• Monday, April 22, 2024
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High-interest rate adds to manufacturers’ woes

High-interest rate adds to manufacturers’ woes

Manufacturers in Africa’s largest economy can’t seem to catch a break. After surviving the difficult moment of the pandemic, they are now struggling to keep up with rising production costs and retain customers amid surging energy costs and FX scarcity.

And just at the moment, many are tweaking their business models to adapt to the new normal, the Central Bank of Nigeria’s medicine for inflation is bringing a fresh wave of worry – higher borrowing costs.

The CBN recently raised MPR, the benchmark for the interest rate in the country to an all-time high of 22.75 percent in its first MPC meeting of 2024, the cash reserve ratio (CRR) to 45 percent and the Liquidity Ratio retained at 30 percent.

Usually, banks respond to MPR changes, according to experts. At the moment, commercial banks charge rates between 20 and 35 percent, according to BusinessDay checks.

With the excessively high rates at deposit money banks leading to higher borrowing costs, experts say more manufacturers may be strangulated.

“The increase in the MPR to 22.75 will increase manufacturers’ borrowing costs and further add to the pressure in the industry,” said Sola Obadimu, director general of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA).

“No money deposit bank can currently lend below the inflation rate. And if inflation is 29.9 percent, it means no bank can lend manufacturers less than 30 percent,” he noted.

Femi Egbesola, national president of the Association of Small Business Owners of Nigeria (ASBON) noted that it is getting harder for business operators in the country without an end in sight.

He noted that more businesses are going to shut down their operations amid the fresh cost of doing business.

Nigerian manufacturers have been facing a questionable 2024 owing to the persistent foreign exchange volatility and higher production costs that have been crippling business activities.

The worsening FX volatility is inflicting more pain on businesses as the cost of production doubled amid low demand from cash-strapped consumers dealing with inflationary pressures.

The Lagos Chamber of Commerce and Industry (LCCI), has already expressed concerns about the effectiveness of the Central Bank of Nigeria’s (CBN) recent decision to raise the benchmark interest rate by 400 basis points to 22.75 percent.

“While the CBN intends to control inflation, the LCCI notes that the decision, particularly the fifth consecutive hike, raises concerns about its effectiveness in tackling the rising food inflation and the likely impact on businesses and economic growth,” Chinyere Almona, LCCI’s director general said in a statement.

Apart from FX volatility and higher costs, the country’s huge infrastructure gaps are also increasing the burden of doing business in Africa’s most populous country.

The availability of adequate infrastructure is a major determinant of the success of every country’s industrial sector; however, Nigeria lacks the necessary infrastructure needed to grow businesses, especially developed transport systems such as roads and rail that are connected to the nation’s seaports.

Also, energy is a key element of the production process. Nigeria’s inability to supply and distribute sufficient electricity has left businesses at the mercy of generators that consume diesel and petrol.

Manufacturers spend 40 percent of their total production cost on generating energy for their businesses, according to MAN.

Growth in the manufacturing sector in 2023 slowed to 1.4 percent, lower than 2.45 percent it grew in 2022. In the fourth quarter of 2023, it slowed to 1.38 percent, lower than the same quarter of 2022 and higher than the preceding quarter by 1.46 percent points and 0.90 percent respectively.