More squeeze for SMEs as CBN raises benchmark interest rates to 18.75%

MICRO, small and medium enterprises (MSMEs) numbering about 39.65 million in Nigeria will have to brace up for accessing higher cost of funds for their businesses.

This is as a result of the Central Bank of Nigeria’s (CBN) raise of its benchmark interest rate, known as the Monetary Policy Rate (MPR), on Tuesday, July 25 by 25 basis points, from 18.5 per cent to 18.75 per cent.

The CBN also adjusted the asymmetric corridor around the MPR to +100-300.

The apex bank retained cash reserve ratio at 32.5 per cent, which  determines how banks will price their loans to customers.

These decisions were announced by the CBN acting governor, Folashodun Shonubi, after the two-day MPR meeting in Abuja.

The meeting outcome was delayed by over two hours, compared to the timing in previous meetings.

The consequence of these decisions is that costs of funds for businesses are expected to rise higher, as banks have to put their mark-up funds, which could see lending costs go as high as 27 per cent in commercial banks.

Shonubi, who defended the hike in rates, said that despite concerns, they had helped to moderate inflation surge.

“Our rate hikes have made lots of difference. Whenever we have had a rate increase, it has actually moderated the rate of inflation. That’s not all. During this MPC, we spent lots of time talking about inflation and the various tools we could use to manage it.

“In addition to interest rate hikes, we have also come up with various ways to tighten liquidity. We are not just looking at rate change to moderate inflation, we are also looking at every available tool that would help us rein in inflation,” he said.

Commenting on foreign exchange unification, Shonubi said the CBN was seeking to make the market more efficient, adding, “some of the liquidity challenges on foreign exchange being witnessed currently are being driven by the fact that the market has to find its level.”

The acting governor also declared that there was a huge demand for foreign exchange, which he said the current supply might not be sufficient enough to satisfy.

“As we satisfy the demands, the market will gradually begin to stabilise. For us, it is a market that anybody through a large institution can participate in,” he assured.

He expressed optimism that the foreign exchange volatility would normalise soon, while further reassuring that the apex bank would keep monitoring and intervening where necessary to ensure stability.

Reactions

The chief economist at Coronation Merchant Bank, Chinwe Egwim, who commented on the development, said an average Nigerian would feel the pinch more as costs of borrowing surge further high.

Egwim said, “The hike in rates at 25 basis points is a signal to high lending costs. However, the interest on fixed income instruments (government bonds and treasury bills) will go further up.




    “An average Nigerian will have to fill the pinch more as companies pass on increased costs of borrowing to consumers through their products.”

    She declared that monetary policy tool was not enough to hedge against inflation, while urging authorities to complement efforts to tackle inflation by enabling business environment and securing farmers in the nation’s food belt.

    Also, the Director of Research and Strategy at Chapelhill Denham, Tajudeen Ibrahim, spoke of the need for compelling interest rate to attract foreign exchange and incentivise exports, and also lower inflation.

    “Inflation is highly structural and we need to address insecurity to address food inflation, which drives core inflation. These require investing in infrastructure and logistics to enable farmers preserve their food,” he said.

    Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.

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