Published On: Tue, Nov 28th, 2017

(Editorial) On interest rate, CBN is wrong

So far Nigeria’s principal banking regulatory body, the Central Bank of Nigeria (CBN) has done a fair job of maintaining financial stability. Broad economic indices have headed in the right direction since the beginning of the year. At the height of economic recession, for example, the country’s gross domestic product growth fell -0.7 per cent in the first quarter of 2016 to -2.3 per cent at the third quarter and ended the year at -1.7 per cent. The economy’s negative growth continued into the first quarter of 2017 when GDP grew at -0.5 per cent, but this ended the blues as the second quarter of the year saw a revised annualized quarterly growth rate of 0.72 per cent. A recent Statistics Bureau (NBS) report puts third quarter GDP growth at 1.4 per cent, should we do a song and a dance? Certainly not. Although the economy has shown signs of recovery, most of that has been attributed to God, good fortune, a rise in international oil prices or a combination of all three, but not policy. Indeed the CBN’s high interest rate environment has left Nigerian corporations hanging on the last thread of their lives, as their workers get pink slips terminating their jobs like wedding bands being showered with confetti.

The CBN of course justifies the high interest rate regime by pointing out that it has resulted in stabilizing the foreign exchange market at N360/$ while also dragging inflation by its coattail from a lofty 18.72 in January 2017 to 15.91 per cent in October. The bank’s Governor at a recent interactive meeting with stakeholders assured that the CBN was on course to bring inflation down to single digits by the second half of 2018. This is dangerous. What the governor seems to be suggesting is that interest rates are likely to remain at double digits for at least another eight months. This could have dire consequences for growth, employment and the electability of the APC government in 2019. It is instructive to note that while Emefiele cooed glowingly about the success of the regulator in calming consumer price increases he remained deliberately (and some would say cynically) silent about the growing levels and rates of domestic unemployment. With the country graduating over one million students from tertiary institutions annually and the economy growing at less than one per cent per annum on an annualized quarterly basis the future is bleaker than the picture painted by the CBN boss.

Nigerian businesses are dying and the banks, despite their flowery financials, are in dire straits. High interest rate environments are by definition high risk environments. The high cost of money reflects a high probability of default, therefore when banks lend many of them have reverted to what behavioural economists call a ‘default mode’. A turn of thinking in which it is presupposed that the loans granted will not be repaid. The cost of lending builds into this bias and therefore creates a self-fulfilling prophesy in line with Sod’s law that whatever can go wrong actually does turn out badly. Nigeria cannot hope to grow in a sustainable manner if private businesses are denied access to capital or are permitted access at prohibitive rates. No nation has been able to grow a robust economy with double digit lending rates. The lower interest rates are and the easier the access private entrepreneurs have to capital or credit the faster the growth of industry and commerce and the lower unemployment of labour.

Business Hallmark newspaper believes unrepentantly in the workings of competitive markets and supports the principle of asset and resource allocation on the basis of relative scarcity but this newspaper cannot reconcile itself to the deliberate policy of the CBN to keep inflation low by keeping interest rates high, especially in an economy with excess labour capacity and high domestic inventories. The late economics Professor Milton Friedman’s argument that inflation is always and everywhere a monetary phenomenon has since become standard textbook theory, but in the short term with excess production capacity the Friedman equation that relates money supply to price is inapplicable because at low base industrial production output with major excess capacity the impact of monetary expansion would first be felt on production and not price. Friedman’s argument becomes more persuasive the closer the economy is to full employment in the medium to long term, a far cry from Nigeria’s current situation.

We therefore, urge the policy wonks at the CBN to reduce the monetary policy rate (MPR) by at least 200 basis points or 2 per cent, they should bring down MPR from 14 per cent to 12 per cent per annum, as cash reserve ratio is reduced from 30 per cent to 25 per cent thereby allowing greater credit expansion and a gradual fall in bank lending rate to support industrial and commercial growth. With a population growth rate sprinting ahead at a threatening 3 per annum and GDP shuffling along at less than 2 per cent (actually 1.4 per cent as at the last quarter), GDP per capita has gradually fallen as consumer spending wanes and manufacturing output sputters to a deathly stall. While nobody doubts the good intentions of the CBN, Nigerian’s must, however, insist that they will not be crucified on the cross of the monetary authority’s morbid fear of price increases, just as only the living can enjoy the breaking of the dawn only the physically present can take pleasure in lower price levels. Dead men do not care about inflation.

Source: Business Hallmark, National Bureau of Statistics (NBS)

© 2017, Hallmarknews. All rights reserved. Reference and link to this site is required if you wish to reuse any article.

Reactions from Facebook

comments and opinions

Leave a comment

XHTML: You can use these html tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Most Shared

Recent posts

  • For the records: President Buhari’s address at the 73rd UN General Assembly (Full speech)

    STATEMENT DELIVERED BY HIS EXCELLENCY, MUHAMMADU BUHARI, PRESIDENT OF FEDERAL REPUBLIC OF NIGERIA AT THE GENERAL DEBATE OF THE 73RD SESSION OF UNITED NATIONS GENERAL ASSEMBLY IN NEW YORK, 25TH SEPTEMBER, 2018. Madam President, Fellow Heads of State and Government, Mr. Secretary-General, Distinguished Delegates, Ladies and Gentlemen, On behalf of the Government and people of […]

  • ELAN’s National Lease Conference Focuses on Stimulating Valuable Investments for Sustainable Growth

