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Home Financial Literacy

Government economic policies that affects SMEs (2)

Chris Pemu by Chris Pemu
August 22, 2017
in Financial Literacy, Small Business
CBN Gov Godiwn Emefiele

Godwin Emefiele, CBN Governor

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In continuation of the previous article published on government policies that affect SMEs, we will be exploring another key policy.

Another important economic policy that you need to be aware of is the monetary policy. This will help you position your business in a way that harnesses its benefits towards your strategic business objective.

The Central Bank of Nigeria (CBN) is solely responsible for this policy as it is the monetary authority of the country who decides the monetary stance of the economy.

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Primarily, this policy controls how much money circulates and the costs of borrowing money, known as interest rate.

Interest Rates

The Central Bank of Nigeria decides the minimum interest rate obtainable from money lending banks through its Monetary Policy Rate (MPR). When the Central Bank of Nigeria increases this rate, it becomes costlier for banks to access money, which in turn makes banks less likely to lend to businesses and consumers.

Your business ability to borrow or establish a line of credit can be largely affected by how expensive or cheap it is for banks to get money. For instance, the CBN MPR is currently 14%; however, the prime lending rate is above 18%.

So, in cases where CBN reviews the rate upward, you may want to consider an alternative source to finance that expansion in your business. Or better still, if the Returns On Investment (ROI) on your investment can cover the cost of borrowing, then you may still go for that loan financing.

Foreign Exchange

This is another very vital channel through which economic policy affect Small and Medium Scale Enterprise (SMEs). The value of Naira in terms of another currency, usually the dollar, is known as the exchange rate. Interest rates and the value of the naira have a unique relationship. When the CBN makes the cost of borrowing (interest rate) cheaper, more money starts flowing in the economy. Moreover, the more Naira that are out there, the less each one is worth; i.e. the naira value drops. This explains part of the reason why the CBN held up the rate in its last MPC meeting.

One way this could affect your business is through your cost of production, if your business depends on the importation of raw material for its production process. On a positive note, if your product is globally competitive, a fall in exchange rate could imply a boost in global demand for your produce (export)

Inflation

In most cases, during periods of low interest rates and increased money flowing through the economy, inflation can occur if economic production and employment do not increase. Stagnant business, despite increased cash, means that more money is chasing fewer goods and price rise. And given that the CBN has the fiduciary responsibility to foster price stability while promoting economic growth, it introduced policy measures to curtail excessive inflation in the economy.

Inflation erodes the value of money and the purchasing power of the citizen. However, in periods of high inflation, customers spending skews more towards necessity than luxury, as such you may want to examine which category your product belong and make possible realignment to reflect the economic reality.

Note that during inflation, demand for luxury goods are highly price sensitive while necessities can still be given the benefit of need.

Tags: Central Bank of NigeriaForeign ExchangeInflationInterest RatesMonetary Policy RateMPC meetingSmall and Medium Scale Enterprise
Chris Pemu

Chris Pemu

Christopher B. Pemu has a degree in Political Science from the University of Lagos. He joined Nairametrics in 2014 as News Editor and later as Managing Editor. He currently serves as the General Manager of Nairametrics. He takes pleasure in traveling, enjoys world politics and in sport, he loves watching football and tennis.

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