Manufacturers Association of Nigeria Expresses Concerns Over Monetary Policy Committee’s Decision

1.0 INTRODUCTION
The Nigerian economy has encountered significant challenges in recent years, including foreign exchange volatility, escalating energy costs, and food insecurity. These challenges have intensified inflationary pressures, adversely impacting consumers’ purchasing power and impeding the growth of the manufacturing sector. Consequently, production levels have declined, leading to reduced competitiveness within the industry.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) convened its 295th meeting on May 20th and 21st, 2024, with the primary objective of assessing recent economic and financial developments. Amidst prevailing challenges, the committee aimed to identify potential risks to the economy’s trajectory and proffers solution. During the meeting, the MPC noted the sustained increase in headline inflation, predominantly driven by rising food prices due to supply constraints and elevated logistics and distribution costs.

1.1 Decision of the MPC
The committee noted the effect of the persistent increase in inflationary rate on the economy and decided to continue its effort to curb the pressure with the aim of achieving its target of getting inflation to average 21 per cent by the end of this year.

Concluding their deliberations, the committee reached a decision to further tighten monetary policy rate. This entails raising the interest rate by 150 basis points, from 24.75 percent to 26.25 percent. Moreover, the committee opted to maintain the Cash Reserve Ratio (CRR) of Deposit Money Banks at 45.0 percent and retain the Liquidity Ratio at 30.0 percent.

2.0 IMPLICATIONS FOR THE MANUFACTURING SECTOR

The persistent macroeconomic instability in Nigeria, resulting from sustained monetary policy decisions over the past two years has negatively impacted the manufacturing sector. This instability, compounded by various constraints affecting sectoral performance, continues to disrupt production plans, undermine investments, and cast uncertainty over prospects.

Furthermore, recent decisions by the Monetary Policy Committee (MPC) exacerbate these challenges by further tightening credit interventions, increasing loan costs, raising production cost, limiting fund accessibility, and eroding investment and competitiveness within the manufacturing sector. It is evident that the MPC leans towards prioritizing the financial sector over the real sector, rather than striving for a balanced approach between the two. These effects are intensified by the current monetary stance, contributing to:

2.1 Constraints on investment and expansion

The combination of heightened borrowing costs and reduced liquidity will hinder manufacturers’ ability to invest in innovative technologies, expand production capacities, or venture into new markets. As a result, this could lead to delays or cancellations of planned initiatives, ultimately constraining the sector’s potential for growth and its overall contribution to economic growth and development.

2.2 Further Decline in Manufacturing Competitiveness

The decision made by the MPC will further compound the already high cost of doing business, consequently diminishing the competitiveness of Nigerian products in the global market. The high lending rate exceeding 30 percent will increase the cost of borrowing and make Nigeria goods less competitive to products from other nation.

This is evident in the substantial downturn in global demand for Nigerian goods. Notably, data sourced from the World Trade Organization reveals a stark contrast in manufacturing export values between Nigeria, South Africa, Egypt and Morocco in 2022, with South Africa, Morocco and Egypt recorded $45.38 billion, $30.61 billion, $20.14 billion respectively compared to Nigeria’s modest record of $3.21 billion. Such a glaring divergence underscores the significant disparity in competitiveness of Nigeria.

Moreover, according to MAN survey the capacity ultilisation of the manufacturing sector reduced from 56.4 percent recorded in 2022 to 55.1 percent in 2023. Also, the growth of the sector reduced to 1.40 percent in 2023 from 3.35 percent and 2.45 percent recorded in 2021 and 2022 respectively.

3.0 CONCLUSION AND RECOMMENDATION

The Manufacturers Association of Nigeria (MAN) acknowledges the efforts of the Monetary Policy Committee (MPC) in confronting the economic challenges facing the country, notably the fluctuations in inflation and exchange rates. While MAN understands the reason behind the MPC’s decision, it is crucial for the committee to thoroughly assess the potential impact on the real sector and the multiplier effect on the nation. Collaborating with fiscal authorities is essential to reinforce the sector’s traditional role in driving significant employment, heightened productivity, steady forex earnings, and sustained economic progress.

It is notable that the strategy of raising the Monetary Policy Rate (MPR) has persisted for nearly two years without yielding positive results. MAN had hoped that the Central Bank of Nigeria (CBN) would explore alternative measures, particularly in addressing the underlying causes of inflation, primarily cost-push factors.

MAN, earnestly urges the MPC to carefully evaluate the effects of these monetary policy actions on both the manufacturing sector and the broader economy. Achieving a delicate equilibrium between addressing macroeconomic challenges and fostering the growth and resilience of the manufacturing industry is crucial.

Therefore, MAN advocates for robust collaboration between monetary and fiscal authorities and suggests considering the following policy measures:
Implement targeted interventions aimed at mitigating the underlying cost-push factors driving inflation, thereby alleviating the financial burden on manufacturers.
Prioritise forex and credit allocation to the manufacturers and fast track the proposed recapitalization of the banking sector.

Emphasize the development of infrastructure within industrial hubs and bolster nationwide investments in renewable energy sources to alleviate logistical expenses and enhance competitiveness.

Further reduce the reliance of the country on imported products and raw materials by providing incentives for investment in backward integration and local sourcing to reduce the pressure on the dollar to the barest minimum.

Segun Ajayi-Kadir, mni
Director General
Manufacturers Association of Nigeria