By Babajide Komolafe
The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture and the Manufacturing Association of Nigeria would want the newly appointed governor of the apex bank to address the problem of high exchange rate, high inflation and astronomically high interest rate in order to save the real sector from total collapse, Babajide Komolafe writes.

Once again, even as the new CBN     Governor settles down in his    new responsibility, the operators in the real sector of the economy as represented by the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) and the Manufacturing Association of Nigeria (MAN) have rolled out their traditional demands from the apex bank.

Commenting on the appointment of the new governor and what the real sector expects from him, NACCIMA President, Dr Simon Okolo, said, “The Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture NACCIMA and entire members of the Organised Private Sector (OPS) warmly congratulate the new CBN Governor Mr. Samusi Lanudo Sanusi on his new appointment and wish him well.

“However, mindful of the woeful state of Nigeria’s industrial and commercial sector, NACCIMA ardently hopes the new CBN governor will no longer delay but rise to tackle frontally the triple problems that have led Nigeria’s economy into utter darkness – namely high exchange rate, high inflation and astronomically high interest rate – these have further crippled Nigeria’s industrial sector.

“He must seriously work to maintain a balance between these three problems to save Nigerians from poverty.  A serious reversal in the way the apex bank handles Nigeria’s dollar revenues from exports must be entertained as part of the solutions being sought to address these problems that have now crippled the economy and widened the gyre between the rich and the poor in the country.

“We want the new CBN governor to be dutiful focused and alive to his responsibilities, to marshal facts, projections and the binding force of the relevant laws to convince and point government on what it must do to get the nation out of the current unsatisfactory economic situation even as he must not loose sight of the woeful infrastructural decay in the country that have crippled the industrial sector and come up with programmes that will help government address the impasse”.

Similarly speaking, Director-General of MAN, Mr. Jide Mike called on the CBN governor to give more support to manufacturers, especially in the following areas: allocation of enough forex (Foreign Exchange) to manufacturing industries so that they can bring in their raw materials that are not available locally

MAN, he said urged the new leadership of the bank to allocate enough foreign exchange to manufacturers to continue in business. “If we are starved of foreign exchange, it compounds our problems bearing in mind that we are saddled with inadequate power supply, unfavourable tax policy and other constraints that makes costs of production so high.”

He further pointed out that another area of intervention that is paramount to manufacturers is window of support to enable them have access to funds for re-tooling their machinery and expansion. Specifically, he said they would want Sanusi to re-visit the Small and Medium Industries Equity Investment Scheme (SMIEIS), funds and initiate a policy that will enable manufacturers to have access to the dormant funds. They would also want the CBN boss to further slash interest rates being charged by commercial banks on loans, saying it’s still so high.

The summary of these requests is that the real sector wants low interest rate, low inflation and low foreign exchange and access to cheap funds. This is despite the many explanation of the CBN that the trinity of low interest rate, low inflation and low foreign exchange cannot be achieved and that one of them must be sacrificed to achieve the other two.

The interest rate challenge
In fact last year following the severe   criticism that trailed the increase in the   Monetary Policy Rate to 9.75 per cent, the former CBN Governor, Professor Chukwuma Soludo, held a meeting with members of the organised private sector at MAN House in Lagos, where he painstakingly explained why low interest rate have to be sacrificed for the objective of low inflation and stable exchange rate.

He even went further to prove that interest rates are not high in Nigeria as being perceived by many people especially when compared to that of some other African countries. Real sector operators however insisted that impact of the   high interest rate on their operations was too severe and hence low interest rate should not be sacrificed for low inflation or exchange rate. They had always insisted that besides the infrastructural decay in the country high interest rate is the next major challenge to their operations.

That is why the issue of interest rate had always pitched members of the real sector with previous CBN governor, and the comments of the NACCIMA and MAN helmsmen indicate it won’t be different for the new governor. The most noted and perhaps effective measure to tackle the problem of high interest rate occurred during the era of Chief Joseph Sanusi as CBN governor.

Then interest rate hovered between 30 to 35 per cent and when it became apparent that the banks would not bulge on the issue, members of the organised private sector appealed to Chief Olosegun Obasanjo, the immediate past Nigerian President, to intervene and call the banks to order.

