Private Sector Fears Loan Repayment Crisis as Interest Rates Surge to 26.25%

The Organized Private Sector (OPS) and economists have raised concerns about the latest increase in Nigeria’s benchmark interest rate by the Monetary Policy Committee (MPC), warning that it could severely impact the ability of economic operators to repay their loans.

During the MPC’s 295th meeting, Central Bank of Nigeria (CBN) Governor Olayemi Cardoso announced the committee’s decision to raise the Monetary Policy Rate (MPR) by 150 basis points, bringing it to 26.25% from 24.75%. This marks the third consecutive hike in the benchmark interest rate this year, accumulating a total increase of 750 basis points since February.

Cardoso justified the decision, stating, “The key focus of the MPC at this meeting remained to achieve price stability by effectively using tools available to the monetary authority to rein in inflation.” He highlighted a moderate rise in year-on-year headline inflation in April 2024 but noted significant declines in month-on-month measures of headline, food, and core inflation.

Despite the CBN’s stance, the latest hike has sparked criticism. Segun Kuti-George, National Vice Chairman of the Nigerian Association of Small-Scale Industrialists, described the decision as insensitive, emphasizing that many businesses rely on credit to survive. Gabriel Idahosa, President of the Lagos Chamber of Commerce and Industry, argued that the CBN is using the wrong metric to combat inflation, focusing on interest rates rather than addressing the cost of production.

Dele Oye, National President of the Nigerian Association of Chambers of Commerce Industry Mines and Agriculture, criticized the lack of engagement with private sector players in formulating monetary policies, stressing that businesses are left in uncertainty due to the absence of a clear fiscal policy.

Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, expressed concerns about the impact on economic operators with credit exposures, noting that interest rates are nearing 30%. He warned that the high Cash Reserve Ratio (CRR) of 45% is also dampening financial intermediation.

Former CBN Assistant Head of Research, Prof. Jonathan Aremu, acknowledged the potential negative effects on businesses but suggested that the CBN might have additional information influencing its decisions. Prof. Akpan Ekpo, a former Vice-Chancellor of the University of Uyo, criticized the focus on demand-side inflation control, suggesting that it might exacerbate existing economic problems.

Despite the criticisms, Cardoso maintained that the banking sector remains strong and resilient, and emphasized the importance of ongoing bank recapitalization efforts to prepare for a $1 trillion economy. He reiterated the MPC’s commitment to achieving macroeconomic balance and addressing inflation, particularly driven by food prices.

As Nigeria’s inflation rate climbed to 33.69% in April, the debate continues over the effectiveness of the CBN’s monetary policy approach and its impact on the broader economy.