The Centre for the Promotion of Private Enterprise has said the Central Bank of Nigeria’s 350-basis-point interest rate cut could reduce the Federal Government’s domestic debt-servicing burden and ease financing costs for businesses.
The CPPE made this known in a policy brief by its Chief Executive Officer, Muda Yusuf, following the decision of the CBN Monetary Policy Committee to cut the Monetary Policy Rate from 26.5 per cent to 23 per cent.
The MPR is the benchmark rate for interest rates in the banking sector.
According to the CPPE, the prolonged high-interest-rate environment had significantly increased the cost of government borrowing.
“The high interest-rate environment has contributed materially to the escalation of the Federal Government’s domestic debt-service burden,” the centre said.
It added that government securities had been forced to compete with high market yields, increasing borrowing costs and putting additional pressure on the government’s finances.
The CPPE said sustained moderation in interest rates could lower the cost of government borrowing and create additional fiscal space for critical sectors.
“A sustained moderation in interest rates should reduce the marginal cost of government borrowing and, over time, moderate domestic debt-service costs,” it said.
The centre said the savings could create room for increased spending on infrastructure, security, education and healthcare.
However, it cautioned that the expected fiscal gains would depend on whether the MPR reduction translated into lower yields in the government securities market.
Businesses seek cheaper credit
The CPPE also said businesses could benefit from reduced financing costs if banks transmitted the rate cut to borrowers.
It noted that commercial lending rates had remained high, particularly for businesses in manufacturing, agriculture, construction and logistics.
“For many businesses, commercial lending rates have remained at levels that are difficult to reconcile with productive investment,” the centre said.
It said lower interest rates could reduce the cost of capital, improve cash flows, stimulate investment and strengthen productive capacity.
The CPPE therefore urged banks to adjust their lending rates in line with the new monetary policy direction.
“Lending rates on both new and existing facilities should progressively adjust downwards,” it said.
The centre warned that without effective transmission of the rate cut to borrowers, its impact on investment and economic growth could remain limited.
The CPPE described the decision as a significant shift from the prolonged restrictive monetary policy regime, saying it could support economic growth, investment and recovery while maintaining price and financial stability.
The CBN also revised its asymmetric corridor around the MPR from +50/-450 basis points to +50/-300 basis points.
Rate cut poses forex risks
Despite the potential benefits, the CPPE warned that monetary easing could create risks for the foreign exchange market.
It said the difference between Nigeria’s easing stance and recent rate increases by some major central banks could affect interest-rate differentials and the attractiveness of naira-denominated assets.
“This creates a potential risk of portfolio-flow reversals and renewed pressure on the foreign-exchange market,” the centre said.
The CPPE, however, said Nigeria was entering the policy transition with stronger external buffers, including improved foreign reserves and greater stability in the foreign exchange market.
It urged the CBN to remain vigilant and deploy appropriate monetary tools, including open market operations, to manage excessive volatility and safeguard exchange-rate stability.
The centre also called for fiscal and structural measures to complement monetary easing.
It said lower interest rates alone would not address the challenges posed by high energy costs, logistics bottlenecks, insecurity, food production constraints, infrastructure deficits and regulatory costs.
According to the CPPE, tackling those challenges is necessary to reduce production costs, improve productivity, strengthen food and energy security and expand Nigeria’s domestic productive capacity.
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