President Muhammadu Buhari |
But it should be surprising
and indeed beggars belief that the benchmark interest rates remained unchanged
for a long period of six years! It is impossible for this experience to be
repeated in advanced economies of the world. In most countries, the monetary
policy authorities only have interest rates to play with and the signal an
adjustment in interest rates sends is often potent and immediate.
A reduction in interest
rate by say 50 basis points in England, for instance, has immediate impact on
the servicing of the mortgage which automatically puts more money in the pocket
of the citizens thereby enhancing purchasing power. We were able to keep
benchmark interest rates at same level for such a long time because the focus
was more to the external sector and therefore the rate of foreign exchange.
And most of the discordant
voices we have heard so far following the recent measures taken by the Central
Bank to conserve depleting external reserves and refocus on growing the economy
to create badly needed jobs have come from those who pander unnecessarily to
the external sector almost to the unfortunate neglect of the fortunes of the
domestic economy.
In addition to the
reduction in benchmark interest rate by 200 basis points from 13 to 11 per
cent, the Cash Reserve Ratio was reduced from 25 to 20 per cent while the
corridor around the MPR was adjusted from the hitherto symmetric position of
200 basis points to an asymmetric rate of +2/-7 points which implies that the
Central Bank will lend to Deposit Money Banks at the rate of 13 per cent while
deposits made with it will attract only four per cent signaling the preferred
thrust of policy in this regard as it is consistent with the prevalent posture
of more credit delivery to the real sectors of the economy.
The Central Bank decried
the posture of the banks when recently similar accommodation was made following
its last meeting when the CRR was reduced from 30 to 25 per cent when the banks
preferred to invest in fix income securities rather than lend to the real
sectors of infrastructure, agriculture, mining and industry.
The bank has served notice
that fund releases will only be made to those financial institutions that
express their preparedness to lend to the real sector as identified by it. We
await further details in this connection, as it should be expected that it
would take uncommon ingenuity to be able to evolve a safe proof strategy to do
so as money as we all know is fungible!
What have been the
reactions so far? As should be expected the reactions have come thick and fast
and have also been varied. It is probable in order to recount the reaction of
the President himself as an opener as conveyed during his swearing in of the
newly appointed ministers when he observed, ‘The Central Bank assisted 30
states in the federation with concessionary loans to offset salary arrears for
their workers.
On the monetary side, the
CBN has implemented country specific and innovative policies that have helped
stabilise the exchange rate and conserve our reserves.’ I have also heard views
expressed to the effect that what the CBN has now done is unorthodox as it is
attempting to inject liquidity into the financial sector while retaining
capital controls at the foreign exchange market! The fact is further bemoaned
that this development would also spike inflationary spiral, which will
discourage foreign investments particularly of the portfolio variant.
Some have commented by
pointing out the rumoured intention of the U.S. Federal Reserve to increase interest
rates in America toward the end of the year pointing out that it could lead to
a reversal of investment flows to the U.S. But such reactions have not factored
in the celebrations from the galaxy of our Micro, Small and Medium Scale
Enterprises in anticipation of the likely potential consequences of this
development as it impacts on the cost of capital in the positive direction
demonstrating this overly excessive focus on the likely consequences of policy
measures on the external sector to the neglect of development in the domestic
economy.
Those who have opposed this
development would rather prefer that the MPC continues with its tightening
stance of policy at the expense of continued closure of companies and rising
unemployment, which accounts for the rising tide in anti-social behaviors. It
has been estimated that the relaxation just announced is likely to inject an
estimated liquidity into the financial system in excess of 700 billion naira.
The MPC prefaced the relaxation stance of policy by citing an indicative
reduction on the rate of inflation between the last two quarters as supportive
of this measure.
But our take is that while
conceding that the core mandate of the Central Bank is to maintain price and
macro-economic stability, the challenges confronting the country today calls
for a slight shift in focus on this policy to reflate the economy, bring back
idle capacity to work, grow jobs and purchasing power while ameliorating the
misery index in the land.
We should, therefore, be
prepared to trade off a slight increase in the rate of inflation even if it
goes outside the preferred target range of single digit. The banks are reeling
from a liquidity crunch particularly following the recent introduction of the
Treasury Single Account which drained massive amount from the banking sector
estimated in multiple of billions of Naira. Therefore this move should amount
to extending a lifeline to the banks, which should be most welcome as it
enables the banks to continue to sustain a going concern.
Interest rate charged by
banks is aimed to recover the cost of deposits which they mobilize, provide for
the direct cost of offering service, that is, overheads including deposits
sterilize in reserves, the payment of the insurance premium and provide for the
estimated risk inherent in extending the credit and make a return on
investment.
The benchmark interest rate
is simply indicative as it only comes into account when a bank borrows from the
Central Bank, which most banks will not do in a hurry as it directly raises a
red flag to the Regulator. It remains a fact that interest rates in the
Nigerian economy have been prohibitive particularly to the SMEs; the engine
that should drive the economy.
Therefore if this measure
achieves a reduction in the cost of funds across board, it should give a boost
to activities in the economy. What will be most impactful is if the authorities
are able to get the banks as indicated to extend credit to the real sectors of
agriculture, mining, industry and infrastructure arising from this liquidity
infusion. Fiscal authorities are expected to embrace supply side economics so
that there is complementarity of policies for the achievement of maximum
results to achieve quick and rapid reflation of the economy. (guardian)
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