High Lending Rate Cuts Banks’ Private Sector Credit By N780bn

…Aggressive Lending Rate Hike Stifling Production, Experts Warn

The high interest rate of the Central Bank of Nigeria has cut banking sector credit to the private sector by N780bn between the months of July and August this year, figures obtained from the apex bank have revealed.

Analysis of the latest money and credit data of the Central Bank of Nigeria by THE WHISTLER showed that Credit to the private sector in August 2024 dropped by 1.03 per cent to N74.73tn from N75.51 which it was in July 2024.

The drop in bank credit is a reflection of the monetary tightening stance, which the CBN had been implementing under the current governor, Olayemi Cardoso.

Experts have said that the rising cost of debt is starting to weigh on businesses’ willingness to expand credit further.

Unconvinced by the relative decline in inflation in July and August, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), had last week raised the Monetary Policy Rate (MPR), the benchmark interest rate by 50 basis points to 27.25 percent from 26.75 percent in response to the continued inflationary conditions in the economy.

The apex bank retained the asymmetric corridor around the MPR at +500/-100 basis points, and also adjusted other monetary policy tools, increasing the Cash Reserve Ratio (CRR) of deposit money banks (DMBs) by 500 basis points to 50 percent from 45 percent and that of Merchant Banks (MBs) by 200 basis points to 16 percent from 14 percent. The MPC retained the Liquidity Ratio (LR) at 30 per cent.

This was the fifth consecutive hike in interest rate, having been raised by 8.5 per cent under the current leadership of the apex bank.

The outcome of the MPC meeting had beaten analysts’ expectations that the committee would, at least, hold policy rates at current levels in response to the economic hardship faced by Nigerians.

But THE WHISTLER analysis of the CBN money data statistics showed that while the private sector experienced a decline in credit, loans to the government surged by over N11tn in the month of August 2024.

This is because high interest rates are making government securities more attractive to investors.

The CBN data also showed that credit to the government accounted for 29.4 per cent of N105.88tn net domestic credit in August as the government continues to rely more on local borrowing to fund its spending.

The Senior Partner and Chief Economist at SPM Professional, Paul Alaje and Nigeria’s first professor of Capital Market Studies, Uche Uwaleke warned that the tinkering of the Monetary Policy Rate by the Central Bank of Nigeria will not moderate inflation citing that over 60 per cent of the country’s inflation is non-monetary.

Speaking to THE WHISTLER, Alaje argued that hiking MPR will crowd out investment, create poverty, and stagnate the Nigerian economy.

Alaje said the country is not achieving results because the CBN is focusing on the monetary causes of inflation.

Alaje said, “The bottom line is that when you have a non-monetary inflation and you are trying to solve it with a monetary inflation approach, it will cause further problems. Nigeria’s case has largely been non-monetary inflation.

“The National Bureau of Statistics, the real cause of inflation is food inflation. So, you have increased MPR from the former CBN governor to the present governor. Why has it not solved the problem?”

Alaje explained that the CBN is not getting it right because the country’s inflation is mostly non-monetary.

He said, “Those leading our monetary team need to upgrade their knowledge. N100tn last year was not the same as N100tn this year because of the kind of inflation. So, when you now raise the interest rate and banks tell people to pay more for loans, you end up energizing inflation, and you will be forced to devalue. So, it becomes a roller-coaster because you are not separating issues and solving issues.

“CBN will need to call on authorities that are non-monetary to face the non-monetary components of inflation. If not, the CBN will be using monetary tools to fight non-monetary related inflation, which includes shortage of food, insecurity, and seasonal-induced inflation.

“You can’t rely on monetary tools such as adjusting MPR, increasing Cash Reserve Ratio, and increasing Liquidity Ratio to solve the problem. When you do, the economy will stagnate. It means that we will not go above 3.5 per cent.

He said the country has always used monetary tools to combat inflation that has over 60 per cent of non-monetary components.

In his comments, Uwaleke said the aggressive monetary policy hike is stifling production as many companies will refuse to borrow to expand their operations.

“Nevertheless, if I were a member of the MPC, I would vote for a hold position as the aggressive policy rate hike is taking a toll on output. Production is stiffled because of very high cost of funds.,” Uwaleke said.

Just like Alaje, the professor warned that the seeming over reliance on the MPR as a tool to tame inflation does not appear to be making any meaningful impact due to the significant non-monetary factors driving inflation in Nigeria.

Uwaleke said, “The high cost of credit is also a factor contributing to cost-push inflation. This is due in part to a very high CRR of 45 per cent representing sterilised Bank deposits with the CBN.

“This liquidity squeeze is now driving undue pressure by banks on the CBN’s Standing Lending Facility.”

He said the CBN must recognise that the challenge currently facing the Nigerian economy is not just inflation but stagflation.