…Stakeholders say that raising MPR at this time will be injurious to the real sector
Prospects of credit expansion to drive the much-touted diversification and grow the real sector and the small and medium enterprises (SMEs) dimmed yesterday following the decision of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) to tighten money supply to the economy.
The 249th MPC meeting of the CBN rose from its two-day bi-monthly meeting in Abuja yesterday with a decision to raise the Monetary Policy Rate (MPR) from 11.00 per cent (+200bps/-700bps) to 12.00% (+200bps-500bps).
MPR is the benchmark for interest rates charged by deposit money banks (DMBs) and other lender institutions to borrower customers.
Cash Reserve Ration (CRR) was also increased from 20 per cent to 22.5 per cent. CRR is the portion of customers’ deposits that banks must keep as cash, or ‘quarantined’ against loanable funds.
Liquidity ratio (LR) was retained unchanged at 30 per cent.
The CBN governor, Godwin Emefiele, explained that the move was necessitated to mop up excess liquidity which he attributed as a major factor driving foreign exchange speculation.
Emefiele stressed that there was need to tighten money supply as a response to the sharp increase in inflation in February, according to a Composite Price Index (CPI) report by the National Bureau of Statistics (NBS) last week.
Inflation rose 11.4 per cent in February from 9.6 per cent in January, outside the single-digit band allowed by the CBN, a development experts say signals serious challenge for the economy in general and the real sector in particular.
Emefiele said that the decision to tighten money supply was because the balance of risk was against inflation.
Part of the ex-MPC meeting communique reads: “From the monetary data, the Committee noted that the excess liquidity in the banking system was contributing to the current pressure in the foreign exchange market with a strong pass-through to consumer prices.
“The Committee further noted that previous efforts to reflate the economy in order to spur growth did not elicit the required response from DMBs, hence; the surfeit of liquidity in the interbank market.
“Obviously, the attendant low rates at that market have not transmitted to the term structure of interest rates.
“Concerned about the need for low interest rates to support growth and employment, the Committee urged the CBN to explore innovative ways of ensuring the unhindered flow of credit at low cost to key growth sectors even as monetary policy has to, under the circumstance, address the liquidity surfeit in the banking system as well as the pressure on exchange rate and consumer prices.
“The Committee hopes that fiscal and other structural policies would soon be, deployed to strengthen the overall response of macroeconomic policy to the shocks.”
Economy watchers predict hard times for the real sector as the credit tightening measure adopted by the MPC would have far-reaching negative effects on the sub-sectors such as manufacturing and small and medium enterprises (SMEs).
Director-General, Lagos Chamber of Commerce and Industry, Muda Yusuf, condemned the decision of the MPC in embarking on the liquid-tightening measure.
He said the decision was ill-timed and inimical to the growth of the real sector at a time government is mouthing diversification of the economy and giving greater attention to the non-oil sector.
Muda Yusuf, Director-General, Lagos Chamber of Commerce and Industry (LCCI) said the MPC decision to raise the MPR and CRR rates was ill-timed.
“I don’t think this is the right time to tighten monetary policy because the economy is down, goods are declining, jobsas well as confidence are being lost.
“Businesses are also suffering from losses arising from the depreciation of the currency. To add the burden of high interest rate is not the right thing to do.
“At a time like this, we should be looking at how to stimulate the economy not making things even more difficult. I do not believe it is the appropriate policy choice at this time,” Yusuf told The UNION in a telephone interview.
The LCCI president, Remi Bello, who expressed similar view, said the development would reduce the competitiveness of fund raising and make goods and services more expensive.
“This is not going to help the real sector. They are raising interest rate instead of bringing it down. It means real sector and SMEs are not going to have cheaper fund.
“The interest rate charged by banks is a function of what the MPR is. So if the MPR is increased, you can be sure that the interest rate will also go up. That means that the competitiveness in accessing funding will reduce because it will become more expensive to raise fund.
“I do not think it is the best thing to happen to the real sector and the SMEs at this time,” Bello said.
It could be recalled that the NBS had reported negative growth in the nation’s GDP for Q4 2015 while inflation and unemployment rates have increased.