Manufacturing investments seen shrinking on high interest rate

Investment opportunities in manufacturing are seen shrinking as Africa’s most populous nation hikes interest rates for the fifth time in 2024.

The Central Bank of Nigeria recently raised MPR, the benchmark for the interest rate in the country, by 50 basis points to 27.25 percent, and the cash reserve ratio (CRR) by 500 basis points to 50 percent.

A move the Manufacturer Association of Nigeria (MAN) has said will stifle new investments in the real sector, and increase production costs and borrowing costs for manufacturers.

“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,” said Segun Ajayi-Kadir, director general of MAN said in a September 27th note.

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

Usually, banks respond to MPR changes, according to experts. MAN noted that the recent hike will increase borrowing costs from manufacturers to 35 percent.

“With the increase in borrowing costs, manufacturers will now pay over 35 percent on their credit facilities. This will increase production costs, higher prices of finished goods, lower competitiveness and production capacity expansion,” Kadir said.

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According to him, manufacturers have incurred over N730 billion in capital expenses due to the continuous interest rate hike by commercial banks in the first half of the year, noting that the dilemma hampers innovation, productivity, and growth.

“The broader implications of these challenges threaten not only the manufacturing sector but also the Nigerian economy. Higher borrowing costs lead to poor access to funds, lower capacities and potential business closures.”

“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.”

Also speaking on the implication of the rate hike, Dele Oye, national president of NACCIMA faulted the decision to hike the Monetary Policy Rate, MPR, saying the rate hike would worsen the burden on businesses already grappling with the negative impact of foreign fluctuations and inflation.

“This decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilise the naira.”

To address the issue, MAN urged the government to conduct a comprehensive review of the effects of continuous rate hikes on inflation and the real sector in the last five years to guide future decisions.

The manufacturers association asked the government to focus on promoting domestic production and economic recovery by allowing time for previous rate increases to take effect before implementing further hikes.

MAN also recommends strengthening the collaboration between the monetary and fiscal authorities to ensure they are aligned to support growth and for the government to accelerate the disbursement of the N1 trillion single–digit loans in the accelerated stabilisation and advancement plan to cushion the impact.