The Eko Electricity Distribution Company (EKEDP) on Thursday said there would be interruption of power supply in some parts of Lagos communities on Saturday. Mr Godwin Idemudia, the General Manager, Corporate Communications, said in Lagos that the outage would be between 10.00 a.m and 2.00 p.m. Idemudia said that the outage was occasioned by routine…
The high interest rates charged by banks and other financial institutions have become an albatross for businesses and the Nigerian economy. The Senate, therefore, spoke the mind of many Nigerians, last week, when it said the rates had become a “yoke too hard to bear” for any real sector business and economic growth. We cannot agree more with the Senate’s position and its charge to the Central Bank of Nigeria to intervene to save the economy.
At a roundtable between the Senate and interest groups in the financial and business sectors in Abuja, the Senate President, Bukola Saraki, called for a downward review of interest rates. He frowned at the insistence of the apex bank to keep the lending rate, otherwise known as the Monetary Policy Rate (MPR), unchanged for the seventh consecutive time at 14 percent.
In attendance at the meeting were representatives of Deposit Money Banks and other financial institutions, Chartered Institute of Bankers of Nigeria (CIBN), Association of Small and Medium Enterprises (SMEs), Manufacturers Association of Nigeria (MAN) and Nigeria Association of Chambers of Commerce, Industries, Mines and Agriculture (NACCIMA).
The CBN had, at its last Monetary Policy Committee (MPC) meeting last month, retained the MPR at 14 per cent, which has been in place since September 2016. Also, left unchanged were the Cash Reserve Ratio at 22.5 percent, liquidity ratio at 30 percent and the asymetric window at +200 and -500 basis points around the MPR. July 2016 was the only time in almost one year that the lending rate saw a marginal reduction to 13 percent.
While the interbank rate remains 14 percent, the interest rates to bank customers range between 25 and 30 percent, and sometimes, above. The intervention of the Senate in this matter is, therefore, a great relief to Nigerian businesses. It is a timely reminder that high interest rates could stifle business and the economy, which is in desperate need of measures to lift it out of recession.
At best, the high interest rates will profit only a few operators in the economy, especially those who have investments in the money market. The high lending rates are disastrous for the real sector, particularly manufacturing, where many operators are folding up and workers being laid off. As the Senate President rightly argued, no business will make profit or remain in operation for long at a lending rate of 28 percent and above.
Even the assurances from the CBN to boost productivity in the economy through credit interventions for SMEs in the manufacturing and agricultural sectors will not yield the desired results if the prevailing high interest regime is not reviewed downwards.
We are aware that curbing inflation and maintaining price stability are just two of the mandates of every Central Bank, but these duties should not be discharged in isolation of compelling economic realities. One of such realities is the current debilitating high lending rate. Lowering the MPR and the onward lending rates of the banks will enable government and private sector operators to borrow funds at economically viable rates. This will help to jumpstart growth and reflate the economy, which is experiencing an all-time high contraction. Although the need for financial stability, inflationary trends and the interest of foreign investors may have weighed much on the apex bank’s decision to keep the MPR at 14 percent, the fact remains that in a fragile economy such as ours, high interest rates will harm economic activities.
The same argument for lower interest rates was made last year by the Minister of Finance, Mrs. Kemi Adeosun, but the CBN differed on the matter. At the last MPC meeting, the CBN Governor, Godwin Emefiele, continued to defend the double-digit MPR, saying it was informed by the need to closely watch and reassess the challenges that confronted the economy in 2016 and the opportunities that exist for economic recovery in the current year (2017). He acknowledged that the prevailing market sentiments are in favour of a rate cut, but insisted that the MPC arrived at the 14 percent MPR to “address the delicate balance between price and growth”. He also argued that the pressures on consumer prices were yet to abate amid the current recession.
If the CBN continues to insist on the current high lending rate, it may hamper the execution of the economic recovery plan, which both the World Bank and the International Monetary Fund (IMF) have said is feasible, if implemented with the right fiscal and monetary policy strategies. Against other economies, Nigeria seems to have one of the highest interest rate regimes. For instance, last week, the United States Federal Reserve raised its interest rate by 0.25 percent, the second increase this year.
The members voted to raise the key target to a range of 1 percent to 1.25 percent, which is the highest level since 2008 when the policymakers cut rates to encourage borrowing and spending after the financial crisis of that year. In Australia and Britain, the interest rates remain at 1.75 percent and 0.25 percent, respectively. Canada is 0.500 percent and South Korea, 1.5 percent.
Altogether, we ask the CBN to review the existing lending rate to single digit. This has become expedient because the challenges facing our economy call for lower interest rates to stimulate economic activities and growth.
Already, the high interest rates that have subsisted for some time now have led to the collapse of many businesses and unemployment, with far reaching negative consequences for the economy. We can no longer sustain the high interest rates at the detriment of business and the economy.