It would seem a cynical denial of reality for anyone to suggest that the prevailing oppressively high cost of borrowing is caused by an unexpected burden of too much money in the financial system.
How, one may ask, will the price of any commodity remain high when supply of the same item is constantly in burdensome surplus? Clearly, such an unusual market model would certainly defy the law of gravity and the equally ubiquitous law of demand and supply.
There are several media reports of Nigerians who took their own lives when intense pressure to make ends meet drove them to borrow from unregulated shylock loan hawks who demanded up to 50 per cent, monthly, return on loans and advances!
Thankfully, the institutional banks for deprived and marginalised Nigerians do not charge such strangulating cost for loans. Nonetheless, the average six-10 per cent/monthly interest rates charged by microfinance banks still seem rather inequitable and clearly distortional, especially when, significantly bigger business conglomerates fervently decry the comparatively more modest 20 per cent+ annual interest charged by commercial banks. Regrettably, this obvious oppressive structural deformity is, ironically, celebrated as inclusive economic support to the poor!
Invariably, the beneficiaries of such “poisonous” structural support may remain terminally in financial bondage even while the government’s treasury is, inexplicably, simultaneously confronted with the embarrassing challenge of perennially managing perceived surplus money supply in Nigeria’s financial system.
On Wednesday, September 20, 2017, for example, the Central Bank of Nigeria borrowed N215.9bn of such surplus funds despite the very high 13-17 per cent interest rates offered in a money market in which commercial banks are major beneficiaries.
Regrettably, proceeds of the CBN’s hundreds of billions of naira bi-weekly borrowing sprees are often widely misrepresented on most media platforms as approved loans already legislated for funding the deficit in annual budgets.
This unfortunate media misrepresentation has, arguably, distracted public attention from the actual counter-productive and reckless demolition that Nigeria’s economy has endured for decades, because of the CBN’s poor management of its sole mandate to efficiently control money supply. The truth is that only the Debt Management Office is constitutionally mandated to borrow to fund annual budget deficits; such loans are irrespective of any additional debt incurred by the CBN, to reduce the worrisome spectre of surplus money from the market. Ultimately, the logical question is, what does the CBN then do with the trillions of naira it borrows from the market, with such distortionally high interest rates, that invariably instigate commercial banks to, in turn, also hike lending rates to their customers?
Evidently, commercial banks’ income was bolstered, for example, by about N600bn in interest payments with the CBN borrowings to reduce increasingly surplus money supply in 2016. But the question again is, what economic activity generates these huge, related interest payments? Clearly, the oppressive interest payments notwithstanding, the CBN, indeed, does absolutely nothing with its borrowed, bloated caché of naira. In fact, the apex bank simply sterilises the trillions of naira loans from any commercial or investment application in the economy. Ultimately, however, fresh naira supply will be minted to pay the heavy interest charges on the sterilised funds, not minding the fresh collateral of inadvertently also increasing money supply in the system, to again instigate a new cycle of borrowing to reduce naira surplus!
“Why would the CBN adopt such financially reckless and counterproductive measures? “Why should the CBN pay such high interest to borrow money that it has power to print? The CBN’s counter to these questions is that its seemingly negative measures are, in fact, necessary to ensure, prices of goods and services do not continue to rise, to make life increasingly unbearable for Nigerians. Invariably, if inflation is left unchecked, all incomes will lose much value and a basket full of naira may be required to buy one loaf of bread! But what has inflation got to do with paying up to 17 per cent to borrow money that will NOT be applied to building schools, hospitals, roads, etc? Instead of borrowing, why not let these funds remain in the market?
Well, Nigerians are clearly familiar with the consumer spending spree during festive and year-end holidays. Invariably, the spike in general demand will also instigate higher prices to purchase, conversely, the relatively stable supply of goods and services. Basically, higher prices during these festive seasons are the product of much more money chasing the relatively fewer goods available. Ultimately, inflation will compulsively spiral if the CBN fails to restrain such irrepressible consumer spending by mopping up (read as borrowing) any perceived surplus money supply from the market.
Obviously, with the very lucrative returns of 17 per cent+ on such risk-free government borrowings, it is no wonder that private sector investors will have a hard time to obtain credit at industrially friendly rates, below seven per cent to make their businesses more cost competitive. Meanwhile, official reports presently show that between January and July 2017, the CBN had already accumulated about N3.1tn of such oppressive and useless loans through its auctions of Treasury bills. It is not unlikely that the total debt that will be incurred in 2017, and the related humongous interest payments, will exceed the N6tn+ also borrowed and over N600bn interest paid, primarily to banks, in the 2016 fiscal year to reduce the threat of inflation. Ironically, obviously syndicated reports in both print and electronic media continue to promote the idea that these debts were incurred “to help government fund its budget deficit” and “support commercial banks in managing liquidity” (see, CBN to borrow N917bn via T/bills in Q4” (The PUNCH edition, September 14, 2017 page 25).
However, the CBN’s intention to additionally borrow a relatively modest sum of N140bn on Wednesday, September 20, 2017, was unexpectedly subscribed about three times over with N556bn, and the apex therefore ultimately borrowed N215.9bn with between 13 and 17 per cent interest rates. Expectedly, banks will remain in a celebratory mood for as long as such free “awoof money” flows, even when industries still cry out for a supportive level playing ground, characterised by interest rates which do not exceed, for example, five per cent to industrialists and one per cent for any agricultural enterprise.
Evidently, the robust latest profit postings of several commercial banks certainly do not bear true testimony to their serious commitment to regenerate the Nigerian economy with reasonably priced, single digit interest rates to businesses.
Sadly, the sustenance of lending rates between 20 and 30 per cent for private sector productive enterprises remains a daunting challenge that will invariably impede progress towards a diversified and socially inclusive economy. This reality is abundantly clear, particularly, when the CBN keeps repeating the same strategies that have failed, for decades, to provide the required solutions in our economy.
Regrettably, it seems our collective national intellect and awareness has remained under a spell of distraction, from the source of the poison, in our fumbling strategy for inclusive economic growth. Alternatively, it could also be the more mundane blind faith of the Nigerian elite, that the managers of our fragile economy are on course, despite the continuous application of the same strategies that have sustained irrepressible inflation and interest rates beyond single digits, with unstoppable growth in unemployment and an obtuse exchange rate structure, that hardly responds positively, in favour of the naira, even when fortuitously bountiful CBN reserves could cover over 20 months of imports, when crude oil sold above $140/barrel.
Instructively, the CBN has the sole authority to print and manage naira supply; thus, if the stock of naira always remains in troublesome excess, then, there are only two guilty parties, i.e. the legitimate printer or the counterfeiters! The question however is, why does the CBN liberally print naira and further spur its liquidity surplus with inappropriate mandatory cash ratios for banks, only to later cry wolf and turn round to pay reactionary interest rates, to once again borrow and reduce the perceived excess stock of money that has resurfaced once more in the financial system?
So, who said there’s no money to borrow?
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