News Column

Interest Rate Cut - Policy Reversal Long Overdue

June 29, 2014

The recent decision by the new CBN governor, Godwin Emefiele to embark on a phased reduction of interest rate is seen as a reversal of the status quo which was stoutly defended by his predecessor. The planned new regime if faithfully implemented, holds the key to unlock the growth potentials in the industries and economy at large, Business Editor, ANDY NSSIEN, reports.

For so long, manufacturers, micro, small and medium scale enterprises and other businesses have been groaning over the prevalent high interest rates in the country which they said was responsible for the crippling effect on their undertakings in the various industries.

Immediate past governor of Central Bank of Nigeria (CBN), Lamido Sanusi, who received brick bats over the issue defended the apex bank's stance, maintaining that apart from the Chief Executive of banks preferring high interest rate, the scourge was traceable to corruption.

However, in his maiden press conference on assumption of office, his successor, Godwin Emefiele, decided to reverse the policy and promised a gradual reduction in interest rates.

"There is no doubt that reducing interest rates and maintaining exchange rates are very daunting twin goals," he said, adding however that the central bank will work assiduously to ensure that these goals were mutually achieved.

Emefiele noted that high interest rates created a perverse incentive for commercial banks to simply buy virtually risk-free government bonds rather than lend to the real sector.

He said, in order to enhance financial access and reduce borrower cost of credit, the CBN "would pursue policies targeted at making Nigeria's Treasury Bill (T-Bill) rates more comparable with other emerging markets and by extension, pursue a reduction in both deposit and lending rates."

According to him, a reduction in deposit rates would encourage investment attitudes in savers, while a reduction in lending rates would make credit cheaper for potential investors."

Emefiele's plan to slash the cost of funds enjoyed the support of his former colleagues who spoke with one voice with the proviso that the reduction would not be in one fell swoop.

The Bankers Committee, made up of chief executives of banks, said the reduction of interest rates should take a gradual process, adding that the current interest rate regime was still suitable given the prevailing fundamentals of the economy.

The Committee identified some impediments to any immediate decision to lower the interest rates to include rate of inflation, type of exchange rates desired, the cost of funds of the banks, cost of providing infrastructure and cost of providing personnel.

Even so, Emefiele's posture on interest rate is at variance with that of his predecessor who defended the status quo.

Last year, the CBN said the Chief Executive Officers of banks in the country had indicated their preference for high interest rate rather than the devaluation of the naira.

The former CBN Governor, Lamido Sanusi, who made the disclosure at the 13th Annual General Meeting (AGM)/National Conference of Risk Managers Association of Nigeria (RMAN), held in Lagos , said: When we asked the CEOs of banks at the Bankers Committee Meeting ,which of these two instruments - higher interest rate and currency devaluation - that they would like to be initiated by the CBN, most of the CEOs said high interest rate.

In defence of high interest rates, Sanusi told the risk managers that there was no empirical evidence so far in the Nigerian context, that lowering interests would boost the kind of lending that is hoped for, especially for real sector growth.

According to him, "The CBN has continued to maintain a tight monetary stance, adding that in November, it kept the benchmark lending rate for the seventh consecutive time on hold at 12 per cent, with a corridor of +/- 200 basis points around the midpoint; retaining the Cash Reserve Ratio (CRR) at 12.0 per cent and the Liquidity Ratio at 30 per cent.

The erstwhile CBN governor said, "The tightening measures were adopted to defend the naira, create price stability and build reserves. The hazards of lowering the rate at this time are much weightier than the gains thereof." This aside, the former governor had also traced the high lending rate regime in the banking sector to corruption.

Sanusi explained that the huge revenue leakage in the system had prevented the reserves from rising to the point where they ought to be, adding that the development had put pressure on the naira.

He said, the persistent pressure on the naira occasioned by foreign exchange gamble, had led to inflation, adding that during a period of high inflation rate, the monetary authorities would need to fight back by raising interest rate.

Sanusi who spoke at the financial regulators' debate forum at the 18th edition of the Nigerian Economic Summit in Abuja said those calling for a reduction in the lending rate did not understand that such a move might not guarantee more funds to lenders.

According to him, "the primary responsibility of the central bank is to provide stability that is conducive to growth, and in taking decisions, we need to work on the basis of evidence.

"I have heard people say the reason farmers are not borrowing is because of the current tight monetary policy and I have asked, when interest rate was at seven per cent few years ago, how much money went to farmers, Small and Medium Scale Enterprises?

