The Central Bank of Nigeria’s (CBN) decision to revert interest rate on its Covid-19 intervention facilities has drawn the ire of stakeholders as well as experts, whose thoughts are that the action will not augur well for the beneficiaries, as the country faced inflationary rate pressure among other worsening economic indicators.
Economists, who spoke with on the matter, said the CBN’s decision was ill-conceived as the country’s economy has yet to recover from the devastating effect of COVID, which could heighten unemployment rate, worsen production level and reduce economic growth.
This is just as stakeholders argued it would lead to higher obligations for the beneficiaries.
The apex bank had, last week, notified all the banks and other financial institutions (OFIs) of the reversal from five per cent, back to nine per cent.
In the circular, which was signed by its Director of Financial Policy and Regulation Department, Chibuzo Efobi; dated August 17; and titled ‘Adjustment of Interest Rate on all Central Bank of Nigeria Interventions’, the CBN stated that all intervention facilities granted effective July 20, 2022 should be at nine per cent per annum.
It also said that existing facilities granted prior to July 20, 2020 should be at the same nine per cent per annum but effective September 1, 2022.
The monetary authority had on March 15, 2020, following the outbreak of the COVID-19, extended interest rate reduction and granted a one-year moratorium on all principal payments on its intervention facilities in an effort to reduce the negative impact of the pandemic on businesses and households.
As such, it granted all deposit money banks (DMBs) leave to consider temporary and time-limited restructuring of the tenor and loan terms for businesses and households most affected by the Covid-19, particularly the oil and gas, agriculture, aviation, manufacturing, healthcare and other sectors of the economy.
The concessionary interest rate of five per cent on its intervention facilities, the CBN had on March 3, 2021 extended by 12 months to February 28, 2022, and subsequent to March 1, 2023, before it shockingly revert it in a notification last week
Chairman, National Association of Small and Medium Enterprises (NASME), Lagos State Chapter, Adams Adebayo, expressed worries that the reversal came at a time inflation rate has worsened to 19.64 per cent; dollar, over N430 at official rate and about N720 at the parallel market price.
Coupled with hike in jet A1 fuel that had pushed one-way flight ticket, for instance from Abuja to Lagos, to almost N180,000 for business class, even aa manufacturers are closing factories due to high cost of raw materials.
“This means sectors such as agriculture, power, and aviation which have enjoyed trillions of dollars in intervention funds from the central bank would have to pay nine per cent, an instant of the five per cent previously enjoyed.
“All the beneficiaries of such intervention would be adversely affected by this policy and change in terms and conditions,” he said.
According to Adebayo, small business might be headed towards a total collapse as most of such categories of business would not be able to compete favourably.
“They (small businesses) might equally downsize their staff strength to cut costs,” adding that “the termination of the facility by CBN is not in the interest of an average business manager or an enterprise in Nigeria.
Chinedu Nevo, an economist and PhD candidate at the Faculty of Business and Law, the Open University Business School, Milton Keynes, United Kingdom, said, the reversal by the CBN was ill-conceived.
According to him, Nigeria is still far from recovering from the impacts of COVID-19, especially from the economic angle.
“Actually, many sources have argued that it will take many African countries more than five years and beyond to recover from the negative effects of COVID-19.
“Thus, the reversal by the apex bank was ill-conceived. This is even worse when placed side by side with the high inflation bedeviling the Nigerian economy at the moment,” he said.
Nevo argued that, from a basic economic perspective, when interest rates increase (in this case, from five per cent to nine nine), businesses or entities with existing loan obligations have higher interest payments, less disposable income and bigger overheads.
His words, “With a simultaneously high inflation, such entities struggle to maintain their daily operations, and over time, may even risk collapse. In some other cases, the entities may only be able to pay off the interest only, rather than the loan itself.
“These are the ways that the interest rate reversal would affect the entities. In all honesty, the CBN, by this move, is not encouraging these entities to thrive. This will also affect productivity on a macro scale. In my opinion, the COVID-19 interest rate should be maintained.”
Cheta Uzah, a lecturer at the Department of Banking and Finance, Rivers State University Port Harcourt, also responded that the Nigerian economy has yet to recover from the devastating effect of COVID.
He noted, however, that the apex bank is struggling to deal with the double digit inflation that has resulted from the enormous amount of government borrowing and spending during the COVID period.
“The expansionary monetary policy by the CBN has resulted in massive debts, worsening devaluation of the naira and poor levels of economic growth,” Uzah said.
According to him, the impact of the interest rate reversal on CBN’s intervention facilities would be that fewer small and medium scale investors will be less likely to apply for the intervention loans since higher interest rates would mean higher payment of interest on the loans.
He said, “If fewer businesses are taking loans to expand their business, it means the fewer opportunities of these businesses to employ new workers, increase production of goods and services..
The don added, “As such, unemployment would get worse, production should reduce and economic growth is likely to decline. To make matters worse, the higher level of insecurities caused by bandits, herdsmen, kidnappers, Boko Haram and Militants is making the business environment difficult.
“The higher levels of inflation and declining value of naira is likely to ensure many small and medium scale businesses shutdown as the difficult business environment makes them unprofitable.”
Nigeria had entered into recession following negative growth rates of -6.10 per cent and -3.62 per cent recorded in the second and third quarters of 2020, before it narrowly
Now, there is a likelihood that the country might enter into another recession this year if all monetary policies are not properly tightened.
According to the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), there is an urgent need to implement policies to prevent Nigeria falling into a third recession by the end of this year, pointing the direction of declining trend in the nation’s economic growth, which had remained worrisome.