Nigeria’s double-digit interest rate regime is an enormous economic conundrum that has resisted persistent efforts of the authorities to tame. At the recent Monetary Policy Rate meeting, the Central Bank of Nigeria retained its benchmark interest rate at 14 per cent. This has been the prevalent figure since the turn of the year. In turn, deposit money banks lend to business at anything between 15 and 29 per cent. This is a prohibitive dilemma. Access to cheap, quality credit by business is pivotal to economic growth. Low interest rates make borrowing attractive and encourage spending. Thus, the monetary and fiscal authorities should take far-reaching measures to bring down the intimidating rate.
To justify its policy, the CBN cites the excess naira liquidity and high inflation. The monetary authorities mop up such funds at a debilitating cost. Yet, inflation, which the National Bureau of Statistics puts at 16.25 per cent, is still too high because of low manufacturing output. The economy shrank 1.5 per cent in 2016, the first annual contraction in 25 years, says the NBS.
The fall of the naira, due to reduced oil income, is another major factor. The national currency, which exchanged officially at N197 to $1 in 2015, went for as high as N520 to $1 early in 2017, before its current official rate of N306 to $1 at the interbank market. Manufacturers import raw materials at great cost. Expensive forex also makes imported goods to command steep prices, contributing in a great measure to the high inflationary trend, which has averaged 12.39 per cent from 1996 to 2017, according to official data.
Conversely, the fiscal authorities argue that the monetary authorities are too rigid with the MPR, which does not incentivise economic growth. Benchmark lending rate averaged 10.45 per cent from 2007 to 2017. It reached an all-time high of 14 per cent in July, 2016 and a low of six per cent in July, 2009. Last September, the fiasco forced a lament from the Finance Minister, Kemi Adeosun. She urged the CBN to lower the benchmark interest rate so that government could borrow domestically without a huge cost and thus take the economy out of recession. Her point that these funds would be spent on infrastructure, the bedrock of economic development, appears well-grounded.
Senate President, Bukola Saraki, succinctly expresses the mind of the majority, saying, “There is no business that can make money if it is trying to borrow at 28 or 29 per cent. It cannot work and if we cannot get the banks to lend to the real sector and they carry on their money to government instruments, there cannot be growth. How can investors survive anywhere on these rates? How can they create jobs and make returns?” In addition, they confront a poor ease of doing business environment.
The CBN Governor, Godwin Emefiele, disagrees with the protagonists of a lower benchmark rate. Emefiele is strongly persuaded that retaining the benchmark at 14 per cent during high inflation “is in the best interest of the Nigerian economy.” He hinges his position on the fact that past efforts at boosting credit facilities to the private sector went awry because the banks diverted such funds to traders, instead of lending to manufacturing and agriculture. In May, the CBN said the oil and gas sector accounted for the highest share of total credit with N4.89 trillion or 30.02 per cent in 2016. The manufacturing sector however accounted for N2.2 trillion or 13.6 per cent. But such infractions ought to have attracted appropriate sanctions.
The manufacturing sector, which comprises several activities, including oil refining, cement, food, beverages and tobacco, and chemical and pharmaceutical products, is the worst hit by the tough interest rate system. It makes Nigeria a net importer of basic items, a crush that manifests in the excessive demand for forex.
In a 2017 note, the Manufacturers Association of Nigeria said that its members achieved just 20 per cent capacity utilisation in 2016, a year in which 272 firms shut down. Several others cut back on production. The crosswind swept many workers away. In its Q1 report, the NBS noted that quarter-on-quarter growth in manufacturing was recorded at -0.79 per cent, while the sector contributed 9.31 per cent to nominal GDP.
However, this is not the scenario in other climes, where economic development determines the fate or tenure of monetary and fiscal authorities. Data compiled by Trading Economics, an American research firm, note that 20 countries, including France, Italy, Ireland, Austria, Germany and the Netherlands, and the Euro area, operate a 0.00 per cent interest rate. Unlike Nigeria, these countries thrive on production. Indeed, four countries – Japan (-0.10 per cent); Sweden (-0.50 per cent); Denmark (-0.65 per cent); and Switzerland (-0.75 per cent) – operate negative interest rates.
This is a sign that the CBN has a tough job on its hand, which it must do differently. The reality on the ground demands extraordinary policies. The CBN’s convenient claim that it is mindful that inflation is harmful, making it to keep a double-digit benchmark rate, deserves a rigorous scrutiny. Without productive activity, the economy is skirting on the edge of disaster.
Ayo Teriba, an economist, calls for immediate reforms in Nigeria’s monetary policy processes, Nigeria’s banking supervision arrangements and Nigeria’s foreign investment policies. “Those reforms are needed to ensure an orderly transition to a low MPR/low CRR regime that is urgently needed to boost growth and investment,” he says. It has also been suggested that the CBN should address bank excess liquidity issue once and for all. Some schools of thought posit that its practice of mopping up funds it does not need at a top rate from the banks to curb excess liquidity needs a review. It could also give dollarised certificates instead of substituting naira for money being earned by the three tiers of government from oil sales. In the short-term, all this and other options should be considered to move Nigeria out of a discouraging interest rate regime that disenfranchises start-ups and established businesses. In the long run, it is the state of the economy that determines interest rates.
