The Manufacturers Association of Nigeria (MAN) and the Lagos Chamber of Commerce and Industry (LCCI) on Wednesday expressed concern over the negative effect of continuous hike in the Monetary Policy Rate (MPR) in an elusive bid to tame the country’s inflation.
In separate press releases, the MAN and the LCCI stated that despite the continuous increase in MPR over the past two years resulting in a weighty 1,475 basis point hike from 11.5 per cent in May 2022 to 26.25 per cent in May 2024, inflation had remained persistently high, reaching a staggering 34.19 per cent in June, the highest since March 1996.
According to the Director General of MAN, Mr. Segun Ajayi-Kadir, the new MPR would further “constrain the growth of the manufacturing sector, as the purchasing power of consumers, production levels, competitiveness and sales will face further decline.
“The manufacturing sector in Nigeria plays a vital role in the country’s economy. However, it is facing multitude of challenges that threaten its sustainability and contribution to economic growth.
“Therefore, the continued increase in the cost of borrowing, which is one of our major challenges, will escalate production costs and consequently the prices of finished goods, with consequential effect on unemployment and social instability and further compound the prevailing low consumer demand, capacity utilisation and profitability,” he said.
Ajayi-Kadir added that high MPR would stifle capacity of businesses to make new and further investments, innovation and curtail opportunities for the growth and constrain the capacity of the manufacturing sector to compete effectively in regional and global markets, and if unchecked, may trigger critical distress of more manufacturing concerns.
He added: “It is noteworthy to state that the worrisome trend occasioned by increase in cost of borrowing is corroborated by the report of the National Bureau of Statistics (NBS), to the effect that manufacturing investment declined significantly in the second quarter of the year.
“This drop underscores the critical link between domestic investment confidence and foreign investor sentiment. In addition, the share of manufactured exports in non-oil exports also declined from 21.4 per cent in Q4 2023 to 15.1 per cent in Q1 2024.”
He said that it was expedient that the survival of manufacturing in Nigeria was prioritised when making monetary policy decisions.
He added that this would enable the sector to effectively play its role as the key driver of employment creation, productivity, stable foreign exchange earnings, and economic sustained growth.
The MAN, therefore, recommended that the federal government should direct the Central Bank of Nigeria (CBN) to conduct a comprehensive assessment of the impact of previous decisions of the MPC on inflation rate and the productive sector over the last five years to provide information that would guide future MPC’s decisions.
It also implored the CBN to be domestic production-centric by taking a detour from continuous hike in MPR and allow time for the real sector to recover from the impact of previous hikes.
The MAN also urged the government to take deliberate actions to “insulate the productive sector from the impact of continuous hike in MPR by expediting action on the disbursement of special provisions earmarked by government for the manufacturing sector.”
It said that the N75 billion single digit loan approved by President Bola Tinubu over a year ago and the recently announced N1 trillion readily comes to mind, urging government to offer a fiscal support system that will enable the manufacturing sector to import raw materials, spares and machines that are not available locally at concessionary duty rate.
In addition it demanded the minimisation of pressure on foreign exchange reserves by incentivising backward integration and local sourcing to decrease reliance on imported products and raw materials.
Speaking in the same vein, the Director General of LCCI, Dr. Chinyere Almona, said that the chamber noted with concern the recent decision by the CBN to raise the MPR.
Almona said: “The LCCI acknowledges the CBN’s efforts to control inflation and stabilise the economy. However, we are deeply concerned about the broader implications of this rate hike on the business community and the overall economic landscape.
“The LCCI urges the government and the CBN to consider a more balanced approach to monetary policy. While controlling inflation is crucial, mitigating adverse effects on business operations and economic growth is imperative.”
She proposed that CBN should diversify its approach to controlling inflation beyond interest rate hikes in favour of policies that directly address supply-side constraints, such as improving agricultural productivity and stabilising energy prices, can help reduce inflationary pressures more effectively.
She said: “Increased investment in infrastructure can alleviate production bottlenecks and reduce business costs. This will enhance productivity and competitiveness, helping to tame inflation from the supply side.’’
The LCCI said that it remained committed to working with the government and the CBN to ensure policies that foster a conducive environment for business growth and economic stability.
“A holistic approach, balancing inflation control with support for businesses, will pave the way for sustainable economic development in Nigeria,” it said.
Meanwhile, Global ratings agency, Moody’s, has disclosed that eight of the nine Nigerian banks under its ratings reported over N3.5 trillion in aggregate pre-tax profits in 2023 compared to N1.1 trillion in 2022.
It further estimated that over a third of the profits were from foreign-currency revaluation and trading gains.
The international ratings institution therefore, said the windfall levy on Nigerian banks’ foreign exchange (FX) revaluation gains was credit negative for banks.
It said the tax will have a particularly negative effect on banks whose capital adequacy is close to regulatory thresholds.
Moody’s said: “The tax follows record profits declared by banks in 2023, largely because of foreign-currency revaluation gains related to the naira’s massive devaluation of 37 percent in June 2023.”
It pointed out that the tax was in line with the CBN’s September 2023 policy prohibiting banks from using foreign-currency-related profits for operational expenses and dividends.
In a report, it stated: “Eight of the nine Nigerian banks we rate reported in excess of N3.5 trillion in aggregate pre-tax profits in 2023 versus N1.1 trillion in 2022, and we estimate that over a third of the profits were from foreign-currency revaluation and trading gains.”
The ratings institution added: “It is unclear, however, what proportion of the revaluation gains will be taxed, given the differences between trading and revaluation gains.
“Additionally, the 2023 revaluation gains include unrealised gains, which may affect how the tax is applied, particularly as the government has not been clear how the 50 percent windfall tax will be achieved.”
President Bola Tinubu had written to the Senate to amend the 2023 Finance Act, to introduce a 50 per cent payment of a one-time windfall tax on the foreign exchange revaluation profits of banks in the 2023 financial year. The amended Act has been passed by the upper chamber.
The Senate however, amended the bill, increasing the tax to 70 per cent, arguing the windfall was not a result of any effort of the banks or value addition, but as a result of government policy which must be redistributed.
Moody’s had previously pointed to the severity of the negative effect of the tax on banks’ foreign-currency-related profits.
It said: “Given banks have already been subject to the standard 30 per cent corporate income tax rate for 2023, in a less aggressive scenario a surplus tax of 20 per cent on the FX gains would equate to the total 50 per cent windfall tax.”
Moody’s further noted that it was possible the government may pursue an additional 50 per cent windfall tax on banks’ foreign-currency revaluation gains, which it estimated would equate to as much as 6 per cent of the aggregate equity (shareholders’ funds) of banks rated by it.
“For the government, we estimate the windfall tax may yield revenue of as much as 0.3 per cent of 2024 Gross Domestic Product (GDP). Although this is not negligible given the government’s small tax intake of around 9 per cent of GDP in 2023, it remains marginal and only a temporary revenue measure,” it added.
James Emejo and Dike Onwuamaeze
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