By Henry Boyo
‘IT is inconceivable that businesses anywhere can survive on a 25 to 30% interest rate regime. How can investors anywhere survive on these rates? How can they create jobs and make returns? But this is the situation our businesses currently live with.”
“The Senate fully appreciates the economic complexities that determine interest rate regimes. It fully recognizes that high inflation times, call for interest rate hikes and such other arguments. But unless businesses are able to survive, inflation and all other market conditions alone will not make the difference.”
The above is an excerpt from the comments of Senate President, Dr. Bukola Saraki, at a Roundtable interaction in Abuja, last Tuesday 13th June 2017 between the Senate, Central bank and private sector stakeholders.
The Senate President is quite clearly categorical, in his assertion, that unless businesses can borrow with lower interest rates, all our efforts at economic growth, job creation and diversification will come to naught and poverty will deepen nationwide.
Nonetheless, the obviously brazen denial of this simple TRUTH by the government and its economic advisers and acclaimed experts, has invariably caused so much pain and poverty in the land, even when we earned bountiful income from crude oil export.
Indeed, former finance Minister, Dr. Okonjo Iweala and indeed, Kemi Adeosun, the incumbent, have at various times anxiously expressed their concerns publicly, on the debilitating impact of sustaining a reckless regime of high interest rates in Nigeria’s economy; regrettably however, their ‘calls’ for industrially supportive lower interest rates, hardly went past the usual, casual condemnation of CBN in the public space, for ‘willfully’ adopting higher regulatory monetary rates, such as the present 14% for commercial banks’ borrowings from the Apex bank; expectedly, CBN’s higher regulatory policy rates will, in turn, compel banks to lend at higher rates (presently over 20%) to their customers and thereby further push up production cost and the general price level.
However, it is reassuring that the Senate President, “fully recognises that high inflation times, call for interest rate hikes.” Saraki and the Senate obviously appreciate the facts about the correlation between inflation and interest rates, but the Senators obviously, don’t want to be confused by the facts, nor indeed, would they want to be denied a better economic environment that would spur business growth and revenue and also reduce the horrendous unemployment rate and the unyielding acute poverty nationwide.
Historically, cost of borrowing in Nigeria’s money market, has hardly dipped into single digit rates for decades, during which time, increasingly more Nigerians, have fallen below the poverty line, in spite of a significant export revenue inflow. Instructively, however there is no successful economy anywhere, where businesses and manufacturers still borrow for as high as 20%. Indeed, amongst ‘first world’ countries, to which Nigeria also aspires, monetary regulatory rates hardly exceed 3%, so that domestic banks can lend to customers particularly industries, at between 4-7%, to bring down production costs and prices of goods/services.
Furthermore, so long as investors continue to endure the comparative Disadvantage of poor access to, and the burden of high cost of funds, Nigerian products will, invariably, remain uncompetitive. Surely, if our economic managers were wise to this stumbling block to inclusive economic growth, they certainly didn’t feel very strongly about it, especially when the media & some experts, ironically herald the travesty of CBN’s, reckless, payment of up to 18% interest to borrow surplus money from the custody of money deposit banks, as astute financial management.
Hopefully, with the Senate President’s clarion demand for low interest rates, public consciousness will become more focused on why CBN does not seem to show much enthusiasm in supporting vibrant economic growth with a lower interest rate regime. Technically Higher inflation rates, are invariably triggered and sustained by increasing supply of money; expectedly, if increasingly more money becomes available for spending, as for example, at a time of general national wage increase, consumer demand will expand, while production lags behind demand while prices will rise rapidly.
It is indeed best practice monetary management in modern economies to reduce consumer demand and the capacity to spend, so as to restrain the oppressive social and economic consequences of further price increases. To this end, each country’s monetary authority will deliberately increase cost of borrowing in order to reduce consumer demand and spending, by raising the regulatory rate at which the Apex bank lends to commercial banks to fund their temporary cash shortfalls. Consequently, CBN’s management of inflation by deliberately instigating higher cost of borrowing, with high monetary policy rates, as a strategy, cannot be faulted as also ‘grudgingly’ acknowledged by the Senate President.
Advisedly, however, with the recognition that high rates of interest mechanically predicate higher inflation rates, it would have been more rewarding if the Senate President had also bothered to interrogate the origin or source of the unceasingly surplus money supply that persistently drives higher rates of inflation, to make lower cost of borrowing and vibrant economic growth a very daunting challenge.
Indeed, with CBN’s obvious counterproductive strategy of paying up to 18% interest to constantly remove surplus funds from the money market, in order to reduce spending and manage inflation, the CBN cannot deny that surplus Naira supply remains a serious destabilizing and persistent burden; but no one seems to care how the surplus Naira becomes so large and burdensome, to eventually attract such a heavy penalty, in excess of N600bn interest paid by CBN to banks primarily to encourage them to part with the excess Naira in their custody in 2016.
Nonetheless the monetary framework of substitution of Naira allocations for dollar denominated revenue remains the most potent source of creating the unceasing Naira surplus in the market. In this model, the good fortune of increasing export dollar revenue will unfortunately invariably instigate a greater burden of excess Naira liquidity which could propel consumer demand and spending and increase the threat of inflation and the collateral necessity to reduce the liquidity surfeit with higher monetary policy rates, which will in turn spur higher cost of borrowing and regrettably restrain output and the competitiveness of goods and services produced in Nigeria.
This writer has constantly advocated for the monthly payment of dollar denominated revenue with dollar certificates, rather than the destructive process of creating fresh Naira substitutes as allocations to the three tiers of government. This arrangement will minimize the threat of excess Naira liquidity and inflation, so that CBN’s monetary policy rate can move towards best practice rates below 3%, so that cost of funds will fall to single digit rates and support economic growth and increasing job creation.