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Monetary Policy: Consumer goods companies report 1345% surge in borrowing cost

consumer goods

The net finance cost of major consumer goods companies listed on the NGX increased by 1,345% in the first quarter of 2024 when compared to the corresponding period of 2023.

A review of the unaudited financial statements of seven listed consumer goods companies reveals that finance costs soared from around N32.18 billion in the first quarter of 2023 to N465.11 billion in Q1, 2024.

Nestle Plc saw the greatest increase in net finance cost during the period rising from N3.74 billion in Q1, 2023 to N217.01 billion in Q1, 2024 marking a whopping rise of over 5000% within the period.

Furthermore, Cadbury Plc saw a reversal of fortunes from raking a finance income of N380 million in the first quarter of 2023 to incurring a finance cost of N13.21 billion.

Dangote Sugar saw its finance cost soar from N5.47 billion in Q1 2023 to N120.63 billion marking a rise of over 2,105% for the company.

Finance cost for Nigerian Breweries Plc rose by 366% from N19.52 billion in the first quarter of last year to N90.84 billion in the first three months of 2024.

BUA Foods Plc was not left out in the soaring finance cost witnessed by consumer goods companies in the first three months of the year. The company’s finance costs grew from N2.12 billion in Q1 2023 to N15.01 billion.

Also, International Breweries’ net finance costs rose from N1.14 billion to N8.87 billion between Q1 2023 and Q1 2024 while Unilever Nigeria Plc’s turned around their fortunes from a finance cost of N396 million in Q1, 2023 to a finance gain of N516 million.

Reasons for the spike in finance cost

While the 600 basis points hike in MPR by the Central Bank of Nigeria (CBN) can easily be attributed to the cause of spiralling financial cost of these companies, that is not the major culprit.

Speaking to Nairametrics, Mr. Tajudeen Ibrahim, Director of Research at Chapel Hill Denham stated that the hike is majorly caused by exchange rate revaluation with higher interest rates as the next driver. To mitigate the impact of the exchange rate depreciation and higher interest rates on their balance sheet, Mr. Tajudeen advised companies to approach the capital markets for funds rather than banks.

He said, “The cause is largely due to exchange rate revaluation, particularly for those with foreign currency loans (FCY). A higher interest rate is the next driver. The companies should consider access to funds through the capital markets. It is relatively cheaper and brings down the average cost of borrowings.” 

Performance of the naira in Q1 amid CBN interest rate hike

The naira started the first quarter of the year at N1,035/$ and closed the quarter at N1309/$– witnessing an appreciation of 21.8% in March.

This is despite severe exchange rate volatility during the period where the naira weakened to around N1,900 to the USD on the parallel market during the quarter.

On the monetary policy front, the apex bank in February raised MPR by 400 basis points from 18.75% to 22.75%- arguably the single biggest MPR increase in Nigeria’s history.

In March, the CBN further raised interest rate by another 200 basis points to 24.75% raising the cost of accessing capital from banks.

However, the apex bank noted that its hawkish monetary policy stance was necessitated by the need to tame inflation and stabilise the foreign exchange market.

Governor of the Central Bank of Nigeria (CBN), Yemi Cardoso explained that the MPC had two main policy options: either maintaining the current rates or further tightening to continue the disinflation trend in his statement defending the hike.

He opined that higher interest rates were needed to attract Foreign Portfolio Investments (FPIs) into the country noting that interest rate hike is the only weapon in the bank’s arsenal to tame inflation.

He stated, “We must also not lose sight of the fact that inflation is the major problem. A tighter monetary policy stance with the accompanying higher interest rates is a policy tool we have at our disposal to solve the problem from a monetary angle, even as we admit that there are structural issues that must also be addressed alongside by various stakeholders.”

“Furthermore, tightening will help to sustain the current momentum of capital inflows into the economy and provide necessary support for the currency in the near term.”

Position of the business community on the MPR hike

He acknowledged that there were strong arguments for keeping the policy rates steady, such as reducing borrowing costs for both the government and private sector, easing difficult economic conditions, and acknowledging the positive outcomes from previous rounds of tightening.

However, the business community differs from the apex bank’s leadership on the monetary policy hike. The Centre for the Promotion of Public Enterprise (CPPE) stated that businesses in the country need single-digit interest rates to survive and that the MPR hike has a limited impact on taming inflation.

Furthermore, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) had stated that the hike in MPR could inadvertently cause inflation instead of reducing it, as businesses might increase the prices of goods and services to offset higher borrowing costs.

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