The Lagos Chamber of Commerce and Industry (LCCI) has decried the retention of the Monetary Policy Rate (MPR) at 12 per cent, by Central Bank’s Monetary Policy Committee (MPC), as ill advised and insensitive.
The statement by Nigeria’s oldest and most illustrious Chamber of Commerce noted that “the continuation of a tight monetary regime would have the following outcomes – persistence of high interest rate, deepening of the unemployment crisis, financial intermediation role of the banks will continue to be undermined, recovery of the real economy will remain sluggish, capacity of enterprises to create jobs would continue to be inhibited, stock market recovery would continue to be slow and the capacity of banks to support the economy would remain severely constrained.” (Punch 22/11/2012, pg 28).
Incidentally, the MPR is the rate at which banks borrow from the Central Bank to cover their immediate cash shortfalls from time to time; thus, the higher the cost of such borrowing, the higher also will be the rate at which banks advance credit to the real sector. For example, CBN’s lending rate of 12 per cent to commercial banks instigates current borrowing cost of 20 – 28 per cent to the real sector.
Such high cost of borrowing increases production cost and also makes made-in-Nigeria products uncompetitive against imported substitutes, which are generally aggressively supported with conversely lower single digit interest rates in their home economies.
Operators of micro, small and medium scale businesses have also observed that high lending rates of deposit money banks in the country are denying them access to credit facilities, thereby leading to the collapse of many small businesses.
Speaking on the negative impact of this development on micro-businesses, the President, Association of Micro-entrepreneurs of Nigeria, Saviour Iche, noted that the CBN’s benchmark lending rate had been “highly unfavourable and destructive to indigenous businesses as some deposit money banks charge as high as 19 – 25 per cent interest rates on loans given to MSMEs.”
Saviour Iche, who spoke at a media parley recently, further noted that “tough access to credit facilities does not create room for Micro, Small and Medium Enterprises to grow in Nigeria and this is seriously affecting Nigerian industrial development negatively”.
The Manufacturers’ Association of Nigeria (MAN) has also decried the high cost of doing business in Nigeria. At its recent 45th Annual General Meeting, Rev. Isaac Agoye, Chairman of the over 600-member strong Ikeja Branch of MAN, called on government to reduce inflation and interest rates by formulating good monetary policies.
In the light of the above it is pertinent to ask why CBN’s Monetary Policy Committee appears to have turned deaf ears to demands for reduced cost of funds to the real sector, especially when it is clear that the fervent expectations of our people for rapid industrialisation, increasing employment opportunities as well as enhanced social welfare cannot be realised with CBN’s prevailing harsh monetary framework.
On its side, the CBN has explained that “the Monetary Policy Committee was faced with three choices: namely increase in interest rates in response to the uptick in headline and food inflation; a reduction in interest rates in view of declining core inflation and Gross Domestic Growth (GDP), and retaining current monetary policy stance in view of conflicting price signals and global uncertainties.”
The MPC, apparently, “considered and rejected option one, as being potentially pro-cyclical considering the structural nature of recent inflationary pressures. While acknowledging the merit of the arguments in favour of option two; it was also rejected as likely to send wrong signals of a premature termination of an ‘appropriately’ tight monetary stance.”
Therefore, “the Committee resolved to retain the MPR which determines the rate at which banks lend to their customers at 12 per cent”.
On the surface, CBN would seem to have made a logical and safe decision, even if it is apparent that it would inevitably have adverse repercussions on our economy and the welfare of our people. Regrettably, CBN appears unable to formulate a model that would reduce high rates of interest and inflation or strengthen the naira exchange rate, as required to galvanise the real sector. In reality, however, these critical variables are not mutually exclusive, as the apex bank would want us to believe. Indeed, a little investigation will reveal that there is actually a primary causative factor to these variables on which our economy depends for its growth!
The common causative index to these variables is of course that of the ever-present burden of excess liquidity; in other words, if we could cure the systemic disease of too much cash, the variables of interest and inflation rates would fall to levels that support industrial regeneration; exchange rate would also become stronger and induce increasing purchasing power for all income earners. This would in turn stimulate aggregate consumer demand and ultimately positively drive industrial and economic growth and employment.
Instructively, however, the scourge of excess liquidity will remain untamed so long as CBN impulsively expands money supply, whenever it unconstitutionally substitutes naira allocations for export dollar-derived revenue. Thereafter, the CBN inexplicably turns round, to reduce its self-instigated systemic cash surplus, with higher MPR, which increases cost of borrowing to the commercial banks and stifle credit expansion; the CBN’s liberal sales of double-digit-yield treasury bills to mop up liquidity inadvertently also increases our national debt burden. This obtuse monetary payments model is poison in our economy.
Consequently, excess liquidity begets a high MPR, which in turn begets higher cost of funds to the real sector, and inevitably fuels spiralling inflation, as it pitches increasing naira balances against less goods and services. Excess liquidity also pitches bloated naira sums against auctions of relatively limited dollar sums in the market, thus inducing a weaker naira with less purchasing power. A weaker naira will precipitate lower aggregate consumer demand and inflation, and ultimately lead to industrial contraction and increasing rate of unemployment. A weaker naira will also increase fuel prices and the inevitable burden of rising subsidy payments.
Conversely, the plague of excess liquidity will be dispelled by significant reduction of money supply; fortunately, this will become possible if CBN adopts non-negotiable dollar certificates for the payment of monthly allocations of dollar-derived revenue. Lower interest and inflation rates and a stronger naira will become realisable with such a payments model, and industrial and economic welfare will be regenerated rapidly with increasing employment opportunities.
By Henry Boyo
