• Wednesday, October 09, 2024
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Rising interest rates threatening Nigeria’s productive sector, MAN warns

Manufacturing investments seen shrinking on high interest rate

Segun Ajayi-Kadir, the director-general of Manufacturers Association of Nigeria

The Manufacturers Association of Nigeria (MAN) has cautioned that the raising of benchmark interest rates by the Central Bank of Nigeria (CBN) could potentially worsen the country’s already frailing economy.

Segun Ajayi-Kadir, the director general of MAN disclosed this on Thursday in a statement reacting to the recent 50 basis points increase in the monetary policy rate to 27.25 percent, marking the fifth consecutive rise this year.

“The continued increase in interest rates, which now totals 15.75 percentage points since May 2022, would compound the challenges faced by the sector, including rising production costs in the face of declining consumer purchasing power,” Ajayi-Kadir said.

“With the increase in borrowing costs, manufacturers will now pay over 35% on their credit facilities,” he added.

The CBN, at its 297th monetary policy committee meeting, unanimously agreed to raise the MPR by a half point, putting the cumulative at 850 bps.

The decision to further tighten monetary policy stems from the 40 percent rise in petrol prices which could offset the gains seen in slowing inflation figures.

Nigeria’s headline inflation eased to 32.15 percent in August, the second straight fall since almost two years but with an emergence of rise in pump prices, prices are expected to rise again by October.

Meanwhile, the manufacturers said this hike will lead to an increase in production costs, higher prices of finished goods, lower competitiveness and production capacity expansion.

“The impact of higher interest rates goes beyond compounding the challenges of manufacturers, it stifles opportunities for investment in crucial areas such as technology, retooling, and expansion within the manufacturing sector,” MAN said.

Capital expenses rises to N730bn in six months

MAN also lamented that it had incurred more than N730 billion in capital expense due to continuous rise in interest rates imposed by commercial banks.

“Manufacturers will, all the more, be compelled to choose servicing existing credit facilities over expansion and investment in new product lines,” the statement read.

“This dilemma hampers innovation, productivity and growth,” it further stated.

Unsold finished goods inventory hits N1.24 trn

Ajayi-Kadir stated that the manufacturing sector is grappling with depressed consumer demand which is primarily driven by lower purchasing power.

This has surged the value of unsold finished goods inventory by 42.93 percentage points, reaching N1.24 trillion compared to N869.37 billion at the close of 2023.

He noted that this decline has “severely hampered capacity utilization within the sector”.

“This growing stockpile of unsold products underscores the difficulties manufacturers face in a weakening market.

“The broader implications of these challenges threaten not only the manufacturing sector but also the Nigerian economy as a whole,” the MAN DG warned.

Rate hikes worsening unemployment crisis

MAN worries that the multiple rate hikes is limiting business expansion, thereby dampening employment opportunities.

This is even as Nigeria’s unemployment ticked up to 5.3 percent in Q1 2024 from Q3 last year, according to data from National Bureau of Statistics.

“Truth be told, the capacity to absorb the country’s growing youth population into meaningful employment has diminished significantly with the attendant adverse socioeconomic and security implications,” Ajayi-Kadir said.

MAN raised concerns about the implications of the continuous rate hikes on the productive sector and advised the CBN to pause rates and “explore more of the monetary-fiscal policy handshake option to curb inflation”.

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