SMEs under stress as new FX rules likely to hike interest rate

Despite several upsides of the new FX rules recently unveiled by the Central Bank of Nigeria (CBN), the policy will likely push up borrowing costs for small and medium scale businesses, experts say.

The CBN on June 20 floated the naira, a move which has closed the gap between the interbank and parallel market rates.

Inflation, which is one of the components of interest rate, was on an all-time high of 15.6 percent in May and was driven by rise in food price, according to the National Bureau of statistics (NBS).

“The new FX flexibility has both positive and negative impact for SMEs. Interest rate is likely to increase because there will be more demand for funds,” Friday Opara, director, strategic partnership, Small and Medium Enterprises Development of Nigeria (SMEDAN), said in a telephone interview with Start-Up Digest.

“Some of the SMEs that wanted to close shop due to dollar scarcity will start expanding their businesses now that dollars are available. The Central Bank of Nigeria (CBN) still has to review the list of the 41 items,” Okpara said.

The CBN since last year restricted 41 items from accessing FX, a ban the apex bank is yet to lift despite floating the naira.

The restrictions deterred foreign investors and starved manufacturers of dollar currency needed to pay for imported raw materials and equipments.

According to analysts, if the apex bank fails to review the list, the restrictions can still make things difficult for businesses despite the availability of dollars.

Opara stated that the government has to look at various incentives given to small businesses in past like the Export Expansion Grant (EEG).

He called for the return of the suspended EEG while stating the importance of such grant.

Opara stated that if the interest rate eventually goes up, SMEs can still access funds with such grants from the government.

Enterprenuers and businesses in African biggest economy cannot easily access finance to expand business, as they are usually faced with problems of collateral, high interest rates, extra bank charges, amongst others.

“There will be more demand for funds because investment will increase due to the availability of dollars and this might push up interest rate,” said a CEO, who does not want his name on print, because he holds a sensitive position in government.

“But with the CBN interventions we don’t see interest going up,” the CEO said.

Femi Egbesola, national president, Association of Small Business Owners (ASBON), said, “We are so happy about the new FX flexibility. Prices of raw materials will drop, which will reduce production cost for SMEs.”

“There will be job creation because most SMEs will now begin to expand and will require more hands,” he said.‎

Ike Ekemele, an expert on small business, confirmed that this could drive up rates but added that it has several positives for SMEs.

Josephine Okojie