Should interest rates be legislated?

By Henry Boyo

The promise to diversify Nigeria’s revenue source and reduce the nation’s dependence on dollar income from oil exports was sustained by earlier administrations. Curiously, however, as with previous administrations, there seems to be a convenient denial of the reality that, competitive production output, cannot be sustained in any sector, if critical monetary indices challenge the creation of vibrant economic activities and job creation opportunities.

File: rates

For example, an inflation rate beyond 4% would be unacceptable in successful economies elsewhere, whereas Nigeria’s inflation rate has never fallen below upper single digit rates in recent years.

Nevertheless, if inflation hops above 20% in the current turbulent circumstances, Nigerians, including pensioners will lose at least a quarter of the purchasing power of their incomes annually.

Ultimately, the double whammy of lower consumer demand and the inevitably reduced social inclination to savings, will further threaten industrial capacity utilization and restrain fresh investment decisions, with adverse consequences for job creation. Evidently, such ambience will seriously challenge the quest to successfully diversify any economy.

Unfortunately, with cost of borrowing currently also between 20-30%, it would be unduly optimistic to expect Nigerian products to successfully compete against imports from countries where lower single digit interest rates and supportive infrastructure make export prices more attractive.

Instructively, therefore, it would be foolhardy to sustain the hope that economic diversification will evolve despite the heavy headwinds defined above. Indeed, after its 289th council meeting in April 2016, the Manufacturer’s Association noted at a media briefing that: “we are very concerned about the high interest rate that banks charge manufacturers.

Though government is serious about diversifying the economy, but it cannot do so with the level of interest regime that obtains currently. We are concerned about it and we are hoping government will do something to reduce the interest rate to between three to five percent. That is the sure way to truly diversify the economy.” (See Guardian newspapers, 09/04/2016).

One may wonder why foreign loans, over which we have no control, are usually cheaper than the rates on domestic loans, over which our monetary authorities have absolute control. Former Finance Minister, Ngozi Iweala, was also obviously unhappy at the disenabling pace of domestic interest rates and ironically noted at a Consultative Forum on Budget 2013 with private sector operators in Lagos that:

“We really need to look at our banking sector again. I think the interest rates being charged by banks in this economy are too high. There is no way businesses can survive with this kind of approach and I wonder what is behind these rates” (Vanguard Newspaper 12/07/2012).  

Lately, however, none other than the Kaduna State Governor, Malam El Rufai, has reportedly insisted, at a forum organized in Abuja by a Women’s Advocacy group in early August 2016, that the high interest rate prescribed by the Apex Bank was one of the major reasons for the massive job losses in the country. Consequently, the State Governor noted that:

“Only traders and drug dealers can make money at this interest rate,” and therefore warned that “unless the Central Bank and the banking system make a conscious decision to bring down the interest rate, one day, we will legislate it; we must decide that businesses should be able to borrow at an interest rate that makes sense and politically lower rates to that level.”

Conversely, the CBN Governor, Godwin Emefiele explained that the Monetary Policy Committee’s latest decision to increase its policy rate to 14-16% and induce higher cost of loans was in defense of the Apex bank’s primary mandate to maintain stable prices for goods and services and thereby check the odious plague of spiraling inflation.

Although some critics may condemn CBN’s choice of restraining inflation beyond the present 17% rather than the facilitation of consumer demand and economic activities with much lower cost of funds in line with best practice, nonetheless, such criticism is probably unfounded as meaningful growth will invariably remain a mirage if inflation further spirals out of control and ultimately reduces the value of the present N1000 note below one kobo! Additionally, government fiscal plans will similarly become meaningless and unimplementable in such an inflationary environment and poverty will clearly deepen nationwide.

Unfortunately, however, if CBN stubbornly retains the current monopolistic pricing model in which rations of dollars are auctioned in a market already saturated with excess Naira liquidity, then the Naira exchange rate will certainly further decline and sustain inflation well above 20%; in such event, CBN will again be compelled to further reduce consumer demand with even higher Monetary Policy rates, which will inevitably push the domestic cost of borrowing well above 30% and forestall any hope of economic diversification or growth.

The preceding narrative suggests that we will become increasingly helpless if unrestrained spiraling inflation becomes CBN’s albatross. Indeed, the 2007 Act unequivocally grants the CBN with statutory autonomy to effectively manage money supply and sustain a low and stable general price level, as in successful economies. Unfortunately, there are no statutory sanctions if CBN fails to deliver on this mandate.

Clearly, as earlier indicated, inflation in growth focused economies, hardly exceed 4% because of the obvious need to promote economic and social stability. Regrettably, in recent years, all CBN Governors have failed in their tenure to replicate best practice inflation rates and Nigeria’s economy has invariably been worse for this failure.

Consequently, in view of the increasingly difficult access to reasonably low and competitive cost of funds, Mallam El Rufai’s recommendation that interest rates should be legislated at levels that will support diversification and create more jobs, may have some merit. However, in view of the dynamic nature of interest rates in response to inflation and growth management, it would be impractical to legislate a static or permanent rate of interest. Similarly, it would also be untidy and cumbersome to constantly enact amendments to subsisting interest rates in response to prevailing market impulses.

However, the above challenge can be favorably resolved if the legislated rate is formally aligned with best practice rates elsewhere. For example, it would be expedient to legislate that inflation rate must never rise above 2% of what is accepted as best practice rates in successful economies in Europe and elsewhere. Similarly, CBN’s monetary policy rate which ultimately dictates the cost of borrowing must also never exceed 2% above the internationally respected denominator of the London interbank offer rate (LIBOR).

In consonance with such reform, the CBN and its Monetary Policy Committee must resign, honorably, if they fail to heep the critical indices of inflation and cost of funds below the legislated limits for over 3 months.



Should interest rates be legislated? on Vanguard News.


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