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Published On: Sun, Oct 1st, 2017

High interest rates threaten ERGP


Nigeria’s hastily constructed economic growth and recovery plan (ERGP) is about to face is stiffest test yet as a growing number of economists argue that the refusal of the Central Bank of Nigeria (CBN) to ease money supply and bring down interest rates at its last Monetary Policy Committee meeting (MPC) will puncture expectation of significant growth in the year.

Indeed, against the background of a growing lobby for a reduction in the CBN’s monetary policy rate from 14 per cent over the last seven quarters the Monetary Policy Committee (MPC) of the Bank at its September meeting last week left the rate untouched, it also kept Cash Reserve Ratio (CRR) at 22.5 per cent and bank’s Liquidity Ratio at 30 per cent for the seventh consecutive time. Explaining the rationale behind the decision, Mr Godwin Emefiele, Governor of the Bank said that the Committee wanted to get a clearer picture of the economy before considering to tinker with the rates as the Nigerian economy was still very fragile despite exiting recession in the second quarter of 2017. “Meaningful economic recovery cannot be achieved without price stability,” the CBN governor insisted. He argued that loosening interest rates now could compound inflationary pressure, while tightening it may worsen the non-performing loans of banks. The inflation rate for July was 16.01 per cent and data for August is expected to be released this week by the National Bureau of Statistics (NBS).

Despite the CBN’s reluctance for rate cuts, the country’s Finance Minister, Mrs Kemi Adeosun, has called for lower lending rates to enable manufacturers’ access credit at a cheaper cost to help tackle burgeoning unemployment which currently stands at 14.2 per cent, while youth unemployment rate is 25.2 per cent.


This Ministers concern also reflected analysts doubts that the government’s ERGP will meet its four year targets. The President Muhammedu Buhari’s economic blue print which spans the years 2017 to 2020 presupposes growth in a relatively low interest, low inflationary environment, but the combination of fiscal and monetary policies presently being adopted by the administration makes this logically impossible. The ERGP aims to deepen financial intermediation to provide credit to the private sector as well as “improve asset quality and reduce non-performing loans through proper asset screening to lower non performing loans (NPL) ratio from the current level of 12 per cent to the prudential threshold of 5 per cent by 2020.”


Senator Foster Ogola, Vice Chairman, Senate Committee on Capital Market in an exclusive interview with Business Hallmark noted there was an urgent need for the fiscal and monetary authorities to harmonize their views if the visions in the ERGP are to materialize. “It is not correct that if interest rate is lower, it could worsen inflation, because countries that advertise low interest rates do not necessarily have high inflation. So, there is definitely something wrong. One is the propensity of the Federal Government to borrow money through Treasury Bills and bonds at high interest rates, which attract bank investment and crowd out private economic agents. If the federal government stops borrowing, rates should gradually go down to single digits.”

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He noted that commercial lenders are not ready to lend to the real sector because they don’t have long term funds, which has made them to key into the frequent short term borrowing of the federal government. “Until we have single digit interest rates, nine per cent and below, there can’t be money for project funding and the manufacturing sector would continue to suffer, because you can’t manufacture and breakeven with average borrowing rates of 28 per cent. “

Senator Ogola was of the view that the federal government should be blamed for the divergent viewpoints of the fiscal and monetary authorities, because the CBN is under the Federal Ministry of Finance. “The Federal Government needs to focus on how to grow the economy. You can’t grow the economy with divergent views. There must a meeting point between those managing the economy and those in charge of monetary policy’’ he argued.

As far as policy goes, Professor Leo Ukpong, Dean, School of Business, University of Uyo, insists that the government should be more concerned with growth and employment rather than short term inflation rates. He argues that the MPC ought to be more concerned about the high unemployment rate in the country.


“The MPC should help the country’s economic recovery by lowering interest rate, because people need to eat first before you talk about inflation,” the professor of Financial Economics said.


According to him, there is an urgent need for the economy to grow, because with 0.55 per cent GDP growth rate, it is still very fragile and a lot of young Nigerians will remain jobless.


Nigeria’s unemployment rate currently stands at 14.2 per cent, while youth unemployment rate is 25.2 per cent. “Inflation is not a problem when you have high unemployment. To reduce interest rate is to help reduce unemployment,” he enunciated.


However, Mr Abayomi Ajayi, research analyst at EDC Securities Ltd supports the decision of the CBN to sustain aggregate rates, saying inflation rate was still too high at 16.01 per cent.

“It will be too early for the MPC to reduce rates now. The economy needs to stabilize before we can talk of rate reduction,” he explains.

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Ajayi was of the opinion that the retention of the MPR at 14 per cent was the best option available to the Committee; he notes that the economy is challenged and the country would continue to battle unemployment problem. “What we know from past experience, once an economy is coming out of recession, labour productivity is getting higher, we now see companies shifting from contract staff to permanent employees. So, though it does not address unemployment, it increases productivity,” he added.


Nigerian population which has been growing at almost 3 per cent and the economy growing less than 1 per cent has also been a source of concern. The International Monetary Fund (IMF) has projected that the country would end the year at 0.8 per cent GDP growth rate, while the country has been predicted to become the third most populous nation in the world by 2050.

Dr Vincent Nwani, Director, Research and Advocacy, Lagos Chamber of Commerce and Industry (LCCI) reasoned that the refusal of the CBN to heed calls to lower rates means the government would continue to crowd out the private sector from accessing credits from banks, which will make hamper their growth and making them unable to create the needed jobs.

“The better part of the ERGP will never materialize. It will be thrown into the dustbin. The ERGP says interest rate should be at single digit and government is presently borrowing close to 18 per cent,” he remarked.

The ERGP targets to expand the economy from the present 0.55 per cent GDP growth rate to 7 per cent in the next three years. “One major strategy is to accelerate implementation of the National Industrial Revolution Plan (NIRP) through Special Economic Zones (SEZs). The focus will be on priority sectors to generate jobs, promote exports, boost growth and upgrade skills to create 1.5 million jobs by 2020,” document stated. But Nwani thinks this may just be a fairytale.

Mr Ambrose Oruche, Director, Corporate Affairs, manufacturers Association of Nigeria (MAN) expressed disappointed that the MPC members only marked register during last week’s meeting. “Lowering interest rate would encourage people to go into production. But the retention of interest rate was not too good. But they may be afraid of the backlash of inflation. He has told everybody that he is pursuing single digit interest rate, so, he does not care about what happens to growth,” he declared.

Without the ERGP, monetary and fiscal policy smoothly engaged in a collaborative marriage, Nigeria’s economic growth seems a road too far to travel.

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