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 has been sustained by all 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 continue to challenge the creation of vibrant economic activities and job creation opportunities.

For example, an inflation rate beyond four per cent will 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 per cent in the current turbulent circumstances, Nigerians, including already beleaguered 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 dampened social inclination to savings will further threaten industrial capacity utilisation and restrain fresh investment decisions, with adverse consequences for job creation. Evidently, such an ambience will seriously challenge the quest to successfully diversify any economy.

Unfortunately, with real sector cost of borrowing currently also between 20 per cent and 30 per cent, it will 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 will be foolhardy to sustain the hope that economic diversification will evolve despite the heavy headwinds defined above. In fact, real sector operators have unceasingly decried the challenges of high cost of funds and the self-provision of public infrastructure to their businesses. Indeed, after its 289th council meeting in April 2016, the National President of the Manufacturers’ Association of Nigeria, Dr Frank Udemba Jacobs, 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, 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 per cent and five per cent. That is the sure way to truly diversify the economy” (The Guardian newspapers April 9, 2016).

Unfortunately, the adoption of selective interest rates for some sectors has also failed to induce the envisaged positive value chain of economic activities, because of the paucity and difficulties associated with access to such “concessionary” loans.

One may however 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 Okonjo-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, July 12, 2012).

Lately, however, none other than the Kaduna State Governor, Mallam Nasir el- Rufai, has also expressed his disdain for the Central Bank of Nigeria’s deliberate promotion of unreasonably high cost of borrowing. El-Rufai reportedly insisted, at a forum organised 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 CBN Governor, Godwin Emefiele, 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 explained that the Monetary Policy Committee’s latest decision to increase its policy rate to 14-16 per cent and deliberately induce higher cost of loans was in defence of the apex bank’s primary mandate to maintain stable prices for goods and services and thereby check the odious plague of spiralling inflation.

Although some critics may condemn the CBN’s choice of restraining inflation beyond the present 17 per cent rather than the facilitation of consumer demand and economic activities with much lower cost of funds in line with best practices, nonetheless, such a 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 difficult to implement in such an inflationary environment and poverty will clearly further deepen nationwide.

Unfortunately, however, if the CBN stubbornly retains its 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 per cent. In such an event, the CBN will again be compelled to further reduce consumer demand with even higher Monetary Policy rates, which will invariably push domestic cost of borrowing well above 30 per cent and forestall any serious hope of economic diversification or growth.

The preceding narrative suggests that we will become increasingly helpless if unrestrained spiralling inflation becomes the CBN’s albatross. Indeed, the 2007 CBN 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 the CBN and its Monetary Policy Committee fail to deliver on this mandate. Clearly, as earlier indicated, inflation in growth-focused economies hardly exceeds four per cent because of the pivotal need to promote economic and social stability. Regrettably, in recent years, however, all the CBN governors, including the incumbent, have failed in their tenure to replicate best practice inflation rates and Nigeria’s economy has unfortunately become worse for their failure.

Consequently, in view of the increasingly difficult access to reasonably low and competitive cost of funds, 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 will be impractical to legislate a static or permanent rate of interest. Similarly, it will also be untidy and cumbersome to constantly enact amendments to subsisting interest rates in response to prevailing market impulses over time.

However, the above challenges can be favourably resolved if the legislated rate is formally aligned with best practice rates elsewhere. For example, it will be expedient to legislate that the domestic rate of inflation must never rise above two per cent of what is accepted as best practice rates in successful economies in Europe and elsewhere.

Similarly, the CBN’s monetary policy rate which ultimately dictates the cost of domestic borrowing must also never exceed two per cent above the internationally respected denominator of the London Interbank Offer Rate otherwise known as LIBOR.

In consonance with such a reform, the CBN and its Monetary Policy Committee must resign, “honourably”, if they fail to keep the critical indices of inflation and cost of funds below the legislated limits for over three months. Unless we adopt such sanctions, the CBN may never address the true causes of the perennial excess naira liquidity that fires inflation and banks will only continue to pay lip service to supporting the real sector so long as the usual bonanza income from government’s Treasury bills and bonds and the stupendous gains from the foreign exchange market exist.


1 Comment

  1. No, No, No, No. You cannot reinvent the wheel. It has proven to be an incredibly stupid practice all over the world to leave decisions on monetary policy with politicians.

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