Interest rate 26.25%: Private sector fears loan repayment crisis

Members of the Organized Private Sector and economists have expressed fears over the recent increase in the nations base interest rate (Monetary Policy Rate) by the Monetary Policy Committee, saying the decision could significantly hamper the ability of economic operators 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 committee’s decision.

The IMC increased the interest rate by 150 basis points to 26.25 percent from 24.74 percent.

Tuesday’s MPR hike was the third consecutive hike in the key interest rate this year.

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

MPR increased by 400 basis points from 18.75 percent to 22.75 percent in February. It rose 200 basis points to 24.75 percent in March.

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

Cardoso said, The main focus of the MPC at this meeting remained the achievement of price stability by effectively using the tools available to the monetary authority to curb inflation. Members noted that while year-on-year headline inflation in April 2024 rose moderately, month-on-month measures of total, food and core fell sharply. This follows a (month-on-month) decline in total and food measures in March 2024, suggesting that the Bank’s recent tightening monetary policy stance is beginning to have the desired effect.

Cardoso added, For the first time since October, we have seen a relatively significant moderation in the growth rate and it is working. I strongly believe that the tool that the central bank is using is working. I’ve said it before, there is no magic wand, these are things that have to take their time. I am sure and the figures show that we are starting to get some relief and I believe that even in a few months we will see some positive reports on the effects of what the CBN is doing.

The MPC has taken a tough stance as it battles inflation amid a challenging economic climate.

As of April, Nigeria’s inflation rate had risen to 33.69 percent. According to the National Bureau of Statistics, the April 2024 headline inflation rate showed an increase of 0.49 percent compared to the March 2024 headline inflation rate.

The NBS said that on an annual basis, the total inflation rate was 11.47 percent higher compared to the rate recorded in April 2023, which was 22.22 percent. Food inflation was 40.53 percent 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 supply and demand of a freely functioning market system. The committee also noted a marginal increase in foreign exchange reserves between March and April 2024, it said.

OPS, economists react

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

CBN figures showed that non-performing loans in the banking sector were over N1.5 trillion in 2023.

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

The NPL ratio remained below the maximum prudential requirement of 5.0 percent, the CBN report read in part. It fell from 5.0 percent in June 2022 to 4.1 percent in 2023.

Meanwhile, the National Vice President 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 interest rates at a time when many businesses relied on credit to survive.

He said: This is the only thing they know. The only thing they know is to raise the interest rate. As long as the industrial sector cannot access cheap funds, we joke. We cannot talk about economic development.

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

Idahosa said, CBN is like a farmer who has no other means. So they are stuck with a tool. We just came out of a consultation session and that was the point. CBN is running a metric unrelated to the problem.

The problem is the cost of production. It has nothing to do with interest rates. Continuing to raise interest rates is not advisable, but they have run out of ideas and don’t want to appear to be doing nothing.

Speaking further, Idahosa questioned the MPC insisting that the move may not dampen rising inflation.

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

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

He added that despite our many letters and publicly expressed concerns about current monetary policies, we have received only one formal response. This lack of consistent dialogue hinders our ability to provide informed feedback and support to our member businesses.

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

He predicted that given continued inflationary pressure, another rate hike could be on the horizon.

He, however, warned 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 Center for the Promotion of Private Enterprises, Muda Jusuf, expressed concern that most economic operators with credit exposures to banks have not recovered from previous increases since interest rates were already close to 30 percent. the threshold.

Yusuf further argued that the existing cash reserve ratio of 45 percent has profound liquidity effects on the financial system.

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

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

Meanwhile, the new rate hike is an additional cross to be borne by investors who have exposures to bank credit facilities. Of course, a rigid monetarist stance is expected from the Central Bank. But we have to reckon with the costs to the economy.

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

Hopefully, with the positive outlook for domestic refining of petroleum products, we can begin to see a moderation in energy costs and a carry-over effect on the overall price level. This is a silver lining that is on the horizon at the moment. Necessary fiscal policy supports are urgently needed to offset the negative impact of extreme monetarism on the economy.

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

He, however, said that the IMC may have more information available for its decision.

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

Second, the implication of the borrowing public using it for production will undoubtedly have a negative effect. Then again, I am sure the CBN would have looked at the macroeconomic policy objective, especially the four points which are: productivity, external balance, inflation and unemployment.

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

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

Ekpo said, I don’t know why they still think that Nigeria’s inflation is mainly demand driven; that when you raise the MPR, it’s like you want to fight demand-side inflation.

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

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

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

The Commission noted with satisfaction that the banking system remains safe, sound and stable despite the challenges facing the economy. He praised the recent recapitalization initiative and urged management to support its regulatory oversight to support the continued stability of the banking system.

Speaking further on the reasons for raising the IMC again, Cardoso said, (IMC) members focused on the best policy approach to guide the economy towards achieving an overall microeconomic balance at this meeting; So the committee was faced with the option of continuing to tighten policy or holding off to observe the impact of previous rate hikes. After a broad risk review and a short-term inflation outlook, the balance of risks suggests a tightening policy to build on the benefits of previous rate hikes.

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

According to the IMF, global growth in 2024 and 2025 is projected at 3.2 percent. He revised Nigeria’s growth to 3.3 percent from 3.0 percent in 2024.

Speaking about bank recapitalization, Cardoso said: First of all, let me reiterate that as a central bank, it is our responsibility to ensure that the banking system is strong and resilient, and I am very happy to say that as we said in the MPC The last. finding that the banking system is sound and safe; there is nothing for anyone to have any anxiety about.

We need a stronger banking system and we need a banking system that will have enough buffers in case of any uncertainty in both the domestic and international ecosystem.

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

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