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Low interest rates not feasible now – CBN

By BABAJIDE KOMOLAFE

Governor, Central Bank of Nigeria, CBN, Mallam Lamido Sanusi, yesterday, said a regime of low interest rate is not feasible at the moment in Nigeria.

Speaking at the Risk Management Conference organised by the apex bank in Lagos, Sanusi said the threat of inflation was still high in the economy, especially with government spending expected to increase in 2014 to 2015 due to elections.

He said “there is more risk of raising interest rate and cash reserve requirement of banks than reducing them”.

In assessing the risk confronting the economy in the near term, especially in the event of sharp fall in crude oil prices, and in terms of inflation, Sanusi said “Everywhere in the world, if you have an election, that is when government spends more because at that time, you will have political office holders wanting to deliver dividends of democracy, they will want to show reasons why they should be re-elected.

“So Central Bank governors all over the world know that election cycles are very difficult for monetary policy. So the point I am making is that if there is increased spending, what is likely going to happen will be higher interest rate. So people should not look forward to low interest rate at a time of increased government spending.

“Despite the best intentions of the Finance Minister, I don’t see her stopping politicians from spending money in 2014. She has all the good intentions and all the commitments, but at the end of the day, she doesn’t approve the budget.

“So there is no way in an election year, when you are not going to have increased spending. There is higher risk of raising interest rates and increasing the Cash Reserve Requirement than reducing it at this point in time. The Central Bank will have to respond in events of elevated spending.”

According to him despite concerns in some quarters, the Asset Management Company, AMCON, does not pose a major risk to inflation and macroeconomic stability.

He said, “today, AMCON is holding about N800 billion in treasury bills. So, we are not creating any new money. At the point it pays off over N800 billion bonds, it will simply hand over these treasury bills to the banks, take these bonds and cancel them all.

“All that is happening is that the balance sheet of AMCON is shrinking and that reduces its liabilities and assets holdings. We are not pumping cash into the system; we are not creating new securities and we are not going to have more liquidity.”

. What may happen, which is not likely, is the possibility of tightened liquidity. But because liquidity ratio is about 70 per cent and most of those AMCON bonds are not being used for repos, even though that can be used.

“So in terms of money supply, we don’t think there is going to be any major impact in terms of liquidity in the system. There might be an impact in the total money supply because of the reduction in credit to the private sector, but we are looking at all the implications and when it is time to pay, the central bank will decide how much of it should be in form of securities, should we issue some special securities to mop up the money and if we are going to sterilise the money for a year or six months.

This will all fit into our monetary policy stance. “It is clear, AMCON winds down as it pays its debts. Clearly from where we are, we have a maximum of 10 years from 2014. We think it will be able to pay down before then. But on the conservative side, we have about 10 years.”


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