The MPR conundrum

Monetary Policy Rate (MPR) has been the problem of Nigeria’s economy in the last two years. The problem is that the Central Bank of Nigeria (CBN) has been fighting inflation with a lone instrument – MPR.

When the inflation rate crossed the 34 per cent mark, the CBN panicked and ranged MPR to 27 per cent. Everyone complained to no avail. 

The CBN believes that a tight rein on MPR can tame inflation. Ironically, even the International Monetary Fund (IMF) holds the same view. 

Right now, inflation, which is what the CBN was fighting with MPR hikes, has dropped to 15.4 per cent. Despite this tremendous gain in the fight against inflation, the monetary policy committee of the CBN rose from its meeting in Abuja, grudgingly reducing MPR to 23 per cent.

The truth is that MPR is the country’s  benchmark lending rate. That means that banks cannot lend below the MPR. 

Last month the IMF rolled out the drums to celebrate CBN’s success in taming inflation with MPR hikes. The IMF in its report on Nigeria’s economy applauded the CBN for using “tight monetary policy” to rein in the inflation rate.

The IMF did not see anything wrong with MPR at 27 per cent in an economy where the micro, small and medium enterprises (MSMEs), are struggling with inflation rate  slipping out of control.

The fact that banks cannot lend below the MPR means that lending rates will remain at high double digits.

President Bola Ahmed Tinubu is equally worried about lending rates. Last month he expressed his frustration over high lending rates. The Minister of Finance and Coordinating Minister of the Economy, Taiwo Oyedele, who represented the president at a function organised by the Chartered Institute of Bankers of Nigeria (CIBN), placed the burden of high lending rates squarely on the shoulders of the banks.

Speaking at the 19th Annual Banking and Finance Conference of CIBN, Oyedele urged banks and financial institutions to move away from heavy dependence on investment in government securities and make credit affordable to businesses.

“For years, we have measured financial institutions by balance sheet growth and shareholders returns…Now, we must increasingly ask; “what are banks doing for the real economy,” the minister queried.

The minister further insisted that “A credible banking system cannot exist indefinitely where business cannot obtain affordable credit. Manufacturing that is struggling cannot expand and millions of productive companies remain outside the financial system.”

The minister warned banks that they live on the manufacturers and that if the high lending rates persist, manufacturers will perish and there will be no one for the banks to depend on. 

It was a clever warning, but the wrong target was blamed for high lending rates. Banks are just executing the regulator’s dictates. 

With MPR at 27 per cent, the lowest prime lending rate in the country (the rate at which banks lend to creditworthy conglomerates) was 31 per cent.

At that rate, which was the lending rate for highly esteemed conglomerates, Aliko Dangote had warned the banks that no one borrows at 30 per cent and succeeds as a manufacturer.

So, with everyone that matters in the economy speaking in the same tone against high lending rates, it was obvious that something had to be done.

The Monetary Policy Committee (MPC) of the CBN held its meeting a few days after the president demanded affordable credit for businesses. It grudgingly met the president’s demand by dropping MPR to 23 per cent.

However, the IMF recently warned that Nigerian banks promptly implement increases in MPR directed by the CBN, but deliberately drag their feet when it comes to implementing downward trends ordered by the regulator. 

IMF contends that a 100-basis-point increase in MPR often triggers a 180-basis-point increase in lending rate which is implemented instantly, while a similar reduction in MPR will elicit a paltry 30-basis-point reduction in lending rates.

The MPR cut is often ignored for months before it is grudgingly implemented. The trend observed by the IMF has kept lending rates artificially high while deposit rates remain ridiculously low at single digits. 

With the Federal Government and Manufacturers Association of Nigeria (MAN) fighting high interest rates, CBN monetary policy committee had no option than to bring down MPR. It did. The governor of the CBN announced to an anxious world that CBN had reduced MPR to 23 per cent.

That reduction was stupendous to the uninitiated. Those who understand the economy warned that the cut was not sufficient to sustain the growth rate established by economy operators. 

There are even more worries for Nigerian fund users. The IMF was the first to point out that inhibiting factor. It is the banks’ failure to reflect MPR cuts on lending rates. 

The IMF argued that Nigerian banks have a penchant for not reflecting MPR cuts on lending rates. Everyone is keenly watching how the apex bank will ensure that lending rates drop is commensurate with the MPR cut.

The CBN owes Nigerian fund users an obligation to ensure that the recent reduction in MPR reflects adequately on lending rates. Otherwise, it would be concluded that the regulator has lost control of the essential industry.

CBN can do that by fixing a margin between MPR and lending rates and enforcing it strictly. Some years ago the apex bank fixed the margin between MPR and lending rates at four per cent. It ensured that no bank lent above that limit. That is the only way to ensure that the recent cut in MPR is transmitted to lending rates.

The cut in MPR is not being celebrated by many fund users. They complain that with inflation rate at 15.4 per cent, there is no reason why MPR should be above 20 per cent. That means that the reduction in MPR was inadequate to keep funds at the rate that is affordable as the president demanded.

The truth is that with MPR at 23 per cent, prime lending rate will hover around 30 per cent and above which is still unaffordable. Now that the inflation rate is heading down, CBN should take MPR below 20 per cent.