New Interest Rate May Lead to More Bad Loans, OPS Warns

The Organised Private Sector (OPS) has raised concerns over the recent interest rate hike by the Central Bank of Nigeria (CBN), warning that it may worsen the situation of bad loans in the country’s Deposit Money Banks. On Tuesday, the CBN’s Monetary Policy Committee (MPC) voted to increase the monetary policy rate (MPR) to 27.25%, marking the fifth rate hike this year.

Announcing the decision after the 297th MPC meeting in Abuja, CBN Governor Olayemi Cardoso said, “The committee was unanimous in its decision to further tighten monetary policy and raise the MPR to 27.25%.”

The MPR is the baseline interest rate that affects all other interest rates within an economy. This latest increase of 50 basis points, up from 26.75% in July, reflects an 8.5% rise in interest rates since Cardoso assumed office a year ago. The upward trend in rates has continued since May 2022, when the CBN first began tightening monetary policy.

Cardoso explained that the decision to raise interest rates was driven by inflation concerns, flooding in many parts of the country, and rising petrol and energy prices. He added, “The MPC decided to retain the asymmetric corridor around the MPR at +500 to -100 basis points and raised the Cash Reserve Ratio of deposit money banks by 500 basis points to 50%.”

Despite Nigeria’s inflation rate easing to 32.2% in August from 33.4% in July, the central bank expressed worries about potential inflationary pressures due to petrol price increases and liquidity concerns linked to federal disbursements. “We have observed a correlation between monthly disbursements from the Federation Account Allocation Committee (FAAC) and liquidity in the banking system,” Cardoso stated.

OPS Reacts to Interest Rate Hike

The OPS has expressed fears that this policy change will have dire consequences for businesses. Dr. Femi Egbesola, President of the Association of Small Business Owners of Nigeria, said, “This definitely will push up the cost of doing business and ultimately, the cost of goods and services. The manufacturing sector may contract more as fund liquidity and profitability will surely reduce.”

Egbesola warned that the interest rate hike could lead to more bad debts as businesses struggle to meet their loan obligations. “The banks or financial institutions may witness more bad debts as many lenders may find it difficult to live up to their loan obligations. This will result in banks being averse to lending to the real sector,” he added.

He emphasized that businesses might be forced to reduce production, downsize, or even shut down due to increased financial burdens. “We may begin to see more ailing or comatose businesses,” he cautioned.

Call for a Different Approach

Dele Oye, President of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), echoed similar concerns. He described the CBN’s decision as a burden on businesses, stating, “This decision burdens businesses with higher loan costs, exacerbating their struggles and failing to curb inflation or stabilize the naira.”

Oye urged the CBN to consider alternative approaches such as targeted sector support and deficit reduction. “We urge the CBN to engage with stakeholders for a collaborative approach,” he said, stressing the need for a reassessment of strategies to promote sustainable growth.

Dr. Muda Yusuf, Director of the Centre for the Promotion of Private Enterprise (CPPE), also criticized the decision, calling it damaging to investment and economic growth. “It is quite troubling that at a time when manufacturers, entrepreneurs, and other investors in the economy are craving for a breath of fresh air, the CBN chose to tighten the noose on them by resorting to a further tightening of monetary policy,” Yusuf said.

Yusuf emphasized that businesses are not responsible for the liquidity problems in the economy. “The injection of liquidity into the system is largely public sector driven,” he said, urging the CBN to address the root causes of excess liquidity rather than stifling businesses.

Experts Defend the CBN’s Move

However, some experts defended the CBN’s decision. Uche Uwaleke, a professor of capital markets, suggested that the MPC likely had access to information that justified the rate hike. “My take on the recent hike in MPR is that in matters like this, the CBN usually has information that may not be at the disposal of the public,” Uwaleke said. He expressed confidence that the MPC acted in the best interest of the economy based on evidence of threats to the exchange rate and inflation.

As businesses brace for the impacts of this decision, the debate over the most effective strategies for economic recovery and growth continues. While the OPS fears the worst, financial experts and policymakers defend the need for tighter controls to stabilize the economy.