CPPE Criticizes CBN's Interest Rate Hike, Warns It Will Suffocate Businesses in Nigeria

 

The Centre for the Promotion of Private Enterprise (CPPE) has raised concerns about the Central Bank of Nigeria's (CBN) latest interest rate hike, warning that it will stifle investment and business growth in an already struggling economy.

Dr. Muda Yusuf, the Executive Director of CPPE, expressed these concerns in response to the CBN Monetary Policy Committee’s (MPC) recent decision to raise the Monetary Policy Rate (MPR) by 50 basis points to 27.25% during its 297th meeting in September 2024. Yusuf criticized the CBN’s continuous monetary tightening policies, stating that they are ill-timed and detrimental to Nigeria’s fragile economic recovery.

Impact on Economic Recovery and Businesses

The CPPE emphasized that the decision to hike interest rates is out of touch with the realities faced by Nigeria's economic players. The rate increase comes at a time when businesses, particularly in manufacturing and other key sectors, are already grappling with high operating costs and challenging economic conditions.

Yusuf highlighted that many critical sectors of the economy, including manufacturing, ICT, trade, real estate, and industrial sub-sectors such as cement, food and beverages, chemicals, and pharmaceuticals, have slowed down significantly, as seen in Nigeria’s second-quarter GDP report. He also pointed out that sectors like aviation, textiles, livestock, and mineral extraction are still in recession, making the decision to tighten financial conditions even more concerning.

He noted that what Nigerian businesses and investors need right now is economic stimulus and support, not further restrictions that will worsen the already suffocating environment.

“What investors and manufacturers need is some oxygen and stimulus, not policy measures that would worsen an already suffocating situation,” Yusuf remarked.

Monetary Policy Too Harsh for Current Conditions

The CPPE further explained that the combination of the MPR set at 27.25%, a Cash Reserve Ratio (CRR) of 50%, and an asymmetric corridor of +500/-100 basis points creates highly restrictive monetary conditions. Yusuf argued that this policy stance does not align with the current macroeconomic landscape and structural challenges, making it difficult for businesses to thrive.

He also warned that the latest rate hike would have severe implications for investors, as the cost of borrowing could escalate to over 35%. This would further burden businesses that are already contending with high production and operating costs.

According to Yusuf, the CRR increase to 50% would also constrain financial intermediation, limiting banks’ ability to lend, which in turn would have a negative ripple effect on the wider economy.

Public Sector-Led Liquidity Issues

Yusuf pointed out that liquidity challenges in Nigeria's economy are largely driven by public sector activities, as acknowledged by the CBN Governor. He argued that businesses in the private sector should not bear the brunt of liquidity management policies for issues they did not cause. The economist called for a more targeted approach to addressing excess liquidity, one that focuses on its root causes rather than resorting to broad monetary tightening measures that stifle private sector growth.

“The injection of liquidity into the system is largely public-sector driven, as rightly noted by the CBN Governor. Therefore, the focus of resolving it should be within that context. Stifling the financial conditions to address liquidity issues is detrimental to the investment and growth of the economy,” Yusuf stated.

Negative Consequences for Investors and Entrepreneurs

The CPPE warned that the CBN’s continued reliance on interest rate hikes as a means of controlling liquidity is inappropriate for the current economic climate. Yusuf stressed that the latest policy decisions will only serve to exacerbate the challenges faced by entrepreneurs, driving up the cost of funds and crippling business operations.

“The policy decisions of the CBN are most inappropriate for the prevailing economic conditions and the challenges faced by entrepreneurs in the country,” he said. “The operating and production costs of businesses would be further exacerbated by the latest monetary policy tightening.”

Conclusion

Dr. Muda Yusuf and the CPPE are calling on the Central Bank of Nigeria to reconsider its approach to managing the economy. Instead of further tightening monetary policies, Yusuf advocates for strategies that encourage investment and stimulate growth, particularly in key sectors of the economy. Without such adjustments, Nigeria's businesses may continue to struggle under the weight of high borrowing costs and restrictive financial conditions, hindering the nation’s overall economic recovery.