In the face of excruciating credit squeeze, high cost of production, restrictive fiscal space and cost of living crisis, the rate-fixing arm of the Central Bank of Nigeria (CBN), the Monetary Policy Committee (MPC), voted overwhelmingly to increase the benchmark interest rate by another half point.
The decision has pushed the Monetary Policy Rate (MPR), a
benchmark that determines the pricing of commercial loans, to 18 per cent – the
highest the market would see in decades.
The monetary authority raised the benchmark interest rate by
an aggregate of 6.5 per cent since May last year, when it adopted an aggressive
tightening to rein in inflation and stave off capital outflow.
Sadly, inflation has continued to tick upward, contrary to
expectations of the market, hitting a new high of 21.91 per cent last month.
But the monetary authority said it would be worse if it did nothing to restrict
liquidity.
With the maximum lending rate already exceeding 27 per cent
in January when the MPR was 17.5 per cent, businesses that are suffocating
under an exclusive operating environment, cloud face tougher funding conditions
in the days ahead. Banks would also reprice existing and fresh consumer loans,
which could significantly increase the cost of living and weaken consumption.
The raise in MPR also has severe consequences for Federal
and state governments, which rely majorly on borrowing to fund their budgets.
This year alone, over 52 per cent of the FG’s N21.83 trillion spending envelope
is to be funded with fresh debt. An increasing interest rate means the
government will pay more for loans.
Existing debts are not spared of rising costs. For instance,
the existing ways and means (W$Ms) facilities held by the CBN, which is
estimated at N22.7 trillion are being serviced at MPR plus 300 basis points.
When the MPR was 17.5 per cent, the projected cost of servicing the facility
was 21.5 per cent. With the new interest rate, the price has moved by 22 per
cent.
The Interest rate hike comes on the heels of fears over the
possible impact of the United States bank failure on the Nigerian financial
market. While conveying the decision of the MPC at a media briefing yesterday,
the Chairman of the Committee/CBN Governor, Godwin Emefiele, said adequate
actions have been taken to insulate Nigeria’s financial system from the
contagion, threatening to spread elsewhere.
The possible impacts of the brewing crisis that has
swallowed three banks and threatening more especially start-ups are on focus as
innovators, investors and world leaders converge in Silicon Valley, California,
United States, to discuss the future of Africa at the African Diaspora
Investment Symposium (ADIS), today. Attention will be divided over the ripple
effect of the collapse of Silicon Valley Bank (SVB), the bank of choice for
most startups and venture capitalists, and the influence its collapse could
have on the startup world, especially fintechs in Africa.
This is as a new study has said 186 more banks are at risk
of failure even if only half of their depositors decide to withdraw their funds
in reaction to SVB’s earlier this month. According to the study by economists
in a paper published on the Social Science Research Network, a run on the banks
could pose potential risk to even insured depositors – those with $250,000 or
less in their accounts.
SVB was closed after the bank announced it had lost $1.8
billion in the sale of treasuries and securities. Millions of dollars banked by
startups and venture capital funds were at stake until the U.S. Federal Reserve
acted to save the day.
The closure of SVB triggered panic on the African continent,
and that fear is not without reason, according to the head of American
technology startup accelerator Y-Combinator (YC), which has 80 African startups
in its portfolio.
“About 30 per cent of our companies exposed through SVB
can’t make payroll in the next 30 days,” said YC president, Garry Tan. “All the
startup founders groups I’m in are in full-on panic mode. Everyone is moving
money around. Nobody knows which banks are safe.”
SVB was the bank that lent to startups and asked that
startups have deposits in the bank as collateral. The bank offered loans against
shares for founders and cashflow loans. Since 2019, SVB has been the preferred
bank for startups.
In the wake of the bank’s collapse, founders in Africa are
reviewing their banking options to cushion their startups from such
eventualities.
African fintech unicorn, Chipper Cash, was among several
startups that could not access a portion of their funds after SVB failed, but
CEO Ham Serunjogi downplayed the company’s exposure. “Most of our funds are in
various other banks in U.S. and around the world. SVB was a great supporter and
partner of Chipper. Sad to see them go down,” he tweeted.
It was gathered that there were 100 most funded startups in
Africa at the end of 2022 by SVB — among them Nigeria with 27 and Kenya with
23. The other two members of the big four, South Africa and Egypt, are
represented by 34 startups, which means the big four represent 84 per cent of
the 100 startups.
In light of the increasing difficulty to obtain funds, the
Federal Government last week announced a $672 million tech fund to support
young entrepreneurs in creative and tech sectors who struggle to raise capital
in Africa’s largest economy.
The African Development Bank will contribute $170 million to
the fund, while the other $116 million would come from Agence Francaise de
Development and $70 million from the Islamic Development Bank.
Adedeji Olowe, founder and CEO of Lendsqr, a fintech
company, offered some assurance, saying that while some startups may have funds
trapped in the failed bank, the funds have not disappeared.
Beyond the impact of SVB’s failure on African startups, the
symposium hosted by the African Diaspora Network (ADN) at the Computer History
Museum, Mountain View, will see techies and members of the diaspora community
discuss how the continent can move away from sole reliance on grants and
remittances from abroad.
