Mr. Stephen Olabisi Onasanya, outgoing GMD/CEO, First Bank of Nigeria Limited, has said that fixing Nigeria’s economy requires fresh thinking, noting that the country needs to define a medium-term direction for monetary policy to enable economic operators take decisions that can bring about fundamental changes in the production and consumption functions of the economy.

Onasanya, who delivered a speech at the Chartered Institute of Bankers of Nigeria’s (CIBN) 3rd valedictory lecture on Tuesday in Lagos, reckoned that many years of high interest rate policy have shifted economic activity to the financial markets fringes of operations to the neglect of the real economy.

He opined that the country needs also a consistent regime of low and declining interest rate policy to shift the economy from merely trading in financial instruments to employment generating activities in the real sector.

In the lecture with the theme, ‘Banks, bankers and the imperatives for sustainable banking’, Onasanya reckoned that it is quite obvious that the high interest rate regime arising from tightening policies of the most recent past has not helped the economy much, noting that yet, the merit of monetary policy lies in its consistency, which defines the medium-term objectives of policymakers. According to him, “The back and forth swings in policy rates only show mere efforts, while it is actually leading the economy in no defined direction. The relevant questions now are: ‘What do we really want to achieve with monetary policy? And how far can we get other macroeconomic policies to be supportive of monetary policy objectives?’

“If our goal is to cut the cost of government borrowing, then we confront another policy flip-flop – returning, in essence to the situation where we were subsidising government borrowing. If the objective now is to give businesses a stimulatory breathing space, monetary policy rate as high as 11% will not do. Interest rates will need to go down considerably and our infrastructure endowment will need to improve to stimulate job creating growth in the economy.”

He said the country cannot reasonably push the infrastructure problem to the rear and expect banks to increase lending to the real sector anyhow, simply because it has been so “decreed”.

“Banks cannot reasonably ignore the problem of low consumer capacity in the economy and the consequent inability of companies to grow sales revenue and insist on increased bank lending in an environment of elevated credit risks.

It is wrong to expect that the reduction in the monetary policy rate would suffice as inducement for business and industry to start borrowing to produce, in the absence of a complimentary consumer spending space. Consumers should be strengthened to spend if businesses are to expand and create new jobs”.

The outgoing First Bank GMD/CEO reckoned that it will be a false expectation that this critically needed shift in the functioning of this economy would be achieved with 200 basis points reduction in the benchmark interest rate, saying that to create the impression that banks will have to be compelled to lend to the real sector raises question marks as to whether they are not the same banks that hawked credit facilities door-to-door in the post consolidated operations.

“On the other hand, if it is foreign portfolio investments that we want to attract, interest rates will need to be kept consistently high; and the free flow of capital has to be maintained to achieve the desired results. That will require a considerable adjustment to the value of the naira and a shift to increased dependence on local input in the industrial sector in order to deal with the fallout of exchange rate-induced domestic inflation.

“The reduction in the monetary policy rate isn’t significant enough to help government finances much; and at the same time, does not entice foreign investors to take the apparent exchange rate risks. In the light of the drop in government revenue, more debts are bound to pile up. The net effect of the reduction in the cost of borrowing on government’s debt burden will be more than countered by the rise in new borrowing. Government cannot stop excessive borrowing either because it is running a bloated expenditure structure that its revenue cannot support. ”

He noted that until government begins to take decisive steps to cut down the cost of governance, it cannot head off the obvious fiscal crisis that is bound to worsen.

“As far as I can see, monetary policy isn’t doing any more than helping us to dress up the day to day disorder in the flow of money. It is neither low enough to cause a fundamental change in the production and consumption functions nor do we have appropriate macroeconomic structures for high interest rates to attract and retain huge portfolio investments. As long as interest rates continue to move a little to the right and a little to the left, the fundamental changes desired in the functioning of the economy will continue to be delayed”, he noted.

BY DON OKERE