Lower Interest Rates? What M.A.N. Must Do

Source: huhuonline.com

The current contribution of manufacturing to Nigeria's Gross Domestic Product (GDP) is currently below 4%; that is well below the target of 15 - 20% required for us to become one of the top 20 countries in year 2020.  Manufacturers are generally in accord that  the greatest impediments to industrial expansion are the poor power infrastructural base and the relatively high cost of funds.  There is, of course, no doubt that power supply is significant, but it is certainly not as critical as cost of funds.  For example, power supply has not seriously impeded development and growth in the oil and gas industrial sub sector even though they also operate in Nigeria.  The reality is that the source of funding for the oil and gas industries are usually derived from the international capital market where cost of funds for such businesses remain at single digit (i.e. between 1 - 10%).  In this manner, the oil companies can fund their own power supply and still remain relatively profitable.  

  However, the double whammy of poor power infrastructure and high cost of funds (usually between 20 - 30%) have stifled growth of manufacturing in Nigeria.  It is for this reason that the management of interest rate is universally at the heart of every country's monetary policy.  Thus, if a country gets its monetary policy framework right, then, its economy would evolve an appropriate lending rate that is in consonance with its development expectations.  If on the other hand a country's monetary policy framework is defective, it would be highly impossible to evolve a conducive lending rate.  This, regrettably, is the fundamental truth about the Nigerian economy.  Our own Central Bank has consistently operated a faulty and fraudulent monetary framework for close to three decades, and the result is the persistently high interest rate, usually above 20% for manufacturers.  Instead of admitting this failure, CBN Governors over the years have latched on to all sorts of excuses, prominent amongst which are power supply, 'excessive' government spending in spite of gross infrastructural deficits, bad roads and also credit crunch in banks in spite of their generous willingness and apparently very deep pockets whenever government itself wishes to borrow from the banks!  

  However, if Nigerian government treasury bills and bonds are often oversubscribed, it may not be true that credit crunch is the real reason for credit limitations to manufacturers.  The glaring failure of CBN's monetary policy framework is amplified by the huge disparities in market rates; so, for example, while CBN's monetary policy rate MPR currently (2010) hovers around 6%, commercial banks also pay interest of 3 - 4% for deposits, while they lend to manufacturers at over 20%!  Indeed, CBN's current inflationary industrial serial bailout packages, which carry a mandatory interest rate of 7% is a response to the apex  bank's failure to bring down interest rate through market forces.  We have ceaselessly maintained in this column that our economy and our industries will remain in a quandary until CBN releases its monopolistic stranglehold on the foreign exchange market, so that constitutional beneficiaries of federal revenue receive dollar certificates for dollar-derived revenue!  Our economy will continue to go round in a descending spiral in spite of increasing revenue so long as CBN stubbornly sticks to this destructive tradition.   

  The following is the text of our article 'LOWER INTEREST RATES? WHAT 'MAN' MUST DO'.   The article was first published in June 2008, when crude oil prices touched $150/barrel.  As predicted, our industries were untouched by the largesse, and our country became listed amongst the world's poorest before the end of 2008.   Please read on.

  'The prevailing level of interest rate will generally dictate the pace of industrial and commercial activity in a country; high interest rates makes 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 fall 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 the power of 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 (compare with N500bn in 2010 budget)!   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.  The CBN and the DMO (Debit Management Office) also simultaneously compete for these funds with the private sector!

  'In this event, the dismal prospect of 'larger allocations' consequent upon much higher crude oil revenue must scare most industrialists and Nigerians alike because of the inevitable collateral of high interest rates, spiraling inflation and higher unemployment!  But this need not be the case, if manufacturers and the organized private sector agree to actively campaign for and support the implementation of the aborted plans by Soludo to pay the three tiers of government export derived revenue with dollar certificates or warrants as part of their monthly allocations!  This writer has canvassed for this framework for about seven years now, even before Soludo became CBN Governor and later grudgingly became a convert.  The details of our proposal are captured in our paper: 'A LIBERALISED FOREIGN EXCHANGE MARKET - a proposal for a liberalized foreign exchange market in Nigeria and its economic benefits' - Boyo/Ojomaikre, presented to the National Economic Intelligence committee in August 2002!  After a protracted period of indifference, the wisdom of dollar allocations was also finally endorsed by the CBN; but inexplicably aborted before implementation in August 2007!

  'Regrettably, Soludo's,  unfortunately feeble attempt to right the wrongs in the system was shot down by the government, but in truth, only this arrangement will change our economy by reducing interest rates below 10% and jumpstarting industrialization and improving employment, as it will immediately dispel the ghost of excess liquidity and release the debt service cost of hundreds of billions (N500bn in 2010) for social infrastructure.  Nigeria will take a turn for the better and vision 2020 will become a more realistic objective!'

Save the Naira, Save Nigeria!!