The disagreement between the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) and Finance Minister, Mrs. Kemi Adeosun, over interest rates, has raised fresh concerns on the best way to stimulate the economy and get it out of recession.
Adeosun had last week urged the CBN to lower interest rates to enable government and private sector operators to borrow at economically viable rates that could reflate the economy and jump-start growth.
But, in an apparent move to assert its autonomy, the MPC at the end of its meeting last week rejected the call. Instead, it retained the Monetary Policy Rate (MPR), otherwise known as the lending rate, at 14 percent.
This was the benchmark interest rate it fixed in July. Amid contraction in the economy, the Finance Minister had argued that the country needs lower interest rates to manage borrowing and stagflation.
Defending the double-digit benchmark interest rate, the CBN Governor, Godwin Emefiele, explained that it became necessary to control rising prices and encourage foreign investments.
Besides, he said the subsisting rate of 14 percent “has attracted $1 billion” in foreign investment in the last two months, while the price level outlook is already moderating.
Moreover, the MPC said it considered the option of reducing interest rates, but concluded that the biggest challenges facing the economy are “unsystematic and incomplete structural reforms”, which it noted, have raised “costs, risks and uncertainty”, with the economy now facing risks on both price and output.
The CBN’s decision has sharply divided policymakers. While some describe it as one of the regulator’s most sensible confidence-building decisions in months, others see the double-digit MPR as one that will stifle business operations and the much-needed economic recovery.
Though financial stability and the interest of foreign portfolio investors weighed heavily in the decision of the CBN, our concern is that the apex bank may not have taken into account how inflation and other economic indices will play out. We believe that the economic weakness our country is currently experiencing ought to counsel prudence.
In that regard, the double-digit interest rates will only benefit a few at the detriment of the economy. High interest rates will damage our fragile economy.
We find it hard to agree with the economic data on which CBN arrived at its decision. High interest rates become necessary when the economy is nearing maximum employment and price stability, and not the other way round when inflation and unemployment have reached an all-time high and companies are recording profitability losses and layoffs.
The CBN decision to retain interest rate at the 14 percent benchmark set in July may give foreign investors the impression that interest rate regime in Nigeria is adjusting to the uncertainties of negative growth, high inflationary trend and foreign exchange challenges. But, this is far from the reality on ground.
The country’s troubled economy requires an injection of liquidity via a reasonable cut in interest rates so that business operators can obtain credit with ease.
In addition, there is need for proper coordination of both monetary and fiscal policies. At present, this is not the case.
Even though we share the optimism of the government and that of the CBN that Nigeria may come out of recession by the fourth quarter of this year, we have our reservations that the policies being implemented by the Federal Government are enough to take the country out of recession.
Concrete monetary and fiscal measures have become exceedingly necessary to get the country out of the woods. The current lending rate needs to be reviewed downward. That is the direction to go.
