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Why Real Growth Will Remain A Challenge

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'While global development agencies recommend single-digit lending rates to enable business concerns invest properly, expand and make profits, interest on loans here has remained persistently high for over the past three decades.'

The above excerpt from the Punch Editorial of 11/5/2012 is a succinct comment on the significance of interest rate in growing an economy.   Some critics, however, would contend that our parlous state is the result of our inability to diversify and sustain a multicultural economy!   In reality, the desired Eldorado would remain a dream until we address the serious concern in the above editorial.  

Regrettably, members of the Economic Management Team have often blamed so-called expansionary fiscal policies of government for the prevalence of high commercial interest rates above 20 per cent and an annual average inflation rate of about 10 per cent.  

Of course, this is far from the truth!   The universal economic antidote to unemployment and a depressed economy, like ours, is for government to spend more money to create demand and sustain industrial growth and increasing employment.   Indeed, the hundreds of billions of naira bailout packages to various subsectors in the recent past is a recognition of this reality.   So, it probably smacks of mischief, for example, for CBN to continuously indict the 'excessive' spending of government, at the same time the apex bank is providing cash injections of over N3 trillion into the system, with its bailouts and intervention funds from the Assets Management Company, AMCON.

It is also inexplicable that soon after such cash injections, CBN and the Debt Management Office, immediately descend on the money market in a borrowing spree, in an alledged attempt to reduce the excessive/surplus cash in the system.   Such unfortunate rigmarole and obvious insincerity have prevailed for several decades to the detriment of a populace pauperized by very high cost of funds and disenabling rate of inflation.

Quite surprisingly, Lamido Sanusi, CBN Governor, made bold to proclaim recently that interest rates cannot be brought down until the inflation rate falls!!   Regrettably, such a mindset would lead to economic perdition, as inflation will never recede as long as CBN maintains one of the highest Monetary Policy Rates (MPR) in the world, while our national debt and related service charges will also continue to rise in consonance with CBN's self-inflicted steep MPR!!   

Regrettably, major stakeholders such as MAN, LCCI and NACCIMA, whose productive activities are inevitably hamstrung by prevailing high cost of borrowing, only manage to make feeble protests from time to time.   These stakeholders have failed to mount a concerted advocacy for CBN to reconcile the paradox of a depressed economy and high interest rates!!   They have also failed to challenge the contradiction between CBN's claim of too much cash in the system, and the reality of the inability and/or disinclination of banks to lend to the real sector because of lack of funds!!

It was therefore a great relief, when none other than Dr. Okonjo-Iweala, Finance Minister and Coordinating Minister of the economy broke her erstwhile mute disposition on these issues, when she recently decried the high cost of borrowing and noted, 'I think the banking sector should be reexamined; interest rates by the banks are too high.   Despite the recapitalization of the banks, their interest rates are still high; they need to be developmental in their approaches….   I wonder when people tell me that they pay 19 - 20 per cent interest rates….   Even, the real interest rates are too high'.

While speaking recently at a consultative meeting with the Organised Private Sector on the 2013 budget, the Minister also decried the rising debt profile of this administration; she noted that 'although the current debt remains sustainable at about $44bn, cost of servicing it remains a challenge; hence the need to slow down the rate at which domestic debt is building up'.   Tactfully, the Minister did not disclose that the rising debt profile and increasing service charges are self-inflicted, as CBN's unforced double digit MPR of 12 per cent inevitably also pumps up cost of government debt above 15 per cent!

Some critics would rightly find it inexplicable for government to consciously and willfully push up his own cost of borrowing well beyond the rates of 1 - 3 per cent offered in successful economies elsewhere for such risk-free sovereign debts!

So the above Punch editorial and the Finance Minister, are certainly on the same page with regards to recognition of the challenges that high interest rates pose to the economy and our welfare; but regrettably, both observations fell short of identifying the major cause of high interest rates.

Excessively high MPRs are the products of CBN's desperate attempts to discourage public borrowing from the expanded credit capacity in banks whenever dollar denominated revenue in monthly allocations are substituted with hundreds of billions of naira by the apex bank!   The ability of the banks to leverage their credit expansion over 10-fold on these humongous monthly naira inflows constitute the ever-present spectre of a cash surfeit, which ultimately, the same CBN sets out to reduce to avert inflation by willfully borrowing hundreds of billions of naira it does not need, when it sells I.O.Us called treasury bills to the banks, oftentimes with the obligation to pay over 15 per cent for the joy of keeping such funds idle!  

From the foregoing, it is plausible that we can only foster lower interest rates, reduce debt accumulation and rising service charges, and also increase employment and economic growth rates, if CBN's nurtured villain of excess liquidity is contained.   Instructively, if CBN adopts a constitutionally compliant payment mode using dollar certificates for allocation of dollar denominated revenue, the ever-present ghost of excess liquidity would be dispelled, as CBN would not need to print/create humongous naira sums that would ultimately trigger excess liquidity!!   In such model, MPR would invariably plummet and cost of borrowing will similarly fall below 10%, inflation will rapidly recede, and an enabling business environment will prevail with increasing level of employment and social welfare as collaterals.   

In this manner, CBN would not be constrained to crowd out the real sector from available market credit by paying outrageous interest rates for money it does not need, and the consequential train of adverse consequences including increasing domestic debt and service charges, rising inflation and unemployment rates will be benignly modulated.