CONTENT

01: MACROECONOMY

02: FINANCIAL PLANNING

MACROECONOMY.

 

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The Central Bank of Nigeria (CBN) made a significant move in March 2024 by raising the Monetary Policy Rate (MPR) by 200 basis points, bringing it to 24.75%. Let us explore the effects of this decision:

1. Tackling Inflation:

• The MPR hike reflects the CBN’s strong commitment to curbing inflation. The central bank aims to reduce excessive money supply and manage inflationary pressures by raising interest rates.
• In February 2024, Nigeria’s headline inflation surged to 31.7%, primarily driven by escalating food prices with food inflation climbing to 35.92%.
• The MPR increase is part of the CBN’s efforts to stabilize prices and maintain macroeconomic stability.

        2. Exchange Rate and Stabilization:

• Since the CBN’s February MPC meeting, there has been a notable appreciation and stabilization in the exchange rate between the US dollar and the naira.
• The exchange rate momentarily peaked at N1800 in the parallel market but has settled around N1,400.
• The MPR hike aims to attract foreign portfolio investment (FPI) inflows and stabilize the exchange rate.

      3. Impact on Borrowing Costs:

• The increase in the MPR affects borrowing costs for businesses and individuals.
• Higher interest rates may discourage borrowing and investment, impacting economic activity.

      4. Investment Decisions:

• Local and foreign investors will reassess their investment decisions based on the higher MPR.
• Fixed-income investments become more attractive due to higher yields, potentially diverting funds away from riskier assets.

      5. Bank Lending and Credit Availability:

• Commercial banks adjust their lending rates in response to changes in the MPR.
• Higher MPR may lead to tighter credit conditions, affecting businesses and consumers.

      6. Economic Growth and Recovery:

• While the MPR hike aims to control inflation, it must be balanced with the need for economic growth.
• Striking this balance is crucial for Nigeria’s recovery from previous recessions.

In summary, the CBN’s decision to raise the MPR has implications for inflation, exchange rates, borrowing costs, and investment climate. The next MPC meeting is scheduled for May 2024.

FINANCIAL PLANNING.

 

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How Businesses Will Adapt to Higher Borrowing Cost Due to MPR Hike.

When faced with higher borrowing costs, businesses must strategically adapt to maintain financial stability and operational efficiency. Here are some ways businesses can navigate this challenge:

1. Review Financial Health:

• Assess existing debt – Understand the current debt structure, interest rates, and repayment terms.
• Evaluate cash flow – Analyze cash inflows and outflows to determine the impact of higher borrowing costs.

2. Refinance Existing Debt:

• Negotiate with lenders – Explore refinancing options to secure lower interest rates or extend repayment periods.
• Consider alternative lenders – Look beyond traditional banks for competitive rates.

3. Optimize Working Capital:

• Inventory management – Streamline inventory levels to reduce carrying costs.
• Accounts receivable – Accelerate collections to improve cash flow.
• Accounts payable – Negotiate favourable terms with suppliers.

4. Adjust Investment Decisions:

• Capital expenditure – Prioritize essential investments and delay non-urgent projects.
• Risk assessment – Evaluate the impact of higher borrowing costs on potential investments.

5. Diversify Funding Sources:

• Equity financing – Consider issuing shares or seeking venture capital.
• Debt instruments – Explore bonds, commercial paper, or other debt securities.

6. Operational Efficiency:

• Cost-cutting measures – Identify areas for cost reduction without compromising quality.
• Process optimization – Streamline operations to improve productivity.

7. Hedge Against Interest Rate Risk:

• Interest rate swaps – Use derivatives to manage interest rate exposure.
• Lock-in rates – Consider fixed-rate loans to mitigate future rate fluctuations.

8. Negotiate with Suppliers and Customers:

• Supplier terms – Request extended payment terms or discounts.
• Customer contracts – Renegotiate terms to align with higher borrowing costs.

9. Monitor Market Trends:

• Stay informed – Keep track of economic indicators, central bank policies, and market rates.
• Scenario planning – Prepare for different interest rate scenarios.

10. Communication with Stakeholders:

• Shareholders – Communicate the impact of higher borrowing costs transparently.
• Employees – Address concerns and provide clarity on business strategies.

Remember that each business’s situation is unique, and adaptation strategies should align with specific goals and risk tolerance.

In conclusion, Centrum Finance Company Limited can help you bridge the gap in this financial crisis era with our products, curated to suit your financial needs from investment, financial advisory, commodity finance and loans. Browse the site for more information.

SOURCES: centrumfinanceltd, nairametrics.

DISCLAIMER

This publication is produced by Centrum Finance Company Limited solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of the Company for actions taken because of the information provided in this publication.