The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) has voiced its apprehension regarding the recent hike in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN), cautioning that such a move could have adverse effects on the country’s private sector.

In a press release issued on Tuesday, the president of NACCIMA, Dele Oye, expressed deep concern over the decision to increase the MPR to 24.75%, alongside raising the Cash Reserve Ratio (CRR) to 45%. Oye warned that these adjustments could potentially unleash severe repercussions on private enterprises operating within Nigeria.

“The increase in MPR to 24.75% and Cash Reserve Ratio to 45% will have severe repercussions on private businesses in the country. The private sector has been sidelined from the decision-making process of the apex bank,” he stated.

Moreover, Oye noted that NACCIMA had previously communicated its reservations to the CBN governor regarding the initial MPR hike to 22.75%, in a letter dated March 13, 2024. The association’s stance remains firm, contending that such policies could inadvertently trigger inflationary pressures, compelling businesses to escalate prices of goods and services to mitigate the escalated borrowing costs.

NACCIMA enumerated four primary concerns regarding the implications of the MPR hike:

Increase in the Cost of Borrowing: Existing loans would incur higher interest rates, thereby elevating the cost of capital for businesses. This scenario discourages entrepreneurial endeavors and expansion plans critical for economic growth and employment generation.

Restricted Credit Availability: With the augmentation of the CRR, banks’ lending capacity is further constrained. This exacerbates the prevailing challenges faced by the private sector, characterized by limited access to finance.

Pass-Through Effects on Inflation: Elevated interest costs borne by businesses necessitate passing on these expenses to consumers through elevated prices for goods and services. Such a phenomenon can contribute to inflation rather than mitigate it.

Stifling Economic Growth: Constricted monetary conditions might precipitate diminished investment and consumption, pivotal drivers of economic expansion. This could potentially impede economic recovery and undermine prospects for prosperity.

In light of these concerns, NACCIMA proffered recommendations to the CBN governor, advocating for a nuanced and targeted approach aimed at alleviating liquidity constraints within the public sector, while mitigating adverse impacts on the private sector.

“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,” Oye said.

“Additionally, policy directions should be clear and communicated on a quarterly basis, with a robust stakeholder engagement strategy to ensure that the views and concerns of the private sector are considered in policy formulation.”

The apprehension voiced by NACCIMA echoes concerns raised earlier in March when the association penned a missive to Cardoso regarding the MPR and CRR increments, and their ramifications on private enterprises within the country.

At that time, the CBN had raised the MPR to 22.75% from 18.75%, while maintaining the liquidity ratio at 30%. NACCIMA had advised adopting a more comprehensive strategy in combating inflation, proposing alternative measures such as issuing FAAC allocation in vouchers, implementing zero-coupon stabilization, resolving custom import duty issues, and initiating a corporate bond refinancing program.

However, Cardoso, speaking of these concerns, assured that the current tightening measures would not be prolonged and would be relaxed upon substantial improvements in the economy concerning inflation and exchange rates. He said there is collaboration between fiscal and monetary policies to achieve sustainable economic outcomes.

He stated, “While the increase in interest may have tendencies of strangulating the economy, with the foreign exchange rate coming down, that also helps to moderate it overall.”

“And I said earlier, you would expect that this would not be too long drawn at least I would hope so. We are getting towards a situation where the exchange rate, it is moderating, and we are expecting it to moderate and then it find a level which quite frankly is sustainable. This would involve huge collaboration with the fiscal side because a lot of that cannot just rely on the monetary side alone.”

The Central Bank of Nigeria (CBN) has implemented significant adjustments to its monetary policy stance, including a notable increase in the Monetary Policy Rate (MPR), which now stands at 24.75%, marking a 200 basis points rise from the previous rate of 22.75% set in February.

This decision was announced by Central Bank Governor, Mr. Olayemi Cardoso, following the conclusion of the Monetary Policy Committee (MPC) meeting on Tuesday.

