News Column

Monetary Strategy - Is Emefiele Our Saviour?

June 9, 2014

Henry Boyo

The European Central Bank has lowered its benchmark interest rate to 0.15 per cent from 0.25 per cent in an effort to stimulate economic growth and avoid deflation in the eurozone.

According to the British Broadcasting Corporation, it has also reduced its deposit rate below zero, to -0.1 per cent, which means commercial banks will have to pay to lodge their money with the central bank, rather than receive interest."

The above is an excerpt from a report titled "ECB cuts interest rate to 0.15 per cent" in the Punch edition of June 6, 2014. For the sake of clarity, the benchmark rate is the rate commercial banks pay when they have to borrow from the Central Bank to cover their cash shortfalls from time to time. Thus, when a nation's Central Bank's benchmark rate is high, banks would in turn expectedly charge a higher rate of interest to their own customers.

Conversely, if the Central Bank's benchmark rate to commercial banks is low, evidently, the commercial banks would in turn also bring down cost of borrowing to their own customers. Universally, the buoyancy of economic activity in any country ultimately depends primarily on the cost of funds.

In other words, more industries and a diversified economy and increasing employment opportunities will become available when businesses across the board can easily access and borrow with very low cost of funds. Consequently, very low Central Bank rates below 1% in more successful economies is regarded as a conscious positive strategy to stimulate increased economic activity with rising employment opportunities and the attendant promotion of enhanced social welfare in those countries.

On the other hand, when benchmark rates become as high as our own CBN's monetary policy rate (MPR) of 12 per cent, then of course, the cost of bank loans to businesses will expectedly exceed 20 percent and constrain the chances of commercial and industrial expansion with more jobs. Thus, a high benchmark rate and its collateral of high cost of funds to the real sector is also a clear signal of our CBN's objective to restrain borrowing and bank lending to customers, inspite of the obvious adverse effect of such strategy on the level of employment and social welfare.

From the foregoing, it will surprise many Nigerians to know that inspite of its usual populist posturing, the inability of the CBN to bring its own MPR to about 1% as in best practice and successful economies elsewhere, makes our Apex bank the number one enemy of industrial growth and increasing employment opportunities.

Regrettably, Godwin Emefiele, the new CBN Governor's agenda gives little hope that the Nigerian economy would begin to be energized by best practice benchmark rates as in successful economies elsewhere.

Despite Emefiele's promise to bring down interest rates, he still has to clarify how this would be possible with the eternally surplus cash instigated by CBN's economically poisonous substitution of fresh Naira creations for dollar revenue.

Evidently, the commercial banks make humongous gains annually from the attendant strategy of receiving government deposits at zero cost while lending to the same government at double digit interest rates as a result of CBN's obtuse strategy to reduce its self inflicted burden of excess Naira in the money market.

Conversely, as evident from the above quoted Punch report, the European Central Bank currently pays next to nothing for keeping or withdrawing excess funds from the commercial banks. Nonetheless, it is unlikely that Emefiele whose antecedent is firmly rooted in commercial banking would commit class suicide by abolishing this rich source of bounty for the outstanding profitability of Nigerian banks.

Furthermore, Emefiele seems to have unfortunately also interpreted the CBN prime mandate of price stability to be akin to the stability of the graveyard. Evidently, best practice central banks benchmark rates are currently less than 1% in successful economies, while inflation in such economies elsewhere remain on average about 2%.

Compare this however with our own CBN benchmark rate of 12% and current inflation rate of about 8% which Emefiele promised to keep relatively stable when in fact what is required is rather the stability of interest and inflation rates at best practice low levels of 1% and 2% respectively i.e levels that would rapidly stimulate economic activities as per the European experience.

Similarly, it is curious that Emefiele would endorse the stability of the Naira at a rate of about N160 =$1 with about $38bn current reserves with eight months import cover, when infact the stronger Naira exchange rate of N80 =$1 in 1996 was supported by barely $4bn reserves with just four months imports cover! Thus, even if Emefiele kept the Naira exchange rate stable at between 155-160 =$1, he would still have done the economy much harm.

In apparent realization of the failed impact of subsisting monetary policy, the Governor announced a series of intervention funds which he has lined up for selected sectors of the economy. Incidentally, such interventions are not new and indeed former governors, Soludo and Sanusi often strayed into the fiscal policy arena, with liberal, unguarded, often unsolicited, disbursements of hundreds of billions of naira without appropriation to various sub-sectors including religious organizations and such other bodies, yet the social impact of these interventions still remain largely minimal; nothing suggests that Emefiele's interventions would have a different impact.

Emefiele's decision to pursue this same failed strategy of sectoral interventions must be quickly interrogated and determined so that the CBN governor and his team would concentrate on achieving the Apex bank's core mandate of price and exchange stability at benign levels which support industrial, social and economic growth.

Although the Governor made no mention of the apparent failure of the current structure of the Nigerian currency, he would be well advised to recognize the utility value of having primary kobo coins and some lower denominations of the Naira as hard currency.

Nigerians rejected the use of coins as a result of their almost worthless purchasing power, regrettably, all the billions of Naira spent on producing and promoting the adoption of coins in the last decade have evidently become wasted.

Sooner than later, therefore, the CBN would have to consider the redenomination of the Nigerian currency profile such that the largest denomination would be a hundred naira note, so that primary kobo coins would once again enjoy utility value in everyday transactions across the nation.

Ultimately, with Emefiele as CBN Governor, we might just end up with more of the same.

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Source: AllAfrica

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