Les Leba
8 October 2007
column
Lagos — It would require a high propensity of self deceit for anyone to maintain that the Nigerian economy is on the correct path of growth.
The truth is self-evident that those indices that represent real growth continue to nosedive inspite of the insistent propaganda churned out by the operators of our monetary policy. Any economy that is unable to accommodate over 50% (still rising) of school leavers and university graduates in any form of gainful employment cannot be acclaimed as successful. The reality of increasing decline of the real sector, with industries and small and medium enterprises experiencing falling capacity utilization in a climate of irrepressible rising prices still remain our lot.
A large proportion of our population cannot afford one square meal a day with rising food prices and dwindling income values, and live in shanty towns and slums without any ray of hope for positive change in the foreseeable future; mortality rates for all age groups continue to be dismal, inspite of the billions of Dollars and Naira expended by government over the years.
Indeed, the banks have become the most prosperous sector of the economy, but the contradiction of their exponential profitability in the face of a depressive industrial landscape and high unemployment appear to be lost on the operators of our monetary policy, as they bathe in self-adulation of engineering consolidation of the banking industry! Regrettably, the promises of increased lending to the real sector, expansion of our industrial base, as a result of the lower interest rates that increased competition amongst the banks would bring about have remained unfulfilled.
The good news is that the current failure of the Nigerian economy is not inevitable; a country's economy can remain in the doldrums, even if human, mineral and agricultural resources are abundant, if universally appropriate monetary principles and practices are not adopted. Any nation that fails to recognize the catalytic power of interest and exchange rate levels on all sectors of its economy will remain a poor country, even if that country is sitting on gold, (solid or liquid as in crude oil)!
There can be no better substantiation of this reality than the recent reduction of the United State 's Federal Reserve Bank rate from 5.25 - 4.75%. The impact of just 0.5% cut in rates is expected to halt the decline in the US Housing market, and also make it marginally cheaper for consumers and industrialists alike to borrow money from the banks. The logic is that a fall in the cost of borrowing will make it easier for consumers to spend more money; such consumer spending will stimulate demand and encourage entrepreneurial investment either in the form of new business, or the consolidation and/or expansion of new businesses. A recognition of this relationship between interest rates and the economy underscores the relatively low control rates adopted by progressive economies like Japan 0%, Norway 4.5%, Germany 2.5%, etc.
In practice, the commercial lending and deposit rates (i.e. borrowings and savings by consumers and businesses) would be expected to be a maximum of 2-3 percentage points respectively over and below the control rate of a country's Central Bank.
The biggest and strongest economies in the world recognize and play by these such rules, while we have failed to emulate best monetary and economic practices. A careful observation of the antics of our own Central Bank gives an unsettling impression that its prime objective is the promotion and generation of fat profits for the owners of our commercial banks.
In fact, it would be interesting, but not entirely surprising, if an audit of the major shareholders in the banking system reveal the heavy involvement of those same public servants, who are responsible for the formulation and implementation of our monetary policies as prime beneficiaries of the inexplicable success of our commercial banks at the same time that the banks' benefactors, i.e. the real sector, is in crisis! Needless to say that, in focused economies, such involvement would fall under the criminal act described as insider trading and attract severe sanctions, including the possibility of extended jail terms!
Indeed, the filthy lucre from insider trading is the only plausible explanation in the thrust of the management of our monetary policy in the last two decades, but probably more acutely so in the last four years. Our policy makers continue to see nothing wrong in the disparity in the fortunes of the commercial banks and the real sector. While the US Reserve Bank recognizes the need to bring down interest rates to stimulate their economy, our own CBN has just recently increased its own monetary policy rate (MPR) from 8% to 9%, inspite of the recognition that high rates of interest discourage consumer and investment spending and may lead to a depressed economy with the hydra headed problem of rising unemployment!
In fact, the structure of our domestic savings/lending rate is even more bewildering. In place of a 2-3% spread around the CBN's control rate as in the US and elsewhere, our own commercial lending rates still hover around 20 - 25% (including all manner of questionable charges) while the deposit/saving rate is a lowly 4 - 5%! It would be difficult to applaud or defend such an abnormal spread in any serious economy!
If the policy makers in much more successful countries recognize the difficulty in promoting and sustaining economic growth with lending rates above single digit, then, what do we conclude on the attitude of our own CBN, which obviously condones a debilitating and inexplicable wide spread in our interest rate structure, and also appears helpless to redress the anomaly towards progressive, supportive level or bands?
But our CBN has a ready excuse: They claim that the Nigerian economy is perennially awash with idle cash and low interest rates would increase commercial bank's lending to both consumers and investors alike, and so much spending (i.e. too much money chasing few goods) will cause rising prices (inflation) and a consequent loss in the value of our incomes! So, in contrast to the US, which seeks to promote spending and investment by lowering lending rates, our own CBN seeks to make lending costly so that people will borrow less for either consumption or investment, thereby promoting stagnation in the economy.
Indeed, in order to reduce the money available for lending, the CBN goes a step further to borrow some of the funds to reduce the credit capacity of the banks by selling treasury bills and bonds in the capital market. The money so withdrawn, currently almost N2 trillion, is not put into a productive venture, but is often just warehoused, as idle funds in CBN vaults. Nigerians will pay almost N300bn interest on such borrowed funds in 2007 alone. Need you wonder where the banks make such huge profits while they shun the more risky loans to the real sector?
The pertinent questions at this juncture will be, who floods the market with the 'cash tsunami' that induces CBN's high MPR and its negative economic impact, and is the CBN truly helpless in enforcing the narrow band of 2-3% points around its own MPR or could this be the result of the stronger motivation of self interest? We shall examine these questions next week.
SAVE THE NAIRA, SAVE NIGERIANS!
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