recapitalisation initiative and urged the management to sustain its regulatory oversight to sustain the continued stability of the banking system,”

Speaking further on the reasons for the MPC hike again, Cardoso said, “Members (of the MPC) focused on the best policy approach to guide the economy towards achieving an overall microeconomic balance at this meeting; the committee was thus faced with the option of either continuing with policy tightening or holding to observe the impact of previous rate hikes. Following an extensive review of risk and a near-term inflation outlook, the balance of risk suggests a tightening policy to build on the benefit of previous rate hikes.”

Cardoso explained that food inflation was a major driver of the inflationary pressure.

According to the IMF, global growth in 2024 and 2025 is projected at 3.2 per cent It revised Nigeria’s growth upward to 3.3 per cent from 3.0 per cent in 2024.

Talking about bank recapitalisation, Cardoso said, “First and foremost let me re-emphasise that as the central bank, it is our responsibility to ensure that the banking system is strong and resilient and I am very happy to say as we said in the last MPC meeting that the banking system is sound and safe; there is nothing for anybody to have any anxiety about.

“We need a stronger banking system and we need a banking system that will have sufficient shock absolvers in case of any uncertainties within both the domestic and international ecosystem.

Reacting to why the apex bank initially issued a circular for the collection of the cybersecurity levy, Cardoso said the bank acted in response to the Cybercrime Act of 2015 and as the banker for the Federal Government, it was its responsibility to ensure compliance with the levy.