"There is no empirical evidence that the real economy will get money simply because you have lowered rate of interest."

Sanusi pointed out that the structural imbalance in the economy needed to be addressed to enable businesses to have access to credit.

"An average manufacturer hasn't got power, infrastructure, the right skills in workers, and no access to markets", he said.

The CBN's stance on interest rate did not assuage the groaning of manufacturers and other stakeholders in the country.

President of the Manufacturers Association of Nigeria (MAN), Chief Kola Jamodu, said the Central Bank of Nigeria's tight monetary policy was not healthy and manufacturing friendly.

According to him, the development will continue to create difficulties for operators to access funds for their operations, as well as for expansion.

President of the Lagos Chambers of Commerce and Industry, Goodie Ibru, joined in the groundswell of opinion against the high interest rate. He said many small and medium scale stood the risk of extinction following their difficulties to have access to credit due to high interest rates.

The worrying attitude of banks in lending money to the economy also got the attention of the country's number one policy maker, President Goodluck Jonathan, who was irked by the lukewarm posture of banks towards granting credit to the real sector.

Obviously perturbed by this development, President Jonathan said: "In order for this economy to develop and grow, we must find a way for companies to have access to long-term finance.

"We are not talking about one to two-year money, if you get even three-year money you will be so happy, sometimes the interest rates are outrageous. We need 10 to 15 years money but we don't have it at affordable rates. We have to solve that.

"Our commercial banking system has not been able to lend to the real sector at the rate, at the extent and at the scope at which they are needed", President Jonathan told the opening session of the 7th annual Banking and Finance Conference of the Chartered Institute of Bankers (CIBN), held in Abuja.

He continued: "You cannot borrow on short-term money when you are making long-term investments. You cannot do business when the interest rates are so high.

"If inflation in this country is 8.4 percent, if the monetary policy rate is 12 per cent, why is the interest rate 20 percent to an entrepreneur who wants to borrow? It means the real rate of interest in this economy is up to 11 percent. In most economies, no rate of interest must exceed 2-3 per cent, even five per cent", he explained.

The President was not dawn yet as he further berated the bankers: "Look at our inflation rate, the inflation rate is eight per cent or even call it nine and the nominal interest rate is at 20 per cent, that means the real interest rate is almost 11 per cent, not doable.

"That's what's wrong with this economy. That's why SMEs cannot develop. Even when they complain that the monetary policy rate is 12 per cent and people just called me that they got loans for two years at 20 per cent per annum, why is that?" he queried.

However, there appears to be light at the end of the tunnel as the Federal Government has unveiled plans to establish a special finance institution that will attract funds into the economy at lower interest rates.

The cheery news was broken by the Minister of Finance and the Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, during her visit to KAM Industries Nigeria Limited's multi-billion naira cold steel rolling mill.

The minister said the bank which could be established in the next 15 to 18 months, would lend funds to the Bank of Industry, Bank of Agriculture and commercial banks to ensure that interest rates were reduced to a sustainable level for indigenous industries to grow.

She said the Federal Government was concerned about the high interest rates being charged by banks and was working to provide an enabling environment that would assist the banks to reduce the rates, especially for indigenous manufacturers and industrialists.

According to her, "We are not saying that the banks should not make profits. They are there for profit making. It must be a commercially viable enterprise but why must they charge 20 per cent? Our inflation has gone from 12 per cent in January this year to 8.7 per cent now, meaning that interest rates, can also go down."

An economist and public affairs commentator, Sylvester Akele, while commending the initiatives of the new governor said the plan to reduce interest rates should help the productive sector if the lending rates will be less prohibitive than they presently are.

However, beyond that he said the productive sector was hampered by unfriendly business environment characterised by epileptic power supply. While appreciating the commitment of the new governor to job creation, Akele noted that there was not much he could do about it on the short run.

On the long run, consistent monetary policies that facilitate the growth of the productive sector could enable that segment to generate more employment, he said.

Chairman of the Progressive Shareholders Association of Nigeria, Boniface Okezie, said the governor's decision to pursue a reduction in interest rates was encouraging because according to him, this would help to create jobs and reduce crime rate and insurgencies in the country.

He said when the unemployed have jobs, apart from taking care of their needs, they would be able to save which he said was an important factor in investment decision.

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Source: AllAfrica

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