By Adedotun Ajayi
|
The Monetary Policy Committee of the Central Bank of Nigeria, last month, voted to increase the benchmark interest rate by 25 basis points to 18.75 per cent.
The Acting CBN Governor, Folashodun Shonubi, disclosed this while reading the communiqué of the fourth MPC meeting of the year last month.
He said, “In summary, the MPR voted to raise the policy rate by 25 basis points from 18.5 to 18.75 per cent.”
Addressing journalists at the end of the two-day meeting in Abuja, Mr. Shonubi said the committee voted to adjust the asymmetric corridor at +100 and -300 basis points around the MPR.
Analysts’ expectations had been divergent ahead of the first MPC meeting after the suspension of Godwin Emefiele as the governor of the CBN.
The CBN started its monetary policy tightening cycle in May 2022, with its benchmark interest rate rising from 11.5 per cent to 18.5 per cent in May this year.
President Bola Ahmed Tinubu had said interest rates needed to be reduced to increase investment and consumer purchasing in ways that sustain the economy at a higher level.
Analysts had said that with the recent removal of fuel subsidy, the increase in energy prices, and the liberalisation of the exchange rate, inflationary pressure would no doubt persist unless the MPC considered options that would deal with the pressure aggressively.
There’s no doubt that businesses operating in Africa’s largest economy are in for harder times after the raised interest rates for the seventh straight time to a record 18.75 percent.
Adegoke Adebiyi, a business developer said for any business, cash flow is the lifeblood of success. In Nigeria, around 33 per cent of small business owners or entrepreneurs struggle due to a lack of funds. That’s one issue that hasn’t be resolved yet, now the increase in interested rate.
According to him; “When interest rates rise, businesses often attain slower growth rates due to the difficulty in getting access to lending as well as the higher costs associated with borrowing.
Accessing capital and funding opportunities is often essential for businesses when they seek to expand and grow, and when interest rates rise, the cost can become prohibitive. Business owners may choose to scale back their plans to ensure that short-term liabilities do not exceed their coming income. Together, these effects can serve to limit the growth rate of potentially successful endeavors” he said
Oluwole Stephen, a business consultant in his submission said rising interest rates would definitely reduce a business’ ability to service debt, as rising costs are incurred by the organization with no corresponding increase in revenues to offset. Businesses may be placed in a precarious situation if too much of their capital is consumed paying off high-interest debt.
He said “When these obligations take priority over investments in new products and services, or in marketing and advertising campaigns to increase sales, businesses may reduce their overall potential for growth.
“In some cases, organizations may turn to cost-cutting methods like layoffs or reduced wages for employees to reduce fixed costs:
“On the other hand, businesses that import raw materials, intermediate goods, or finished products from abroad will also suffer from higher inflation, as the naira depreciates against the dollar and other foreign currencies. This will increase the cost of production and operation for these businesses, and may also affect the quality and availability of their inputs. Some businesses may try to pass on the higher costs to consumers by raising their prices, but this may not be feasible in a competitive market or a weak demand environment. This will erode their profit margins and market share” he added
On the contrary, Olubunmi Adewa, an economist, said the spike in interest rates is not all bad. She said as the cost of borrowing money increases, rising interest rates can be beneficial for certain types of businesses.
According to her; “For example, businesses that are in fields typically considered “safe” may benefit from rising interest rates if they have a large amount of capital or cash investments. These businesses may see their returns on investment increase as the value of their investments rise. For instance, businesses with positive cash flow can potentially benefit when interest rates rise because they can invest their positive cash flow into higher-yielding securities.
“When the general interest rate in the market increases, businesses with positive cash flow can use this surplus capital to buy securities and investments that pay a higher return than before, allowing them to further increase their positive cash flow as well as maintain liquidity.
In general, by having positive cash flow, companies can have increased flexibility when it comes to dealing with potentially challenging economic conditions due to access to a greater variety of investment options that provide higher returns” she concluded
Also speaking, Darasimi Olatunji, an accountant said start-ups and small businesses looking to expand often have at least one thing in common which is, they want some extra funding. This decision by the CBN would definitely discourage people who are interested in taking loans. In return, make the economy dwindle.
She said “Nigerians are facing enough already, hike in fuel prices, high cost of living, among others, now the increase in interest rate. Why is everything happening at the same time. We business owners know clearly that loans from a bank can only be beneficial when they come with low interest rates. With this new interest rate, businesses would remain stagnant because there’s no appropriate funding.
“And most importantly, businesses that sell goods or services to consumers will also face challenges, as higher interest rates will reduce the purchasing power and disposable income of consumers. This will lower the demand for non-essential or luxury items, such as electronics, clothing, entertainment, and travel. Consumers may also postpone or cancel their planned purchases or investments, such as buying a car, a house, or starting a business. This will affect the sales and revenues of businesses that cater for these markets, and may also lead to overstocking or inventory problems.
“We appeal to the government and the authorities in charge to consider the common man in every decision they make” she said
