allAfrica.com: Nigeria: Lower Interest Rates? What 'Man' Must Do (Page 1 of 2)

The prevailing level of interest rate will generally dictate the pace of industrial and commercial activity in a country; high interest rates make borrowing burdensome and existing and potential entrepreneurs will defer ventures particularly when, as in this country, lending costs hover around 20%, (excluding other charges) and projected profits may be wiped out by the additional cost of self provision of relevant infrastructure.

Inhibited borrowing in the private sector will translate to fewer industrial expansions or indeed start ups with adverse impact on government revenue, employment opportunities and the related security and welfare implications of an increasing population. For these reasons and the need for export competitiveness, lending rates in most industrially advanced countries are usually below 10%! Indeed, there is no successful economy anywhere in the world today where commercial lending rate is close to our level of over 20%! Traditionally, every Nation's Central Bank defines the prevailing interest structure with the rate at which it lends money to commercial banks. In Nigeria, this rate is currently called the Monetary Policy Rate (MPR).

In focused and successful economies, the respective Central Bank modulates monetary policies to ensure that the ultimate interest paid for industrial and commercial loans and deposits falls within a band which is usually not more than 5% on either side of the prevailing Control Rate. In spite of such Central Bank induced modulations, the interest rate structure is still generally regarded as liberalized or market determined. In our own peculiar circumstances in Nigeria, the erstwhile maximum 3% band around our CBN's MPR has been lately officially jettisoned so that our banks can charge whatever interest rate they desire thus, our current CBN Control Rate does not control anything!

It is disturbing that in spite of the critical need for industrially supportive interest rate structure that would impact positively on MAN (Manufacturers Association of Nigeria) and the economy, our own CBN has deflated its prime control instrument in the name of free market economics. CBN's laissez faire interest rate structure is probably ill-conceived and anti-people, and the banking sector is the sole beneficiary of this and other inexplicable policy positioning of our Apex Bank, especially, the unyielding self inflicted plague of too much money, otherwise called excess liquidity in our monetary system.

President Yar'Adua in his 2008 budget indicated that the cost of removing such excess cash from the system was about N400bn in 2007, and most banks became much richer by these payments. The CBN Governor claimed in a recent interactive session with MAN that the actual cost of these loans in 2007 was only N92bn! Even if the cost was only N1, one may ask what benefit we derive from borrowing money at any cost from the same group that the CBN has also gleefully featherbedded with a soft loan or deposits of $8bn; (over N1000bn); worse still why should we pay 10% or more to borrow money that, the CBN itself admits, is simply sterilized or kept idle in vaults to prevent inflation! This strategy against inflation has also instigated a current MPR of 10.25% and reduced private sector ability to borrow; the mind boggles at the potential of increased damage to industry and enterprise in 2008 when unexpectedly higher crude oil dollar revenue would further blow up the consolidated naira allocations paid into the bank accounts of the three tiers of government!

The CBN appears impervious to the increasing cost of incessantly mopping up such cash deluge, even when our domestic debt doubled to over N2 trillion since 2004 with a retrogressive impact on our people! One wonders why less costly and salutary strategies such as increases in CBN's mandatory cash reserve positions of the banks to well above 10% were not aggressively adopted to tame the plague of cash excess. This alternative to borrowing with treasury bills and bonds would have cost Nigerians nothing but saved the country billions of naira. But if this approach is adopted, how will the banks declare their tens of billions of profits this year?

The CBN Governor has insistently declared that inflation, high commercial lending rates and indeed unbridled public debt expansion and its collateral costs are the result of increasing public sector spending! Thus, in order for industrialists and the private sector players to access low, industrially supportive and people benevolent interest rates, the three tiers of government must be made to curtail their spending even though this would mean no water, no roads, poor educational and health facilities and no electricity, etc!

Of course, this approach is not realistic or feasible in view of the pervading deprivations of our people. If the truth must be told, the problem of excess cash in the system is not due to public sector spending; the problem of excess cash manifests immediately the monthly constitutional allocations hit the bank accounts of the beneficiaries; i.e. the three tiers of government!

Even if the beneficiaries are restrained from spending from the account, the challenge of excess cash will still be present with the immediate increase and buoyant cash position of the banks on receipt of the allocations.

This cash inflow provides a veritable platform for multiple credit expansion by the banks! It is this unfettered credit expansion that the CBN resorts to curb by increasing its control rate to make borrowing less attractive to the private sector.

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