Hint on interest rate review? It is time  

For the first time in about two years, the Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, on first Friday of 2018, hinted at possibility of lowering interest rate in the New Year, thereby provided a glimmer of hope to the nation’s long suffering investment community.

The CBN boss at a dinner on the positive economic outlook expected in 2018 in Lagos said monetary policy stance could change in 2018, when the underlying fundamental such as drop in inflation becomes more supportive. The CBN boss did not say however, how low the interest rate could drop this year.

Emefiele’s hint on the coming changes in management of interest rates could well be interpreted to mean that monetary easing is now a matter of when, not if, and by extension we expect the Apex bank would adopt liberal stance this year for businesses, although this might bear some implications on inflation and capital flows.

With this major policy statement at the start of the New Year, the CBN is expected to witness renewed pressure from investors and  private sector operators for it to complement the economic growth agenda of fiscal policies ahead of February 2019 general election in the country.

Since the introduction of the 14% interest rate, businesses and the entire economy have agonized passing through the present circumstances of high interest rates, by way of bad monetary effects on business confidence. Watching the economy over the past 18 months, it is crystal clear the present monetary regime has not been supportive of efforts to rescue the economy.

Indeed, analysts have for long seen the current interest rate as counter-productive and restrictive as interest rates remain in the high region. Manufacturers and agro-businesses have for long argued that an accommodating policy is necessary, as it would send the right signals to economic agents.

Over the last 12months, many businesses are reported have become averse to borrowing following what they consider as unfavorable, the rate at which banks currently lend money in the economy.

Going by reports in the media on account of interest rates, it is currently ranging between 25-30 per cent. Now, how can domestic investors invest profitably, when the economy has an interest rate of between 25-30 per cent?

Perhaps, this may explain why there are so many disincentives for investors to go into real sector such as manufacturing, agriculture, solid minerals investments, because of the issue of cost of fund. Furthermore, there are no incentives for domestic investors to even play significant role, and these are the kind of things that shape economy and the investments people do.

Then, there is the challenge of the way the federal government borrows. In recent time government’s borrowing has been criticized to be a major problem for investors. Government is borrowing at 18-20 per cent and even at times at zero risks.

How can the private sector compete under these circumstances? This may explain why all funds in the economy now are going into treasury bills or practically going into federal government pocket. So the situation has been made very difficult for the private sector to play its role in the economy in terms of this rescue mission.

As the situation is right now, there is no way the private sector can compete with government in the financial market; even the banks would rather buy treasury bills and bonds than to give money to manufacturers. That is the kind of investments disincentives or structure that the 14% interest rate policy has foisted on investors.

As businesses have become averse to borrowing due to high-interest rates, the economy is facing among others higher unemployment problem. We therefore call on the CBN to do a rate review in the short to medium term, as do nothing approach to monetary policy is only adapted to hedge inflation expectations. This paper is firmly in support of a relaxed interest rate regime.

And given increasing political pressure to lower interest rates to encourage growth, we expect that the CBN’s yield to the call for review of the monetary policy rate at its next MPC meeting would be given the special consideration it deserve.


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