Consequently, Obasanjo visited the Bankers Committee Meeting in 2001, where he called for a reduction in interest rate. This led to what was known as the tripartite agreement on interest rate which pegged banks’ lending rate to 400 basis points above the prevailing Minimum Rediscount Rate (later replaced with the Monetary Policy), which was then the anchor for  other interest rate in the country.

The agreement succeeded in bringing down interest rate to about 26 per cent and further down to 17 per cent with subsequent reduction in the MRR. The agreement was however jettisoned upon the assumption of office by Professor Soludo as the CBN governor. In fact under Soludo, the CBN gave banks the liberty to determine their lending rates. At the meeting with members of the organised private sector Soludo explained the inexpediency of bringing down interest rate by fiat or through pegging. But when interest rate began to rise due to competition for funds among banks prompted by the common year-end policy, the CBN under Soludo moved and pegged lending rate at 22 per cent maximum and deposit rate at 15 per cent maximum.

But according to manufacturers, lending rates at 22 per cent is still high and what they want is single digit interest rate. Though high interest rate affects the whole economy, it is the real sector that vigorously canvasses against it, constantly engaging the monetary authorities for a reduction in the level of interest rate. How the Sanusi led CBN will respond to the clamour for low interest rate by the real sector even in the face of rising double digit inflation would determine how his tenure is scored by members of the organised private sector.

The Exchange Rate Challenge
The Nigerian economy is highly   import dependent and this fact is    reflected most in the real sector where most of the raw materials are imported in addition to the machines used for production. Consequently, depreciation of the naira i.e. increase in the exchange rate as well as exchange rate volatility impacts severely on the sector translating to increased cost of production and increase in prices which reduces the competitiveness of their products with imported finished goods. Hence members of the real sector have bitterly criticised the Structural Adjustment Programme (SAP), which culminated to the adoption of a flexible exchange rate regime and the subsequent persistent depreciation of the naira between 1986 and now.

The depreciation of the naira according to real sector operators has occasioned the closure of many companies and mass retrenchment. That is why the exchange rate is another factor that would determine the relationship between the new CBN governor and the real sector.

The real sector wants first and foremost a stable exchange rate and secondly low exchange rate. Under former governor, Chief Joseph Sanusi, not only was the exchange rate constantly on the increase, it was for most time volatile as the CBN changes from one system to the order. Perhaps, but for the impact of the global economic crisis, which led to the sharp depreciation of the Naira from N118 per dollar in November last year  to over N150 per dollar in January,  before dropping to below N150 per dollar, the real sector  had a better deal under Soludo.

Courtesy of the roboust external reserve position, the naira appreciated significantly and was stable for about three years out of the five year tenure of Soludo. Also during his tenure, the CBN was able to tame the notorious parallel (black) market, eliminating the parallel market premium. But all this was eroded in the last six months of his tenure due to declining external reserve occasioned by fall in crude oil prices. With the external reserves yet to climb back to its pre-global crisis level of $64 billion, will Sanusi be able to meet the demands of the real sector for a stable and low exchange rate? Also how would he handle the quest of the sector for increased foreign exchange allocation?

Beyond these, the real sector, as indicated by MAN director general would want Sanusi to revisit the Small and Medium Industries Equity Investment Scheme (SMIEIS), created by the Joseph Sanusi led CBN to facilitate funds for small and medium enterprises (SMEs). In fact, according to real sector operators the scheme was the most notable policy measure put in place to address the lack of access to finance by SMEs who are regarded as the engine of growth of the economy.

Under the scheme each bank is to set aside ten per cent of pre-tax profit for equity investment in SMEs.  However, after series of adjustment to the guidelines, in response to pressure from the banks, the Soludo led CBN set aside the scheme replacing it with a micro-credit guaranty fund, which has been criticised as a political gimmick. Without any doubt the banks do not want to continue with SMIEIS. But real sector operators insist that it should be revived. How would the new CBN governor tackle this logjam? Would he go along with the banks, his former colleagues or with the real sector?  Definitely, this challenge he cannot but address during his tenure.