THE decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to retain the Monetary Policy Rate (MPR) at 14 percent despite repeated appeals from key stakeholders for a downward review will harm the Federal Government’s efforts to reinvigorate the real sector and diversify the economy. The MPC, which is the highest decision-making body of the CBN, had at its 257th meeting voted six to two, to retain the lending rate at 14 percent for the 6th consecutive time in a year.
The CBN Governor, Mr. Godwin Emefiele, while reading the communiqué at the end of the meeting in Abuja, gave reasons for the MPC decision. First, he cited the domestic economy and the uncertainties in the global environment, noting that the members considered the headwinds confronting domestic activities before deciding to hold rates at the existing levels. Also, retained at their current levels are the Cash Reserve Ratio (CRR) at 22.5 percent, Liquidity Ratio at 30 percent, and the asymmetric corridor at +200 and-500 basis points around the MPR.
Emefiele said the decision was based on the need to safeguard the stability achieved in the foreign exchange market, and allow sufficient time for past policies to work. The MPC, he explained, believes that easing interest rate at this point would signal insensitivity to growth and unemployment concerns. Rather, he said the need to encourage the flow of credit to the real economy and promote policy consistency and credibility, weighed heavily on the minds of the members. However, he stated that the option could predispose the economy to further risks, increase inflation and make the 2017 Budget hard to implement.
In addition, he claimed that while available forecasts of key indicators point to a fragile economic recovery in the second quarter (Q2) of this year, there is need for caution to avoid a relapse to a more protracted recession than the one already in place. But, his fear seems somewhat exaggerated. Data from the National Bureau of Statistics (NBS) show that the contraction in the economy moderated to 0.52 percent in Q1, a sign that the economy is recovering. Also, inflation rate has continued to ease, falling to 16.1 percent last month, the fifth consecutive decline this year, though still far short of the CBN’s target ceiling of nine percent.
The MPC said it identified risks to economic outlook to include weak financial intermediation, poorly targeted fiscal stimulus and absence of a structural programme. It, therefore, called for more fiscal measures to stimulate the economy through non-oil exports such as agriculture and manufactures, which should be “pursued relentlessly”.
We do not see how the agricultural and manufacturing sectors can be revived with the high interest rates charged by banks. The economy will continue to stutter in spite of Federal Government’s efforts if interest rates remain at the present level. In the same vein, investors and businesses can hardly survive at the current rate, create jobs and make returns on investment.
The insistence of CBN on holding the lending rate at the current level is disappointing. It has become necessary to ask whose interest the MPC is serving. Is it really that of the country or that of a group of bankers? We are inclined to believe that it is the latter. Unarguably, interest rate in Nigeria is about the highest in the world. We recall that at the last MPC meeting for 2015, the CBN openly declared that it had come to the end of its monetary tightening and announced a reduction of lending rate to Deposit Money Banks (DMBs).
At the end of that meeting, the CBN was widely quoted to have said that the reduction of interest rate to 11 percent was in response to the need to activate the real sector of the economy by making sure that both the CBN and the commercial banks play their fundamental roles to reinvigorate the diversification effort of the Federal Government. The apex bank has not kept its word ever since. It has ignored calls for monetary policy rate reversal. It also rebuffed appeals from the Minister of Finance, Mrs. Kemi Adeosun, the Senate President, Dr. Bukola Saraki and other stakeholders.
Last month, the Senate Committee on Banking, Insurance and Other Financial Institutions invited the CBN, the Nigeria Deposit Insurance Corporation (NDIC), representatives of Manufacturers Association of Nigeria (MAN) and the Association of Small and Medium Enterprises(SMEs) to a roundtable to review the interest rate regime.
The Senate President had lamented at that meeting that high interest rate was stifling businesses, some of which have been forced to shut down. Without lowering interest rate, access to borrowing that will help stimulate growth, boost industrial capacity and increase manufacturing output, will not be achieved. Now that emphasis is on non-oil exports and diversification of the economy to ramp up growth, holding rates at the current high level will not bring about the much-expected economic recovery. High interest rate will only lead to capital flight from Nigeria and closure of more businesses.
Considering the economic challenges in the country, we find no rational argument for holding the interest rate at 14 percent. The rate is not consistent with the plan to jumpstart growth and end recession. If the objective of the CBN is to boost the economy, this is the time for a reduction of the MPR. We, therefore, urge the CBN to listen to the voice of reason ahead of the next MPC meeting. The decision on the MPR should not be based on “expert views” alone. The best interest of the vast majority of Nigerians should also be a determinant factor.