    In furtherance of its objective of promoting the business of leasing in Nigeria, Equipment Leasing Association of Nigeria (ELAN) has concluded plans to organise the 16th Annual National Lease Conference with focus on the economy. The conference is the highest gathering of stakeholders in the leasing industry and a platform for brainstorming on issues pertinent […]

  •  KIAKIAFX partners TURTLEWAX BDC on FX transfers

    KiaKiaFX, an indigenous Fintech company has signed a technical services agreement with Turtlewax BDC to promote the sale of retail Foreign Exchange (FX) where customers can exchange FX from the comfort of their homes offices via desktop, tablet or mobile device. Speaking in Lagos, the Managing Director, KiaKia FX, Abisoye Coker, said the digital platform […]

  • RMB seeks improved awareness on financial inclusion

    The Chief Operating Officer of Rand Merchant Bank Nigeria (RMB), Mr. Funso Odukoya, has called for increased awareness on issues around financial inclusion in the country. Odukoya spoke during a panel session at the 2018 Annual National Conference of the Finance Correspondents Association of Nigeria (FICAN), with the theme: “Banks, Fintechs and Nigeria’s Financial Inclusion […]

  • NDIC MD Emerges IADI Africa Regional Committee Chair

    The Managing Director and Chief Executive of the Nigeria Deposit Insurance Corporation (NDIC), Umaru Ibrahim, has been elected the new Chairperson of the Africa Regional Committee (ARC) of the International Association of Deposit Insurers (IADI). Ibrahim was elected during the Annual General Meeting (AGM) of the IADI-ARC, which was a prelude to the IADI Technical Assistance Workshop being […]

  • Full Communique of MPC Meeting

    CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO 120 OF THE MONETARY POLICY COMMITTEE MEETING OF MONDAY 24th AND TUESDAY 25th SEPTEMBER, 2018 Background The Monetary Policy Committee (CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO 120 OF THE MONETARY POLICY COMMITTEE MEETING OF MONDAY 24th AND TUESDAY 25th SEPTEMBER, 2018 Background The Monetary Policy Committee (MPC) met on […]

  • MPC retains interest rate at 14% for 13th consecutive times

    The Monetary Policy Committee (MPC) of the Central Bank of Nigeria on Tuesday for the retained the Monetary Policy Rate unchanged at 14 per cent for the 13th time. The CBN Governor, Mr. Godwin Emefiele, announced the decision of the committee at the end of a two-day meeting held at the apex bank’s headquarters in […]

  • 2018 budget: FG to sell 10 state-owned companies to raise funds

    The Federal Government may put up 10 state-owned companies for sale in the fourth quarter of 2018 to raise N289 billion for the funding of the 2018 budget, Joe Anichebe, a director at the Bureau of Public Entreprises (BPE), has disclosed. Anichebe said preparations are in the final stages for the sales of the companies, […]

  • FG to sell 10 public assets in Q4 2018

    The Federal Government has concluded plans to sell 10 government-owned companies for sale to selected investors and the public in the fourth quarter to raise N289 billion toward funding the 2018 budget,Bureau of Public Entreprises (BPE) has disclosed. According to Bloomberg report, preparations are in the final stages to begin the sale of the companies […]

  • Modric defeats Ronaldo, Salah to emerge FIFA’s Footballer of the Year 2018

    Real Madrid and Croatia midfielder Luka Modric has been named the Best Men’s Player at The Best FIFA Football Awards on Monday evening, fighting off competition from fellow nominees Cristiano Ronaldo and Mohamed Salah. The award caps off an incredible year for Modric, who won his fourth Champions League title with Real Madrid in May, […]

  • Nigerian bond market witnesses low demand

    A slowdown in client demand characterizes the bond market on Monday, unlike sentiments witnessed for the most part of last week. This is on the back of expected renewed supply at the bond auction on Wednesday, where the Debt Management Office (DMO) would raise a total of N90billion from the 2023, 2025 and 2028 maturities. […]

  • Oil price climbs to four-year high as Saudi, Russia turn Trump down

    Oil prices have hit a four-year high of over $81 a barrel after Saudi Arabia and Russia rejected calls by Donald Trump to increase production. Brent crude hit its highest level since November 2014 at $81.16 a barrel, up 3 per cent on the day. Saudi Arabia led the c oil cartel, while Russia is […]

  • Buhari releases N22bn to Nigerian Airways retirees

    The Federal Government has released N22.68 billion to settle part of the retirement benefits of former workers of the defunct Nigeria Airways. The government has also approved the release of N20 billion to revitalise public universities in line with demands of the Academic Staff of Universities (ASUU). Minister of Finance, Zainab Ahmed, made the disclosure […]

  • MPC set for another policy freeze

    By FELIX OLOYEDE Despite the outcry for lower domestic interest rates, the Monetary Policy Committee (MPC) is expected to leave the Monetary Policy Rate (MPR) at 14 per cent as it responds to inflation jitters ahead of the 2019 general elections, say economists. The MPC meeting schedule to hold today, Monday 24th 2018 and Tuesday […]

  • Ambode fights for his political life

    By OBINNA EZUGWU It is no longer news; the political love affair in Lagos state is in trouble. For the first time since 1999, a sitting governor is facing a real challenge from his own party for the ticket. The indignity can only be imagined and its implications continue to reverberate across the state and […]

  • Adeosun: Betrayed by a dysfunctional system (Editorial)

    A fortnight ago, former Finance Minister Mrs. Kemi Adeosun, resigned her position following the report of an investigative panel into allegations of NYSC certificate forgery against her. The allegation had been earlier made by an online newspaper, Premium Times, and the nation was agog with speculations about it. Her resignation has been interpreted by most […]