The Monetary Policy Committee’s decision to aggressively tighten the monetary policy rate has raised several concerns, particularly among small firms.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously agreed to tighten the monetary policy rate aggressively to tackle surging inflation rates and restore balance to the economy caused by the lingering effects of COVID-19 and the Russia-Ukraine war.
The CBN gave insight into the need to tighten the MPR aggressively, saying that the increase in the monetary policy rate is because the economy is still at high risk of encountering high inflation with adverse consequences for the general standard of living, so the need for tightening the monetary policy rate will be of great importance to the economy. The Monetary Policy Rate (MPR), is the rate at which the CBN lends to commercial banks. Due to this implication, commercial lenders are going to increase their interest rates and impose stricter criteria when assessing loan applications, which means that many small-scale entrepreneurs who wouldn’t have been able to meet those requirements anyway might now be completely excluded altogether, resulting in fewer entrepreneurship opportunities being created, especially among the youth population.
However, there is a deep concern about the effect of the increase in the MPR on both existing small businesses and prospective entrepreneurs. Mr. Godwin Ekop, an economics professor at Ritman University, has criticized the Monetary Policy Committee’s decision. He told Ratecaptain that the sources of inflationary pressure in Nigeria are largely cost-induced, meaning that inflation is not cost-pushed but demand-pushed; in that sense, inflation is not driven by too much money in the system but by increasing costs.
Implications on small businesses and prospective entrepreneurs
Dr. Austin, a certified economist, and financial analyst and also the founder of Pharmahub Nigeria, told RateCaptain that a hike in the monetary policy rate will result in higher costs associated with borrowing money from banks or other lending institutions by small-scale businesses. It could also lead to an overall decrease in investment activity due to reduced access and affordability of capital for business projects, and it will result in a reduction in profits due to increased financing costs that would need to be passed on through price increases or decreased margins on products sold by these companies. He also stated that the policy poses a threat to prospective entrepreneurs interested in starting a new business venture within Nigeria’s economy. “They may find it increasingly difficult, if not impossible, depending upon their circumstances, such as income level and collateral available, since the high-interest rate will make loans more expensive than ever before, which could limit potential start-up funds needed even further than what was already limited beforehand, making starting up very difficult indeed,” he said.
In addition, lenders are likely going to impose stricter criteria when assessing loan applications, which means that many small-scale entrepreneurs who wouldn’t have been able to meet those requirements anyway might now be completely excluded altogether, resulting in fewer entrepreneurship opportunities being created, especially among the youth population.
Conclusion
Ratecaptain analyst suggested that while there are some benefits associated with increasing monetary policy rates, such as controlling inflationary pressures, we must not forget about how these changes can negatively impact small-scale enterprises and prospective entrepreneurs within the Nigerian economy, either through a lack of funding options or simply because they cannot meet certain criteria set out by lenders. As a result, it is critical for government officials in charge of decision-making processes like this one to consider all relevant factors so that no individual sector is left behind during times of economic hardship, but rather that everyone is treated equally throughout the process.
