In light of Nigeria’s unprecedented inflation rate, which reached a landmark high of 34.19 percent in June 2024, and the ongoing devaluation of the naira, the Central Bank of Nigeria (CBN) has implemented a series of measures aimed at tightening liquidity and restoring economic stability. These measures include:
1. Monetary Policy Rate increase: The CBN’s Monetary Policy Committee (MPC) has raised the monetary policy rate by 795 basis points, from 18.8 percent in January to 26.75 percent in July 2024. This increase, amounting to 63 percent, has led to lending rates for the private sector rising to between 28 percent and 42 percent annually, depending on risk profiles and banking tiers.
2. Loan to Deposit Ratio adjustment: The Loan to Deposit Ratio was reduced from 65 percent to 50 percent in March 2024, further limiting banks’ ability to extend credit to the private sector.
3. Cash Reserve Ratio hike: The Cash Reserve Ratio was increased from 34.5 percent to 45 percent in January 2024, further constraining banks’ lending capacity and raising the cost of borrowing.
4. Government Debt Issuance: The Federal Government, through the Debt Management Office (DMO), plans to raise over N1.6 trillion in debt in Q3 2024 at record yields exceeding 21 percent per annum. This not only drives up borrowing costs for the private sector but also competes with the private sector for the already limited liquidity.
These measures, though necessary for addressing inflation and managing foreign exchange rates, have placed a significant burden on the private sector. Bank lending to businesses has declined from N80.8 trillion in February 2024 to N74.3 trillion by May 2024. Capital markets have also been hit hard, with bond issuances falling to historic lows of N1.1 billion in H1 2024 compared to N141 billion in H1 2023 and commercial paper issuances dropping from N798 billion to N503 billion over the same period.
This credit squeeze poses a considerable challenge for businesses of all sizes. Large corporations, which traditionally rely on bank loans for essential operations such as inventory management and payroll, are now facing severe difficulties accessing necessary funds. The impact extends to vendors, who are also experiencing financial strain as a result of delayed payments from corporations struggling to secure funding. This creates a ripple effect throughout the supply chain, tightening the financial noose around vendors, who are often the first to feel the effects of a credit crunch.
“Adaptability is about the powerful difference between adapting to cope and adapting to win.” Max McKeown
Corporates and vendors alike need to adapt to win in these times and explore partnerships with fintechs who can introduce innovative approaches to unlock previously overlooked sources of capital trapped within their businesses, specifically in their supply chains.
Supply chains, which encompass all players and activities involved in the production and delivery of goods and services, have traditionally been viewed as a cost centre. However, with the incursion of artificial intelligence into supply chain financing (SCF), corporations and vendors can now benefit from innovative approaches to risk underwriting, which further derisk transactions and unlock spontaneous financing opportunities and a competitive advantage for corporations while providing vendors with much-needed liquidity to grow sustainably. The International Finance Corporation (IFC) estimates that Nigeria’s supply chain holds a financing potential of approximately $6 billion annually.
In conclusion, embracing the innovations in supply chain financing offers a promising avenue for businesses to navigate the twin challenges of high inflation and adverse currency fluctuations. By focussing on innovative financial solutions, both corporations and vendors can unlock trapped capital and ensure continued operational success despite the current economic adversity.
Oluseye Seton; Co-Founder/CGO, Vendorcredit.
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