Lamentation by the Manufacturers Association of Nigeria (MAN) over the excruciating burden that high interest rate poses to the real sector deserves serious attention by the federal government. At 27.5 per cent, Nigeria is the third country with the highest anchor interest rates in Africa, sitting just behind Ghana and Zimbabwe.

The elevated interest rate has increased Nigeria’s competitiveness in global capital flow with records suggesting significant improvement in the value of inflow in the past two years. The rising inflow of foreign capital has helped to keep the foreign exchange (FX) market more liquid, thus reducing the demand pressure. While this is a welcome development, it is rather too marginal to offset the huge price businesses, especially those in the manufacturing sector, have had to pay.  Checks revealed that lending rates to manufacturers have crossed the 35 per cent mark, up from less than 30 per cent two years ago.

The high cost of commercial lending is understandable. At an asymmetry corridor of +500/-100, deposit money banks’ (DMBs) short-term liquidity lifeline from the apex bank comes at 32.5 per cent. Just a little margin on this pushes the effective interest rate to nearly 40 per cent.  Besides, banks have a huge cost of 50 per cent of sterilised deposits to fund alongside enormous independent energy bills as well as sundry operational expenses imposed by the peculiarities of the local economy. These challenges not only weaken the financial intermediation capabilities of the banks but also feed into their interest rating setting equations. The country cannot talk about accessible credit for manufacturing and other economic activities without putting mechanisms in place to address these humongous challenges.

Manufacturing in an economy with daunting challenges like Nigeria is risky for both operators and lenders. It is important, therefore, to incentivise banks to finance these high-risk businesses as well as discourage hibernating capital. Forthwith, the Central Bank has a responsibility to lead this campaign by recalibrating its standing deposit facility (SDF) programme. Why would rational bank managers fund a manufacturer whose operations are constrained by uncertainty and range of risks, if they could offload the excess fund at CBN at 26.5 per cent, over three times the statutory cost of deposits? This is one of the many paradoxes that cannot be dismissed in the efforts to create a robust credit culture, which President Bola Tinubu committed to in his inaugural speech two years ago.

A near-40 per cent interest rate has grave consequences for an economy where businesses are already reeling from high energy, poor logistics and high operating costs, compounded by declining purchasing power that has forced some multinationals to exit the economy. Many are yet to come to terms with Procter & Gamble, Sanofi, Kimberly-Clark, Unilever, GlaxoSmithKline and Diageo’s recent exit or significant re-scoping of operations in the country.

Also, MAN Economic Review for the second half of 2024 said investments in the sector contracted by 35.3 per cent last year. According to MAN, also, 767 manufacturing companies shut down operations in 2023, while over 18,000 jobs were lost last year. Except for the cement industry, profit margins have contracted by 36 per cent between 2021 and 2023 alone. In 2024, unsold inventory surged to N2.14 trillion, representing an 87.5 per cent increase from the previous year, no thanks to weakened consumer demand, escalating production costs and declining purchasing power. Data also suggested that manufacturing capacity utilisation dipped from 73.3 per cent in 1981 to 57 per cent in 2024, while its contribution to the output level contracted from 29.9 per cent to 8.6 per cent in the same period.

These are all signs of a dying sector. And ultra-high cost of funds will only bring doomsday closer. Sadly, it is difficult to build the competitiveness that would help Nigerian companies survive the invading foreign brands at this cost. Some of the Chinese firms Nigerian businesses are competing with, whether domestically or in the international market, get loans at lower single digits. Nigerian manufacturers deserve support, not based on humanitarian grounds but as an economic survival strategy, to compete with foreign companies. A win for Nigerian companies would mean more jobs, higher tax revenue, better standard of living and more inclusive economic growth for the country.   

Indeed, the manufacturing sector is the engine room of the industrialisation drive of every developing economy. Nigeria’s industrialisation goals cannot be realised unless urgent steps are taken to support the manufacturing sector. It is important, thus, that the MPC members consider a more accommodating stance when they meet again in July. This is much more important as the effectiveness of the current policy seems undermined by structural bottlenecks, supply chain inefficiencies, poorly developed markets and weak transmission of the policy.

An obsession with interest rate hikes ignores the need to develop effective strategies to ensure sustainable, inclusive growth, which robust local manufacturing guarantees. In monetary policy intervention, there could be a market failure and, indeed, there have been. It thus means that Nigeria needs a more active fiscal involvement in efficient credit allocation across sectors, matching this with the country’s industrial development agenda. There is no better time to act than now that the commercial interest rates are at their all-time high.