Nigeria: Manufacturers Warn CBN: Interest Rate Hike Will Aggravate Nigeria’s Economic Challenges

The Manufacturers Association of Nigeria (MAN) has raised serious concerns about the Central Bank of Nigeria’s (CBN) decision to increase the Monetary Policy Rate (MPR) from 26.75% to 27.25%. In a statement issued on Friday, the association highlighted the significant negative implications this decision could have on the manufacturing sector and the broader Nigerian economy.

Segun Ajayi-Kadir, Director General of MAN, warned that the continuous upward adjustment of interest rates—totaling a 15.75 percentage point increase since May 2022—will exacerbate the already considerable difficulties faced by manufacturers, particularly in light of rising production costs and weakened consumer purchasing power.

“With the increase in borrowing costs, manufacturers will now pay over 35% on their credit facilities. This will inevitably lead to higher production costs, increased prices of finished goods, reduced competitiveness, and hindered expansion of production capacities,” Ajayi-Kadir explained.

He further pointed out that the impact of rising interest rates goes beyond increasing production costs, as it stifles investments in critical areas such as technology upgrades, retooling, and overall sector expansion. Many manufacturers, he noted, will be forced to prioritize servicing existing loans over investing in new product lines or expanding operations.

Ajayi-Kadir also drew attention to a growing inventory of unsold goods, citing a troubling 42.93% increase in unsold finished goods, with the value reaching ₦1.24 trillion by the first half of 2024, compared to ₦869.37 billion at the end of 2023. This growing stockpile is a clear indicator of the shrinking market and diminished consumer demand, which has adversely affected manufacturing capacity utilization.

Broader Economic Implications

The challenges faced by manufacturers, Ajayi-Kadir warned, could have far-reaching consequences for the Nigerian economy. Higher borrowing costs could lead to reduced access to capital, decreased production capacities, and potential business closures, all of which would further exacerbate unemployment and worsen Nigeria’s socioeconomic and security situation.

“MAN is deeply concerned about the impact of these continued rate hikes on the productive sector. We urge the CBN to halt further increases and explore more integrated monetary and fiscal policy measures to address inflation,” Ajayi-Kadir said.

He expressed surprise that the CBN chose to raise the MPR despite minimal improvements in inflation figures, which could largely be attributed to the harvest season. Ajayi-Kadir emphasized that other central banks around the world are maintaining or reducing interest rates, and urged the Nigerian government to take a more balanced approach to economic policy, carefully considering the effects on all sectors, particularly manufacturing.

Impact on Manufacturing Sector

Ajayi-Kadir highlighted the challenges manufacturers have faced in the first half of the year, with over ₦730 billion spent on capital expenditures due to rising interest rates from commercial banks. This, he said, stifles innovation, reduces productivity, and hampers growth within the sector.

“The manufacturing sector is also grappling with depressed consumer demand due to lower purchasing power, significantly affecting capacity utilization,” Ajayi-Kadir added. “This should be a top priority, particularly as the government has committed to fostering domestic production, creating jobs, and reducing poverty.”

MAN’s Recommendations

In light of the recent developments, MAN has urged the government and the CBN to conduct a comprehensive review of the effects of continued interest rate hikes on inflation and the real sector over the past five years, to guide future decisions. The association also called for a focus on promoting domestic production and economic recovery, allowing time for previous rate increases to take effect before considering further hikes.

Other key recommendations include:

1. Strengthening collaboration between monetary and fiscal authorities to align policies that support economic growth.
2. Accelerating the disbursement of the ₦1 trillion single-digit loan under the accelerated stabilization plan for the manufacturing sector, to mitigate the impact of high borrowing costs.
3. Introducing fiscal measures to support the importation of essential raw materials and technology at concessionary rates, to ease the burden on manufacturers.
4. Encouraging backward integration and local sourcing to reduce reliance on imports and minimize pressure on foreign exchange reserves.
5. Promoting investment in renewable energy to reduce rising energy costs that undermine manufacturers’ competitiveness.
6. Utilizing savings from subsidy reforms to improve industrial infrastructure, including roads, electricity, and rail systems, to enhance manufacturing productivity.

Ajayi-Kadir concluded by emphasizing that while price stability is important, it should not come at the expense of the survival and growth of Nigeria’s manufacturing sector, which remains critical to job creation and economic recovery.