MAN highlights how acute forex shortage; unfriendly exchange rates can fuel inflation and depress industrial production

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Manufacturers Association of Nigeria (MAN)’s perspective on the September 27, 2022 decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria stressed that the MPC in its Communique No. 144 of the Third Quarter 2022 meeting recognized the global economic tension occasioned by the Russian-Ukrainian war with the associated disruption of global supply chain, degenerating global financial situation and accelerating world inflation.


Consequently, MAN noted that the Committee increased the Monetary Policy Rate (MPR) by 150 base points to 15.5% with an asymmetric corridor of +100/-700 basis points around the MPR; and Cash Reserve Requirement (CRR) by 750 base points to 32.5%; while retaining Liquidity Ratio at 30%. According to the Association, the increase was aimed at moderating the high inflationary pressure on the economy and narrow the gap between the hitherto MPR of 14% and inflation rate which stood at 20.52% in August 2022 in order to improve the level real interest rate. Of course, real interest rate is critical to prospective investors who would want optimize their investment earnings, it noted.


The Director General (DG) of Association, Segun Ajayi-Kadir, said the implications of the MPC decision on economy and manufacturing sector as it regards to the increase in the two monetary parameters, MPR and CRR portends worrisome negative consequences for the manufacturing sector, some of which include:

➢Increased cost of borrowing by manufacturers, further beyond the extant double-digit rate, which disincentivize new investments in the sector;

➢Increased factor costs which feed into high product prices, making the sector uncompetitive;

➢High product prices, which makes patronage to plummet and lead to huge inventory of unsold manufactured products in the sector.

➢High inventory of manufactured products will trigger reverse effect in the sector as manufacturing capacity utilization, production, employment, profit and tax contribution to national building will decline.

The DG said going forward:  In consideration of the prevailing scenario around increase in interest rate and access to funds, tougher times are ahead for the productive sector. Clearly, he stressed that the increase in MPR from 14% to 15.5% will rub-off negatively on other rates and dash the hope for a single digit lending rate for the productive sector in the economy. Moreover, the observed continuous contractionary monetary policy posture without complimentary fiscal support may not effectively reduce the prevailing inflationary pressure on the economy, he added. This is not unconnected with the fact that the current increase in Consumer Price index as reported by NBS is not largely driven by monetary phenomenon, as self-inflicted weak foreign exchange rate management can be linked to the pressure, DG cited.


“An experiential x-ray of the prevailing economic stance revealed that domestic output gap due to the inefficiency of the macroeconomy, unguided industry development, inclement and high-cost operating environment, exploitative regulatory ecosystem and some externalities are predominantly responsible for the rising inflation that the nation is experiencing.


In conclusion, Ajayi-Kadir pointed out that it is important that the monetary authority strategically set in motion mechanism for wholistic balancing of the real interest rate, which is critical to investment and not just following leading economies to adjust Interest rate without considering domestic peculiarities. Interest rate (MPR), Inflation and Exchange Rate are triadically critical to investment and production. According to him, balancing the rates in line with local aspiration is therefore imperative.


Regrettably, DG highlights that at the moment, other contributory factors like insecurity and externalities induced food shortage; Government’s excessive drive for internally generated revenue, increase in interest rate in the US; unsustainable and unpragmatic interventions in the forex market; the acute shortage of forex and unfriendly exchange rates are not only fueling inflation, but seriously depressing industrial production.


Consequently, MAN is hopeful that the CBN will creatively go beyond the conventional monetary management system, because global economic dynamics are changing and conventional measures may no longer be effective, he said.


In the light of the above, we (MAN) recommend as follows:

➢ Upscale the current efforts at improving the availability of development-oriented funds at single digit interest rate, prioritizing industries.

➢ Promote a more robust production centric forex management and intervention in official forex market, leveraging on sustained increase in crude oil price in the global market;

➢ Give priority attention to meeting forex requirement of the industries vital inputs that are not available locally, to sustain and ramp-up production;

➢ Intentionally promote monetary and fiscal policy fusion; that is, the Central Bank of Nigerian and the Federal Ministry of Finance, Budget & National Planning should jointly put complimentary measures in place in support of domestic manufacturing.

➢      Emplace the framework that will facilitate harmonious implementation of relevant policy guidelines aimed at boosting productivity.


Undoubtedly, MAN DG said the Implementation of these measures will enable industries to remain in business; increase aggregate output; improve contribution to GDP and ensure inclusive and sustainable economic growth.


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