Interest Rate Increase: Manufacturers caution CBN, say it’ll worsen Nigeria’s situation

The Manufacturers Association of Nigeria (MAN) has expressed concerns over the Central Bank of Nigeria (CBN) decision to increase the Monetary Policy Rate (MPR) from 26.75 per cent to 27.25 per cent.

In a statement on Friday, the association said the decision has far-reaching implications for the manufacturing sector in Nigeria.

MAN’s Director General, Segun Ajayi-Kadir, explained in the statement that the continued increase in interest rates, which now totals 15.75 percentage points since May 2022, would compound the challenges faced by the sector, including rising production costs in the face of declining consumer purchasing power.

“With the increase in borrowing costs, manufacturers will now pay over 35 per cent on their credit facilities. Clearly, this will lead to an increase in production costs. higher prices of finished goods, lower competitiveness and production capacity expansion,” he said.

He noted that the impact of higher interest rates goes beyond compounding the challenges of manufacturers as it stifles opportunities for investment in crucial areas such as technology, retooling, and expansion within the manufacturing sector.

He said manufacturers will, all the more, be compelled to choose servicing existing credit facilities over expansion and investment in new product lines.

For instance, he said over the first six months of the year, manufacturers incurred more than N730 billion in capital expenses due to the continuous rise in interest rates imposed by commercial banks.

This dilemma, he said, hampers innovation, productivity and growth.

“Moreover, the manufacturing sector is grappling with depressed consumer demand, primarily driven by lower purchasing power. This decline has severely hampered capacity utilisation within the sector.

“Data from the first half of the economic review published by the Manufacturers Association of Nigeria reveals a troubling trend: the value of unsold finished goods inventory surged by 42.93 percentage points, reaching N1.24 trillion compared to N869.37 billion at the close of 2023,” he added.

He further explained that this growing stockpile of unsold products underscores the difficulties manufacturers face in a weakening market.

“The broader implications of these challenges threaten not only the manufacturing sector but also the Nigerian economy as a whole.

“As higher borrowing costs lead to poor access to funds, lower capacities and potential business closures. Truth be told, the capacity to absorb the country’s growing youth population into meaningful employment has diminished significantly with the attendant adverse socioeconomic and security implications.

“MAN is worried about the implications of the continuous rate hikes on the productive sector and earnestly expects the CBN to stop the rate hike but explore more of the monetary-fiscal policy handshake option to curb inflation,” he said.

The association said it was surprised that the CBN is increasing the MPR against the backdrop of the meagre improvement in inflation figures, which could be largely traceable to the onset of the harvest season.

“We also note that this increase is coming at a time that Central Banks, in other climes, are either retaining or cutting rates. It is therefore expedient that the government adopt a holistic and balanced approach to policy formulation and decisions, with due consideration of their overall impact on the various sectors of the economy, particularly the productive sector,” Mr Ajayi-Kadir said.

Undoubtedly, he said, price stability is crucial, and so is the survival and growth of the manufacturing sector.

“This should be top priority at this time and is in line with the government’s avowed commitment to growing domestic production, creating more jobs and alleviating poverty.”

Recommendations

In light of the recent decisions by the MPC, MAN urges the government and CBN to consider conducting a comprehensive review of the effects of continuous rate hikes on inflation and the real sector over the past five years to guide future decisions.

It also urged them to focus on promoting domestic production and economic recovery by allowing time for previous rate increases to take effect before implementing further hikes and strengthen the collaboration between the monetary and fiscal authorities to ensure that they are aligned to support growth.

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“Accelerate the disbursement of the N1 trillion single-digit loan in the accelerated stabilisation and advancement plan for the manufacturing sector to cushion the impact of the high MPR on borrowing costs and introduce fiscal measures that support the importation of essential raw materials and technology at concessionary rates to ease the burden on manufacturers.

“Encourage backward integration and local sourcing to minimise dependence on imports and reduce pressure on foreign exchange reserves and promote investments in renewable energy to alleviate the rising energy costs that burden manufacturers and reduce competitiveness.

“Utilise savings from subsidy reforms to improve infrastructure within industrial hubs, including roads, electricity, and rail, to enhance manufacturing productivity,” he said.