Yemisi Izuora
The Manufacturers Association of Nigeria, MAN, has asked Nigerians to brace up for a corresponding rise in prices of locally manufactured goods following interest rate hike by the Central Bank of Nigeria, CBN.
Segun Ajayi-Kadir, Director General, of the Association gave the warning in his reaction to the recent MPR increase recently announced by the apex Bank.
The Monetary Policy Committee (MPC) in Communique No. 144 of the Third Quarter 2022 meeting recognized the global economic tension occasioned by the Russian-Ukrainian war with the associated disruption of global supply chain, degenerating global financial situation and accelerating world inflation.
Consequently, the Committee increased the Monetary Policy Rate (MPR) by 150 base points to 15.5 per cent with an asymmetric corridor of +100/-700 basis points around the MPR; and Cash Reserve Requirement (CRR) by 750 base points to 32.5 per cent, while retaining Liquidity Ratio at 30 per cent.
The increase was aimed at moderating the high inflationary pressure on the economy and narrow the gap between the hitherto MPR of 14 per cent and inflation rate which stood at 20.52 per cent in August 2022 in order to improve the level real interest rate.
Ajayi-Kadir, however noted that the real interest rate is critical to prospective investors who would want optimize their investment earnings.
Listing the implications of the action for the economy and manufacturing sector,the Association said the increase in the two monetary parameters, MPR and CRR portends worrisome negative consequences for the manufacturing sector, some of which include increase in cost of borrowing by manufacturers beyond the extant double-digit rate, which disincentivize new investments in the sector.
In addition it will lead to increased factor costs which feed into high product prices, making the sector uncompetitive.
Also, consumers will witness high product prices, which makes patronage to plummet and lead to huge inventory of unsold manufactured products in the sector, while high
inventory of manufactured products will trigger reverse effect in the sector as manufacturing capacity utilization, production, employment, profit and tax contribution to national building will decline.
He warned that the prevailing scenario around increase in interest rate and access to funds, tougher times are ahead for the productive sector.
“Clearly, the increase in MPR from 14% to 15.5% will rub-off negatively on other rates and dash the hope for a single digit lending rate for the productive sector in the economy.
“Moreover, the observed continuous contractionary monetary policy posture without complimentary fiscal support may not effectively reduce the prevailing inflationary pressure on the economy. This is not unconnected with the fact that the current increase in Consumer Price index as reported by NBS is not largely driven by monetary phenomenon, as self-inflicted weak foreign exchange rate management can be linked to the pressure.” the DG stated.
He said that an experiential x-ray of the prevailing economic stance revealed that domestic output gap due to the inefficiency of the macroeconomy, unguided industry development, inclement and high-cost operating environment, exploitative regulatory ecosystem and some externalities are predominantly responsible for the rising inflation that the nation is experiencing.
Ajayi-Kadir, therefore advised that it is important for the monetary authority to strategically set in motion mechanism for wholistic balancing of the real interest rate, which is critical to investment and not just following leading economies to adjust Interest rate without considering domestic peculiarities.
According to him, Interest rate (MPR), Inflation and Exchange Rate are triadically critical to investment and production. Balancing the rates in line with local aspiration is therefore imperative.
He regretted that at the moment, other contributory factors like insecurity and externalities induced food shortage; Government’s excessive drive for internally generated revenue, increase in interest rate in the US; unsustainable and unpragmatic interventions in the forex market; the acute shortage of forex and unfriendly exchange rates are not only fueling inflation, but seriously depressing industrial production.
He expressed the hope that the CBN will creatively go beyond the conventional monetary management system, because global economic dynamics are changing and conventional measures may no longer be effective.
The Association therefore recommended that authorities upscale the current efforts at improving the availability of development-oriented funds at single digit interest rate, prioritizing industries and promote a more robust production centric forex management and intervention in official forex market, leveraging on sustained increase in crude oil price in the global market.
Other recommendations include giving priority attention to meeting forex requirement of the industries vital inputs that are not available locally, to sustain and ramp-up production; promotion of monetary and fiscal policy fusion; that is, the Central Bank of Nigerian and the Federal Ministry of Finance, Budget & National Planning should jointly put complimentary measures in place in support of domestic manufacturing.
They also sought for emplacing the framework that will facilitate harmonious implementation of relevant policy guidelines aimed at boosting productivity and hoped that implementation of these measures will enable industries to remain in business; increase aggregate output; improve contribution to GDP and ensure inclusive and sustainable economic growth.