More pain for SMEs as CBN hikes rate to 17.5%

Small and Medium Enterprises battling higher borrowing costs now face a bigger headache as the Central Bank of Nigeria (CBN) raised its benchmark interest rate on Tuesday for the fifth straight time.

After the first two-day Monetary Policy Committee (MPC) meeting of the year in Abuja, seven out of 12 members voted to raise the Monetary Policy Rate (MPR), also known as the benchmark interest rate, by 100 basis points to 17.5 percent.

Abdulrasid Yarima, president and chairman of the governing council of the Nigerian Association of Small and Medium Enterprises, said the increase in the MPR would reduce the number of micro, small and medium enterprises, especially the nano and micro ones, in the country.

“They will not only run out of business but their chances of becoming formal will also be affected. The interest rate hike will also make it difficult for those who desire loans and others in retaining them,” he said.

He added that the interest rate hike combined with the lack of access to foreign exchange and the removal of subsidy later in the year would add to the cost of inputs. “So, these become very difficult for us to maintain our database.”

The rate hike decision followed the slowdown in the country’s inflation rate to 21.34 percent in December from 21.47 percent in November, according to the National Bureau of Statistics.

All the members unanimously voted to retain other parameters. Consequently, the CBN retained the asymmetric corridor of +100/-700 basis points around the MPR, the cash reserve ratio at 32.5 per cent, and the liquidity ratio at 30 per cent.

Last year, the MPC, chaired by Godwin Emefiele, governor of the CBN, increased its key interest rate four times from 11.5 percent in May to 16.5 percent in November.

Emefiele, who addressed journalists after the meeting on Tuesday, said although the MPC was delighted that inflation moderated year-on-year in December, it was not convinced that a marginal 13-basis-point drop in inflation was enough to celebrate. “The committee therefore was of the opinion that a hold or loosen option was desirable.”

According to him, the MPC noted that loosening could lead to a more aggressive rise in inflation and erode the gains achieved through previous rate hikes.

“Furthermore, a hold stance was also not in consideration, as this would suggest a weak thrust towards CBN’s goal of taming inflation. Although the committee noted the decline in y/y inflation in December 2022, they believed that the economy remains confronted with the risk of higher inflation, with adverse consequences on living standards,” he said.

Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said the hike in the MPR by another 100 basis points “is not cheering news for struggling businesses in Nigeria and for output growth in general”.

“In view of the pause in inflationary pressure, declining GDP growth, ongoing implementation of cash withdrawal limit, which will ultimately reduce money supply, and the fact that supply-side factors are major inflation drivers in Nigeria, I had expected the MPC to maintain the status quo,” he said.

Read also: MPC seen holding interest rates on slowing inflation

According to him, following this development, it is expected that banks will re-price their loans, which may further jeopardise their risk assets and worsen asset quality.

He said: “It is obvious that the CBN is heeding the advice of the IMF at the just-concluded World Economic Forum where the global financial body urged central banks not to pause their aggressive monetary stance.

“While doing so helps central banks to pursue their primary mandate of price stability, it leaves global economies vulnerable to economic recession.”

According to him, a high interest rate environment in Nigeria is inimical to economic growth, job creation and the stock market.

“Given the likely effect on price pressures of planned fuel subsidy reforms, today’s hike was a step in the right direction,” said Razia Khan, managing director and chief economist, Africa and Middle East, global research at Standard Chartered Bank.

She said the broad policy environment needs to be considered holistically, to assess the appropriateness of the policy stance.

“In particular, the transmission mechanism of MPR hikes – whether they do indeed translate into higher market interest rates – needs to be looked at,” Khan said.

She said despite the tightening effects of the naira redesign policy, the CBN hiked its policy rate by 100 bps, more than the consensus had expected.

“Our immediate read on this is that the CBN is showing more anti-inflation resolve, and is preparing the way – perhaps – for an eventual FX policy liberalisation that will require a reset to higher market rates,” Khan said.