In response to the domestic economic conditions in Q2 2022 and other economic realities, especially those associated with the prevailing international financial and economic environment, the Monetary Policy Committee (MPC) recently reviewed its previous decisions. The Committee decided to deepen its contractionary monetary policy stance by increasing the Monetary Policy Rate (MPR) to 14% from 13%, which was fixed in May 2022.
The fundamental rationale for upscaling the MPR stems from the need to curb the rising rate of inflation that recently peaked at 18.6%, ensure relative stability, and sustain economic growth in the face of the high-level uncertainties in the global economy. The MPC however, retained the asymmetric corridor of +100/-700 basis points around the MPR; Cash Reserve Ratio (CRR) at 27%, and Liquidity Ratio was also kept at 30%.
In reaction to the increase, the Manufacturers Association of Nigeria (MAN) posited that the increase in MPR has further widened the preferred single-digit interest rate regime,
According to the statement signed by the Director-General of MAN, Segun Ajayi-Kadir, mni, the increase is not manufacturing friendly considering the myriad of binding constraints already limiting the performance of the sector.
MAN is therefore concerned about the ripple effects of this decision and its implications for the manufacturing sector that is visibly struggling to survive the numerous strangulating fiscal and monetary policy measures and reforms.
Consequently, manufacturers are hopeful that the stringent conditionalities for accessing available development funding windows with the CBN will be relaxed to improve the flow of long-term loans to the manufacturing sector at the single-digit interest rate. The expectation is that MPC will ensure that future adjustments of MPR take into consideration the trend of core inflation rather than basing decision on a headline and food inflation. This will no doubt shield the sector from the backlashes from the 14% MPR, ramp up production and guarantee sustained growth in the overall best interest of the economy.
Ajayi-Kadir states that the implication for the economy and the manufacturing sector include-
- This is another level of increase in interest rates on loanable funds, which will no doubt upscale the intensity of the crowding out effect on the private sector businesses as firms have lesser access to funds in the credit market.
- It will spur upward review of existing lending rates dependent on obligations of manufacturing concerns, which will drive costs Northward.
- Intensify demand crunch emanating from the heavily eroded disposable income of Nigerians, constrained access of households and individuals to cheap funds.
- Lead to rising cost of manufacturing inputs, which will naturally translate to higher prices of goods, low sales, and an enormous volume of inventory of unsold products
- Exacerbate the intensity of idle capital assets, worsen the already declining profit margin of private businesses and heighten the mortality rate of small businesses
- Further reduce capacity utilization, upscale the rate of unemployment, incidences of crime and insecurity as the capacity of banks to support production and economic growth is heavily constrained
- Reduce the pace of full recovery of the real sector, make manufacturing performance remain lackluster and of course, lead to a leaner contribution to the GDP.
