CBN’s rate hike portends harder times for SMEs

CBN’s rate hike portends harder times for SMEs

As the economy flounders, the hike in the benchmark lending rate from 11.5 per cent to 13 per cent by the Central Bank of Nigeria may not provide the much-needed succour for the productive sectors of the economy, or ease unemployment, inflation, and poverty. Emerging from the third Monetary Policy Committee meeting of 2022, the CBN Governor, Godwin Emefiele, said the rise in the Monetary Policy Rate by 150 basis points was primarily to tamp down inflation and to avoid overheating the financial system.  However, the Organised Private Sector disagreed, and insisted that it would instead further weaken the manufacturing sector and stifle small businesses.

What is clear is that amid the furious headwinds lashing the economy, the CBN’s exertions have failed so far to tame inflation, stimulate the productive sectors, or rescue the critical micro, small and medium enterprises sector to boost job creation and diversify export and revenue sources. This should be the primary focus of the fiscal and monetary policy authorities.

The problem is well-known but implementing effective solutions has been elusive. As Emefiele explained, the MPC was concerned that inflation might spike even higher and harm the economy. His fears are well-grounded.

The latest inflation figures released by the National Bureau of Statistics showed a jump to 16.82 per cent in April, the highest in eight months, and compared to the 15.92 per cent recorded in March. Food inflation was higher at 18.73 per cent, up from 17.2 per cent the previous month. Nigeria has the eighth highest inflation rate in Africa. It fared worse than Egypt with 13.1 per cent in April, and 5.9 per cent in South Africa, according to Focus Economics[1].

Claiming to pursue an expansionary monetary policy in the last 24 months, the CBN retained the asymmetric corridor around the MPR at +100/-700 basis points, Cash Reserve Ratio at 27.4 per cent and Liquidity Ratio at 30 per cent. Reacting, however, the Manufacturers Association of Nigeria (“MAN”) said it would rather compound the plight of manufacturers and hit smaller producers the hardest in terms of access to credit at affordable rates. By convention, the Bankers’ Committee (made up of deposit money bank CEOs and CBN directors) agree that onward lending to customers would generally not exceed 4.0 per cent above the MPC rate, which is the rate at which the apex bank lends to the DMBs.

MAN lamented, that “Commercial loans are already beyond the reach of manufacturers, especially the small and medium manufacturers. The continuous rise in food prices is worrisome. Then, exchange rate continues to go up. The CBN leadership will have to do something about it.”

Average lending rates are already prohibitive at between 16 per cent and 40 per cent. As expected, the rate hike would raise costs of production, reduce SMEs’ capacity to employ and expand, and limit the purchasing power of consumers. SMEs are critical, having great potential for employment generation, innovation, indigenous entrepreneurship, and forward integration with large-scale industries.

Culled from an editorial insight @

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