Stakeholders Lament CBN Interest Rate Reversal on Intervention Loans

The decision by the Central Bank of Nigeria (CBN) to reinstate the interest rate on its Covid-19 response facilities has drawn anger from stakeholders as well as experts, whose opinion is that the action will not be This does not bode well for beneficiaries as the country faces inflation pressure on rates among other deteriorating economic indicators.

Economists, who spoke 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 raise the unemployment rate. , worsen the level of production and reduce economic growth.

This is exactly as stakeholders argued would lead to higher obligations for beneficiaries.

The apex bank had last week notified all banks and other financial institutions (AIFs) of the five per cent to nine per cent reversal.

In the circular, which was signed by its director of the financial policy and regulation department, Chibuzo Efobi; as of August 17; and titled “Interest Rate Adjustment on all Central Bank of Nigeria Interventions”, the CBN said that all intervention facilities granted from July 20, 2022 should be 9% per annum.

He also said that existing facilities granted before July 20, 2020 should be at the same rate of nine percent per annum, but from September 1, 2022.

The monetary authority had, on March 15, 2020, following the outbreak of COVID-19, extended the reduction in interest rates and granted a one-year moratorium on all principal payments on its intervention facilities with the aim of reducing the negative impact of the pandemic on businesses and households.

As such, he authorized all depository banks (DMBs) to consider a temporary and time-limited restructuring of loan terms and conditions for companies and households most affected by Covid-19, in particular oil and gas, agriculture, aviation, manufacturing. , health and other sectors of the economy.

The preferential interest rate of 5% on its intervention facilities, the CBN had on March 3, 2021 extended for 12 months until February 28, 2022 and after March 1, 2023, before shockingly returning it in a notification last week

The President of the National Association of Small and Medium Enterprises (NASME), Lagos State Chapter, Adams Adebayo, expressed concern that the reversal came at a time when the rate of inflation worsened to 19.64%; dollar, more than 430 naira at the official rate and about 720 naira at the parallel market price.

Coupled with the rise in A1 jet fuel which had pushed one-way airfare, for example from Abuja to Lagos, to almost 180,000 naira for business class, even aa manufacturers are closing factories due to the cost high raw materials.

“That means sectors such as agriculture, energy and aviation that have benefited from billions of dollars in central bank intervention funds would have to pay 9%, a moment from the 5% they previously enjoyed.

“All beneficiaries of such an intervention would be affected by this policy and the change in terms and conditions,” he said.

According to Adebayo, small businesses could be heading for total collapse as most of these categories of businesses would not be able to compete favorably.

“They (the small businesses) could also reduce their workforce to reduce costs,” adding that “CBN’s termination of the facility is not in the interest of an average business owner or a business. in Nigeria.

Chinedu Nevo, an economist and PhD student at the School of Commerce and Law at the Open University Business School, Milton Keynes, UK, said the CBN reversal was ill-conceived.

According to him, Nigeria is still far from recovering from the impacts of COVID-19, especially from an economic perspective.

“In fact, many sources have argued that it will take more than five years and more for many African countries to recover from the negative effects of COVID-19.

“So the reversal by the apex bank was ill-conceived. It is even worse when placed side by side with the high inflation plaguing the Nigerian economy at the moment,” he said.

Nevo argued that, from a basic economic perspective, when interest rates rise (in this case, from 5% to 99), companies or entities with existing loan obligations have payments of higher interest, less disposable income and higher overhead.

His words, “With concurrently high inflation, these entities struggle to sustain their day-to-day operations and, over time, may even be at risk of collapse. In some other cases, entities may only be able to repay the interest, rather than the loan itself.

“These are the ways in which interest rate inversion would affect entities. In all honesty, the CBN, by this decision, does not encourage these entities to prosper. It will also affect productivity on a macro scale. In my opinion, the COVID-19 interest rate should be maintained.

Cheta Uzah, a senior lecturer in the Department of Banking and Finance at 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 cope with double-digit inflation that has resulted from the huge amount of government borrowing and spending during the COVID period.

“The CBN’s expansionary monetary policy has resulted in massive debts, worsening naira devaluation and low levels of economic growth,” Uzah said.

According to him, the impact of the interest rate inversion on the CBN’s intervention facilities would be that fewer small and medium-sized investors would be less likely to apply for the intervention loans, as lower interest rates Higher interest would mean higher interest payment on loans.

He said: “If fewer businesses take out loans to expand their business, it means fewer opportunities for those businesses to employ new workers, increase production of goods and services.

The don added: “Thus unemployment would worsen, production would decline and economic growth would decline. To make matters worse, the high level of insecurity caused by bandits, herders, kidnappers, Boko Haram and militants makes the business environment difficult.

“Higher levels of inflation and the falling value of the naira will likely cause many small and medium-sized businesses to shut down as the difficult business environment makes them unprofitable.”

Nigeria had entered recession after negative growth rates of -6.10% and -3.62% recorded in the second and third quarters of 2020, before it narrowly

Now, the country is likely to enter another recession this year if all monetary policies are not properly tightened.

According to the Nigerian Association of Chambers of Commerce, Industry, Mining and Agriculture (NACCIMA), there is an urgent need to implement policies to prevent Nigeria from falling into a third recession by the end of this year, indicating the direction of a downward trend in the country’s economic growth, which had remained a concern.

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