While the MPR saw a substantial hike, the CBN opted to maintain the Cash Reserve Ratio (CRR) for commercial banks at 45%. However, the CRR for merchant banks was adjusted upward from 10% to 14%. Additionally, the liquidity ratio of banks remains unchanged at 30%.

In a significant change to its policy framework, the CBN also modified the asymmetric corridor from +100/-700 to +100/-300 around the MPR. This adjustment aims to provide greater flexibility in monetary policy implementation while maintaining price stability.

Reacting to the decision, financial analysts expressed mixed views on its potential impact on the economy. While some welcomed the move as necessary to curb inflationary pressures, others raised concerns about its potential adverse effects on small and medium-sized enterprises (SMEs) and overall economic growth.

“As inflation is up the CBN has raised rates as expected. However, raising interest rates kills the local economy. The question today is how much economic growth can be sacrificed to reduce inflation,” Kalu Aja said.

Many economists have urged the central bank to lower interest rates, cautioning that further increases could exacerbate the slowdown in economic activities. They argue that high interest rates could constrain borrowing and investment, stifling economic growth and job creation.

The decision to hike interest rates occurred against the backdrop of a surge in broad money supply in Nigeria. As of February 2024, Nigeria’s broad money supply (M3) reached a historic high of N95.56 trillion, marking a staggering 79.29% increase from the previous year. This surge reflects a substantial year-on-year growth of N42.26 trillion and a 1.96% increase from the preceding month of January 2024 and has been fingered as a contributor to inflation.

In addition to the surge in broad money supply, Nigeria’s Money Supply (M2) also reached a historical high of N93.9 trillion in February, up from the previous record of N92.8 trillion established in January 2024. These developments denote the significant liquidity in the Nigerian economy, posing challenges for monetary policy management.

The trajectory of the broad money supply (M3) in Nigeria underscores its considerable upward momentum in recent years and reflects a key measure of economic liquidity. This metric includes both net foreign assets and net domestic assets and provides a comprehensive overview of the country’s monetary dynamics.

Ms. Emem Usoro, CBN Deputy Governor of the Operations Directorate, highlighted the correlation between broad money supply and inflation during the MPC meeting in January, noting that both have moved almost in tandem.

“Notably, broad money and inflation have moved almost in tandem as broad money supply (M3) expanded by 18.25% at the end of January 2024. This growth was ascribed to a rise in other deposits, transferable deposits, and securities other than shares, by 26.55%, 4.73%, and 99.98%, respectively.

“From the asset side, Net Domestic Asset (NDA) contributed significantly to broad money growth while Net Foreign Asset (NFA) subdued growth in broad money. The steady rise in inflation has resulted in negative real interest rates,” she said.

Meanwhile, the CBN has directed deposit money banks in the country to expedite actions to increase their capital base. Cardoso emphasized the importance of strengthening the financial system against potential risks, urging banks to accelerate their recapitalization efforts.

He said although the MPC also reviewed developments in the banking system and noted that the industry remains safe, sound, and stable, there is a need for the bank to sustain its surveillance and ensure compliance of banks with existing regulatory and macro-potential guidelines.

“The MPC also enjoined the banks to expedite actions on the recapitalization of banks to strengthen the system against potential risks in an increasingly globalized world,” he said.

It would be recalled that in November 2023, at the 58th Annual Bankers’ Dinner of the Chartered Institute of Bankers of Nigeria (CIBN), Cardoso announced the CBN’s intention to embark on a new round of bank recapitalization for Deposit Money Banks (DMBs).

Addressing the Policy Advisory Council on the National Economy, Cardoso highlighted President Bola Ahmed Tinubu’s ambitious target of achieving a Gross Domestic Product (GDP) of $1 trillion by 2030. This target underscores the government’s commitment to drive economic growth and development over the next decade.

Cardoso emphasized the need to recapitalize the banks so that they can play their role in developing Nigeria’s economic growth over the next seven years.