Rising CBN rates portend tougher times for SMEs

As the economy flounders, the Central Bank of Nigeria’s hike in the benchmark lending rate from 11.5% to 13% may not provide the much-needed relief to the productive sectors of the economy, nor reduce the unemployment, inflation and poverty. . At the end of the third meeting of the Monetary Policy Committee of 2022, CBN Governor Godwin Emefiele said the 150 basis point hike in the policy rate was mainly aimed at curbing inflation and avoiding overheating. of the financial system. The organized private sector disagrees, insisting it would further weaken manufacturing and stifle small businesses.

What is clear is that amid furious headwinds battering the economy, the CBN’s efforts have so far failed to rein in inflation, boost productive sectors or save the critical sector of micro, small and medium enterprises to stimulate job creation and diversify sources of export and income. . This should be the main objective of the authorities in charge of fiscal and monetary policy.

The problem is well known, but implementing effective solutions has been elusive. As Emefiele explained, the MPC feared that inflation would rise even higher and hurt the economy. His fears are well founded. The latest inflation figures released by the National Bureau of Statistics showed a jump to 16.82% in April, the highest in eight months, and from 15.92% recorded in March. Food inflation was higher at 18.73%, compared to 17.2% the previous month. Nigeria has the eighth highest inflation rate in Africa. It is doing less well than Egypt with 13.1% in April and 5.9% in South Africa, according to Focus Economics.

Claiming to pursue an expansionary monetary policy over the past 24 months, the CBN has kept the asymmetric corridor around the MPR at +100/-700 bps, the cash reserve ratio at 27.4% and the liquidity ratio at 30 %.

Reacting, however, the Manufacturers Association of Nigeria said it would instead worsen the plight of manufacturers and hit small-scale producers the hardest in terms of access to credit at affordable rates. By convention, the Bankers’ Committee (composed of CEOs of depository banks and CBN directors) agrees that subsequent loans to customers would generally not exceed 4.0% above the MPC rate, which is the rate at which the bank ridge ready for DMB. .

MAN lamented: “Commercial loans are already beyond the reach of manufacturers, especially small and medium-sized manufacturers. The continued rise in food prices is worrying. Then the exchange rate continues to rise. CBN management will have to do something about this.

Average loan rates are already prohibitive, between 16% and 40%. As expected, the rate hike would increase production costs, reduce the employment and expansion capacity of SMEs and limit consumer purchasing power. SMEs are essential, as they have great potential for job creation, innovation, local entrepreneurship and forward integration with large-scale industries.

Reference rates are used by central banks to control the money supply, inflation and productivity. This has an impact on consumer spending and borrowing. Development experts recommend single-digit lending rates to facilitate access to credit. In an emerging economy, this takes on even more importance.

Indeed, SMEs that drive growth, exports and job creation generally cannot afford high borrowing rates. They face a myriad of other constraints. So, proactive governments and central banks deploy policies to help them in a variety of ways. One is access to low interest credit.

The NBS reports that Nigerian SMEs contribute 46.31% of the national GDP, account for 96.7% of businesses and 84% of employment. In South Africa, SMEs account for 91% of businesses, 60% of employment and contribute 52% of GDP. South Korea’s three million SMEs represent 99.9% of all Korean businesses and their 10.5 million employees constitute 87.5% of employment.

Financing is the cornerstone of SMEs. According to OECD data, loans to SMEs account for more than 80% of all loans in member countries. In addition, the volume of outstanding guarantees amounts to 6.2 percent of GDP, just behind 7.3 percent in Japan. In Nigeria, the percentage of total bank lending to the private sector in the five years to 2017 was less than 1.0%.

In India, the World Bank’s MSME Growth, Innovation and Inclusive Finance Project has improved access to finance for MSMEs in three segments: start-up/start-up, services and manufacturing. Investors benefit from a line of credit of 500 million dollars, granted to the Small Industry Development Bank of India and technical assistance of approximately 3.7 million dollars. For Nigeria, this is the way forward.

A 2017 study by the International Finance Corporation and RBL, an Indian financial institution, found that access to credit had a significant relationship with job creation. Currently, more than 170 countries, including the UK, US, Japan, Taiwan and Germany, use the Credit Guarantee Scheme to help SMEs gain easier access to capital.

The IFC estimates that 65 million businesses, or 40% of formal MSMEs in developing countries, have an unmet financing need of $5.2 trillion each year, or 1.4 times the current level of global lending to MSMEs.

A clear indication of the high death rates of SMEs is reflected in a January report showing that 39.4 million MSMEs were operating in Nigeria in December 2020, compared to 41.5 million in 2017, a decline of 4.5%.

Although the CBN has introduced interventionist programs to accelerate the growth of small businesses, these initiatives have been largely inadequate. Last year, it disbursed N149.21 billion to SMEs and households across the country under the Targeted Credit Facility, with a pledge to increase its support from N150 billion to N300 billion. naira. Reimbursement has been beset by insecurity, currency scarcity and rising energy costs.

The government should address the energy crisis and poor infrastructure that have hampered the growth and dynamism of SMEs, limited their competitiveness and hampered innovation. To revitalize SMEs, the CBN should more effectively manage lending rates, curb inflation, and encourage expansion and competitiveness.

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