CBN Governor, Godwin Emefiele; and Finance Minister, Kemi Adeosun |
The Finance Minister had on
Monday, called on the CBN to lower interest rate, so the government could
borrow domestically to boost the economy without increasing debt servicing
costs. But Governor of the CBN, Mr.Godwin
Emefiele, who briefed the press at the end of the Monetary Policy Committee
(MPC) meeting in Abuja, said rate cuts in the past did not result in banks
giving credits to the real sectors of agriculture and manufacturing as
instructed. The CBN Governor said a cut in the rate at a time inflation was
rising could worsen the nation’s economic situation.
In his own words: “Whereas the Minister of Finance has called for a reduced
interest rate at this time, the MPC decides otherwise. Basically, like I said,
both the monetary and fiscal authorities have the intention to achieve growth,
but the direction through which we want to achieve it may differ as long as you
still achieve the growth.
“The issues here,
just as we have read in the communique, is that when you say reduce the
interest rate, there are two possibilities here. You are saying because you
want that to push credit to the private sector at lower rate, or two which I
have had the fiscal authorities talk about, is to be able to borrow at lower
rates and spend. Our view at the MPC, which was exhaustively discussed, was
that in the past, there was a time when MPC decided, not only to reduce the
policy rate, but, indeed, also increased the Cash Reserve. Past rate cuts
channeled to traders
“These were
intended to lower rates and encourage spending, particularly to the private
sector. After we did that, because we did not see the impact of credit to the
private sector, we needed to further redo the CRR. During that first section,
we reduced the CRR from 30.5 to 25%. It provided an opportunity for about
N1trillion to be injected by the CBN into the economy or made available to the
banks.
“But rather than
loan this money to the banks or loan them to the consumers, or agriculture and
manufacturers, like we said in the communique, we found that those credit went
to traders, who used them to demand for foreign exchange, which ended up
putting pressure on the foreign exchange market. That was what happened.
“Subsequent to
that, we said since this money wasn’t deployed directly, we would also be
reducing the CRR, then from 25% to where it is right now, which is 22.5%. That
was going to provide between N350 billon and N500 billion through that avenue. But
we said we are not going to allow the banks to really have the cash until they
send proposals to the CBN for primary agric projects, new manufacturing
projects and other projects that will spur industrial capacity and
manufacturing output.
“I must confess that
the proposals we received were mainly for the purpose of refinancing the
liquidity of the banks and we thought that was not what we wanted and that is
the reason we have been a little circumspect about raising some of these
liquidities. But we are looking at the books and very few of them that have
submitted proposals for agric, new manufacturing projects will be considered in
due course.
“The second part
of it was that yes, if you lower interest rate, what that will do is that it
will make it possible for the fiscal authorities to borrow at lower rates. We
are saying fine, if they borrow at lower rate, it simulates spending, what that
does is that it simulates demands for goods by providing cash or money to be
spent without taking actions to boost industrial capacity. When you take
actions to boost manufacturing output, what happens is that you will see a
situation where you have too much money chasing too few goods, which will also
worsen the inflationary condition in which we are now. FX inflow above $1 b
since July.
“That is why we
are saying the option that we will like to adopt is, while the fiscal is going
ahead to spend, what we want to do is retain the rates where they are. When you
say retain the rates where they are, you are saying you want to defend a tight
situation so that it will again, as we said at the last meeting, encourage the
inflow of capital. But I was not that optimistic, but today, I can report that
I am looking optimistic because between July and now, we have seen inflow of foreign
exchange (FX) of above $1 billion.”
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