Recorded remittances from the Africa Diaspora reached over
$95 billion in 2021. This is in addition to aid from foreign investors and
partners.
According to Almaz Negash, Founder and Executive Director of
ADN, ADIS is looking forward to bringing this critical dialogue beyond remittances
back to Silicon Valley.
“With a median age of 20 years and 60 per cent of the
population under 25, Africa is the youngest continent in the world and holds
the future. Projections show that a quarter of the world’s people will be
African by 2050. Africa has an opportunity to drive major transformations that
adapt to this drastic demographic shift and build resilience in an era of
disruption.”
In 2019, Africa received $82.7 billion in personal
remittances, nearly double foreign direct investment (FDI) flows of $46
billion. Remittances to Nigeria alone were $23.8 billion compared to $3 billion
in FDI. Egypt saw remittances worth $26 billion. Those are just the formal,
countable remittances.
These payments provide a financial crutch to millions of households.
This is why smaller, poorer and more fragile economies are so dependent on
them.
Africa’s top remittance recipients as a proportion of their
economies are South Sudan, Lesotho and The Gambia with 35 per cent, 21 per cent
and 15 per cent of GDP respectively, coming from remittances, according to
World Bank statistics. Between 2004 and 2017, remittances as a share of GDP
grew from one per cent to 7.5 per cent in Ghana.
“Remittances from the diaspora constitute one of the major
sources of revenue in many African countries. Unlike foreign direct investment
flows, remittances directly reach the most vulnerable and are less likely to
end up in the pockets of corrupt officials,” said Aleix Montana, Africa analyst
at Verisk Maplecroft, a risk intelligence company.
Participants at the symposium will for three days discuss
what can be done to tap into and engage the diaspora community and leverage
their strengths for Africa’s benefit.
Meanwhile, some experts believe marking up the interest rate
by 50 basis points reflects the realities not just in Nigeria but around the
world.
The managing director of 3Data Concept Limited, Jonathan
Izuchukwu, said with what is happening in the United States and Switzerland,
where the banking systems are confronting challenges, it is heartwarming that
the Central Bank is taking a step to ensure such economic calamity does not
befall Nigeria at this time.
His argument: “Raising the interest rate by 50 basis points
by the CBN is in reaction to the upward movement of inflation. It is basic
economic 101 that once inflation goes up, the interest rate has to equally move
up proportionately. There must be a balance within the economy.”
On his part, Kelvin Emma Emmanuel, who is the Chief
Executive Officer at Dairy Hills, said that hiking MPR to tighten monetary
policy to avoid a negative real rate of return is a viable tool for aligning
inflation to the interest yield curve on institutional capital. He wants the
MPC to realise that as the cost of capital becomes more expensive in the debt
capital markets, the increase in Cost Price Index (CPI) caused by demand-pull
inflationary buffers will only rise because companies that borrow to produce
will pass on the cost to end consumers.
But Head, Equity Trading, Plane Capital, Paul Uzum said the
rate hike would increase the cost of borrowing from banks, especially for loans
that are based on a floating interest rate just as many listed consumer goods
firms especially the breweries and other sectors that depend on debt financing
would continue to witness rough times.
Another stockbroker with Kapital Care Trust Limited, Andy
Tsaku, said the real sector would witness higher production cost, which
naturally will translate in ballooned prices of goods and worsen inflationary
pressure.
He described the development as a misalignment between the
pursuit of monetary aggregates and fiscal policy direction, stressing the need
for both authorities to work together and move the economy forward.
“On the whole, it is my considered opinion that the current
strategy by the MPC in attempting to chase inflation using the MPR might just
be a wild goose chase unless there is a fundamental shift of focus towards
enhancing our actual productive base of both goods and services.
“Without an intentional fusion of between the monetary and
fiscal authorities, we may continue to turn and turn in a widening gyre, until
the Falcon can no longer hear the Falconer,” he said.
Chief Executive of Wyoming Capital and Partners said the
stock market already understands the reasons for periodic MPR hikes and has
adjusted fully to its impact, the reason there was not much aggressive selldown
or repricing that tends to unsettle the markets yesterday.
However, he stated that except there is a huge supply of
government securities to back up the decision of MPC, which comes at a huge
cost to the government, it is unlikely there would be much impact on yields in
the fixed income space.
Emefiele, in his address at the end of the MPC meeting,
explained that the apex bank cannot afford to over-tighten the economy,
pointing to the United States and Switzerland’s financial system crisis.
He allayed the fears that what happened in the two counties
could happen in Nigeria.
“The prudential regulations put in place even before I
started banking have ensured that the banks are insulated against such a
crisis,” he stated.
The bank also cautioned bank shareholders to desist from
‘misbehaving,’ saying, a banking licence is not a right but a privilege that
can be withdrawn at any time.
“The bank has always warned shareholders of the banks
against misbehaving. They should know that depositors’ money in most banks is
bigger than shareholders’ funds. The banks are owned by depositors and not the
shareholders because of the amount of money that comes from these two groups,”
he warned.
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