16 November 2017

Nigeria: Economist Urges Govt to Reduce Interest Rates to 12 Percent

Photo: The Guardian

An Economist, Dr Bongo Adi, has advised the Federal Government to reduce interest rates from 14 per cent to 12 per cent, to stimulate growth in the real sector.

Adi, a Senior Lecturer at the Lagos Business School (LBS), made the plea in an interview with the News Agency of Nigeria (NAN) in Lagos on Thursday.

He said that government was no longer under pressure to retain the Monetary Policy Rate (MPR) at 14 per cent, due to the declining inflation rate.

The Monetary Policy Rate (MPR) is the benchmark rate at which banks can lend to companies and their customers.

NAN reports that data released by the National Bureau of Statistics (NBS) on Nov.15 showed that the October inflation rate stood at 15.91 per cent, the ninth consecutive decline in inflation rate since the beginning of the year.

Inflation targeting had been a major economic policy objective of the Central Bank of Nigeria (CBN) and this has been the focus of its Monetary Policy Committee (MPC).

The apex bank had since July 26, 2016 maintained the MPR at 14 per cent, the Cash Reserve Ratio at 22.5 per cent and the Liquidity Ratio at 30 per cent, in its bid to control inflation.

Adi said that inflation declined because of government's sustained and efficient battle against any surge in the foreign exchange rate, like what was witnessed in the country in the last one or two years.

"Government has been under pressure from the real sector to cut the interest rate because inflation has been on the decline.

"The inflation that we had was cost-push inflation and it arose as a result of the depreciation of the naira and with the sanitation of the foreign exchange market, we have seen inflation dropping.

"I expect government to cut the rate as a palliative measure to boost activities in the manufacturing sector.

"Even though other sectors have bounced out of recession, the manufacturing sector seems to be still suffering, because of the high borrowing rates in the banks. With a rate cut, things would become easier for them," he said.

According to him, the MPR has been at 14 per cent for almost two years.

He proposed that the MPC should be reduced to 12 per cent, to encourage speedy economic growth.

Adi said that the macroeconomic environment, stability in oil price and oil production had increased government's liquidity and revenue, thereby reducing its financial pressures.

The economist, however, noted that government's efforts to source money to fund the budget deficit could be a dynamic move that might work against rate cut.

"The Senate just gave approval for the President to borrow 5.5 billion dollars from the market.

"That would tend to push rates, because the reason why interest rate is high till this moment is because of the crowding out effect which arises from the competition of the government also looking for liquidity.

"Because of that, they had to jerk up the rate so that individuals would prefer to invest in government's assets rather than giving their money to businesses.

"Now that government seems to be getting stability in oil revenue, may be it would reduce the amount of its borrowing in the market.

"We are approaching the political campaign cycle, so I see the rates coming down," he said.

Adi said that maintaining the interest rates at the present level at the forthcoming MPC meeting would imply that the government was not interested in growing the real sector of the economy.

NAN reports that the last MPC meeting of the CBN for the year would hold on Nov. 20 and Nov. 21. (NAN)

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