The Manufacturers Association of Nigeria (MAN) and the Lagos Chamber of Commerce and Industry (LCCI) have commended the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) for reducing the monetary policy rate (MPR) from 26.5% to 23%. This decision is expected to ease pressure on the real sector of the economy. The move is seen as a response to persistent calls from the business community for a reduction in interest rates to stimulate economic growth.
Segun Ajayi-Kadir, Director-General of MAN, described the development as indicative of CBN's positive disposition to easing pressure on the real sector. He, however, expressed concerns about the transmission of the MPR cut to lending rates. Chinyere Almona, Director-General of LCCI, also welcomed the decision, describing it as a significant easing of monetary conditions. Both groups emphasized the need for the CBN to ensure that the cut is reflected in lending rates to have a tangible impact on the economy.
Despite the commendation, business pressure groups expressed fears about the ability of banks to transmit the MPR cut to lower lending rates. Ajayi-Kadir noted that despite previous MPR cuts, bank lending rates have remained high. The International Monetary Fund (IMF) has also expressed concern about banks' implementation of MPR cuts. The IMF observed that Nigerian banks promptly implement increases in MPR but are slow to implement downward trends.
The IMF noted that a 100-basis-point increase in MPR often triggers a 180-basis-point increase in lending rates, while a similar reduction in MPR elicits a paltry 30-basis-point reduction in lending rates. This trend has kept lending rates artificially high while deposit rates remain low. The fears expressed by business pressure groups are well-founded, and it remains to be seen how the CBN will address this issue.
The business pressure groups argued that with MPR at 23%, prime lending rates will hover around 30%. They contended that no manufacturer in Nigeria can produce at 30% lending rate and compete in the export market with countries like Egypt, South Africa, and Morocco, where lending rates are in single digits. Aliko Dangote, Africa's richest man, also expressed concerns about the high lending rates, stating that no business operator can produce at 30% interest rate and compete in the export market.
Leading economists have also weighed in on the issue, contending that with an inflation rate of 15.4%, there is no reason why MPR should be above 20%. Some pundits believe that MPR should drop to 17% to stimulate economic growth. The CBN's challenge is that it is fighting inflation with limited tools, and it needs to find a way to address inflation from multiple fronts.
The CBN's decision to reduce the MPR has been welcomed by business groups, but concerns about lending rates remain. To have a meaningful impact on the economy, the CBN needs to ensure that the cut is transmitted to lending rates. The apex bank should consider using a combination of moral suasion and regulation to ensure that banks implement the MPR cut.
Key points
- Business groups welcome CBN's MPR cut but express concerns over transmission to lending rates.
- High lending rates in Nigeria make it difficult for manufacturers to compete in the export market.
- Economists believe that MPR should be around 17% to stimulate economic growth.
