CBN’s Incessant Increase in Monetary Policy Rate Stifles Manufacturing Sector, Economic Growth – MAN

The Manufacturers Association of Nigeria (MAN) has continued to express concerns that the incessant increase in the Monetary Policy Rate (MPR) of the CBN are destabilizing the manufacturing sector and impeding Nigeria’s economic growth.

According to the recent MAN’s CEO’s Confidence Index Report (MCCI), Second Quarter 2024, the average maximum lending rate charged by commercial banks on manufacturers’ finances rose to 35% in Q2 2024 from 28.6% in Q1 2024.

The report noted that the “Central Bank of Nigeria continues to hold the erroneous belief that inflation in Nigeria is primarily money-induced, it has persistently increased interest rates in an attempt to curb the escalating inflationary pressure, which reached a 28-year high of 34.19 percent in June.

“The Monetary Policy Committee’s decision to further hike the Monetary Policy Rate (MPR) by 50 basis points in its July meeting brings the total increase to 1,525 basis points since May 2022, when the committee began its aggressive rate hikes. Unfortunately, inflation has continued to defy the antidote of increased interest rates, as the inflationary problem in the country is largely driven by supply-side deficiencies and other structural bottlenecks.

“The continuous hikes in MPR have tightened financial conditions for the productive sector, with the average maximum lending rate charged by commercial banks on manufacturers’ finances rising to 35% in Q2 2024 from 28.6% in Q1 2024. This has not only increased the cost of goods but has also further compounded the inflationary problem and threatened employment in the sector. “

The Association in the report bemoaned that the capacity of the manufacturing sector to play its strategic role of stimulating economic growth is further constrained by the increase in interest rate, stressing that the new rate will further limit the growth of the manufacturing sector, as the purchasing power of consumers, production levels, competitiveness and sales will further decline beyond measure.

The report added that the recent increase in cost of borrowing will escalate production costs, prices of finished goods, unemployment and social instability; Reduce capacity utilization, consumer demand, and profitability; Stifle investment, innovation and curtail opportunities for the growth; Lead to closure of more manufacturing concerns and constrain the capacity of the sector to compete effectively in global and regional markets; Constrain reinvestment for expansion as significant portion of revenue of manufacturing concerns is directed towards interest payments; Further restrain access to capital judging from the fact that only 16% of total commercial bank credit was disbursed to the manufacturing sector in the first quarter of the year and reduce the flow of investments into the sector and funds required for retooling, upgrading facilities and procurement of new technologies.

MAN in the report acknowledged the efforts made by the Monetary Policy Committee (MPC) to stabilise price and observed the rationale behind its decisions, but maintained that it is expedient that the survival of manufacturing in Nigeria is prioritized when making monetary policy decisions.

This, according to the group, will enable the sector to effectively play its role as the key driver of employment creation, productivity, stable foreign exchange earnings, and sustained economic growth.

MAN’s CEO’s Confidence Index Report also acknowledged the critical link between domestic investor confidence and foreign investors sentiment, noting that as increasing interest rate contribute to low domestic investor confidence, foreign direct investment in the sector had also declined to $191.92 million in the first quarter of the year marking significant drop of 25 percent Quarter on Quarter and 57 percent Year on Year.

Consequently, the Association recommends that the Government should consider the following policy measures: “Direct the CBN to conduct a comprehensive assessment of the impact of previous decisions of the MPC on inflation rate over the last 5 years. This will provide information that will guide future MPC decisions.

“Implore the CBN to be domestic production centric by taking a detour from continuous hike in MPR and allow time for the real sector to recover from the impact of previous hikes.

“Direct the CBN to collaborate with the Coordinating Minister of the Economy to facilitate stronger handshake and coherence between monetary and fiscal policies.

“Insulate the productive sector from the impact of continuous hike in MPR by ensuring the disbursement of the N75billion single digit loan approved by President Bola Tinubu, GCFR over a year ago for the manufacturing sector.

“Offer fiscal support system that will enable the manufacturing sector to import raw materials, spares and machines that are not available locally at a concessionary duty rate.

“Minimise pressure on foreign exchange reserves by incentivising backward integration and local sourcing to decrease reliance on imported products and raw materials.

“Enforce Executive Order 003 to enhance support for local industries and ramp-up domestic production by restricting access to forex for the import of products manufactured locally.

“Address the issue of low manufacturing productivity and food production occasioned by the high-level insecurity across the country to effectively curb the persistent rise in inflation”.

“Utilise Forex revaluation gains to improve patronage of made in Nigeria products and upgrade electricity, road and rail networks within industrial hubs.

“Encourage nationwide investments in renewable energy sources to alleviate energy cost and enhance competitiveness,” the report emphasized.