THE Tuesday, May 24, 2022 decision by the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) meeting that put the lending rate at 13 per cent has several negative implications for dollar speculators and the upcoming political primaries, ICIR findings have shown.
This is the first time the bank has increased its MPR rate since September 2020, when it was 12.5 per cent.
The hike in the lending rate is expected to increase the cost of funds for bank creditors, manufacturers and producers in the economy.
By further implications, dollar speculators and politically exposed persons nursing an interest of accesing banking facilities to prosecute party primaries would be caught in a tight rope with the cost of funds now raised.
Implications on ongoing party primaries
As it is, the two major political parties – the ruling All Progressives Congress (APC) and the main opposition party, the Peoples Democratic Party (PDP) – have commenced their primaries.
Delegates, who often got paid in dollars during the primaries, may not be getting that currency in this dispensation as the cost of funds in banks would make that difficult. That is already being confirmed as the two parties began their primaries. Tales of how aspirants greased the palms of delegates have been denominated in naira, not in dollars.
“There is already confusion everywhere. Even the rumour and counter-rumour of the status of the Central Bank Governor is affecting the fragile market.
“With the current speculation, the fragile market is already affected. As at yesterday, the dollar exchanged to the dollar for N607. Last week, it was around N595. You could see the uncertainty in the market. Today, Wednesday, at the parallel market, it exchanges for N607 still.
“There are other several factors. The Nigerian currency is one of the most difficult currencies because of the interplay of factors. This interplay is often out of the demand and supply factors,” the president, Association for Bureau de Change Operators (ABDCO), Aminu Gwadabe, told THE ICIR.
Gwadabe added the increase in the lending rate would affect the additional cost of inputs for manufacturers who are struggling to access foreign exchange.
He argued further that because of the high lending rate, there are possibilities of politically exposed persons selling their properties to get fund for their ambition.
A professor of Economics, Ken Ife, told The ICIR that part of the reason the MPC hiked the rate was to make it unattractive for the “dollarisation” of the economy.
“Politicians and speculators are alert on the dollarisation of the economy. It is also part of the reason the CBN hiked the rate to keep these people at bay.
“Dollarisation and allowing politicians to borrow money and throw at elections is one of the reasons the CBN hiked the lending rate.
“The incessant borrowing by politically exposed persons who often wait for the devaluation of the naira is discouraged with the high lending rate.
“This is the main reason the CBN fixed a 1.5 per cent hike on the rate. The target of the hike are the politicians, to discourage dollarisation.
“The target again is to make local manufacturers to look inward for their raw materials,” Ife said.
An economist and chief executive officer of the Centre for Promotion of Private Enterprise, Muda Yusuf, expressed concern on the decision to the economy.
Yusuf said, “What the recent rate hike means for the economy is that the cost of credit to the few beneficiaries of bank credits will increase, which will impact their operating costs, prices of their products and profit margins.
“Investors in the fixed income instruments may also benefit from the hike. There would be some adverse effects on the equities market.”
What the 13 per cent lending rate means for the real sector.
With the 13 per cent lending rate, manufacturers and producers will come for the CBN’s neck as banks hike borrowing rates.
An economist and businessman, Tope Fasua, told THE ICIR that the idea behind raising the lending rate was to slow down inflation.
“That, however, may be ineffective because transmission mechanisms are weak in Nigeria.
“In nearby Ghana, consistent hikes in their policy rates to about 19 per cent has not slowed down inflation, which is in the mid 20 per cent.
“Sub-saharan African economies must be managed with different thinking, else we continue to sink into despair.
“Taken together with what’s happening on the global scene, perhaps, this is the onset of another global recession,” Fasua said.
CBN’s strategies to manage current crisis
Emefiele said the apex bank was managing the impact of the hike by giving out loans to key real sector players at single digit interest rates with few years of moratorium to be able to tame inflation.
He said because of the current Nigerian inflation at 16.82 per cent, the apex bank was using its discretionary powers to control liquidity to avoid inflation surge and manage growing prices.
The apex bank insisted that one of the key reasons for increasing the MPR was to mop up liquidity ahead of election spending.
Besides jacking up the MPR, the MPC retained the Asymmetric Corridor of +100/-700 basis points around the MPR, the Cash Reserve Ratio (CRR) at 27.5 per cent, and the liquidity ratio at 30 per cent.