To lift the Nigerian economy into prosperity, the Central Bank of Nigeria (CBN) must seize the advantage of the coronavirus pandemic-induced crisis to lower the interest rates with a view to boosting domestic production and investment.
The one-time Lagos State governor said modern global economy is built on credit while prosperous nations built their success on the use of credit to generate high level domestic investment which allows for significant consumer financing.
He added that high interest rates for many years crippled domestic production and created a false sense of security on foreign capital inflows.
The national leader of the ruling All Progressives Congress (APC), gave this position in a statement yesterday titled: “The case against high interest rates in time of contagion.”
He described high interest rates as a fundamental drag on national economic growth, second only to Nigeria’s unreliable power supply on negative impact to national prosperity.
The Monetary Policy Rate (MPR), which is the benchmark interest rate, has been 14 per cent since July 2016 until it was reduced to 13.5 per cent in March 2019.
Banks are expected to lend at three to four per cent above MPR to prime customers while the maximum lending rate is between 25 to 40 per cent per annum.
It could be higher depending on the perceived risk of the borrower.
CBN Governor,Godwin Emefele said the decision to loosen the MPR was borne out of the desire to stimulate growth in various sectors of the economy.
Despite the reduction in MPR since March 2019, banks have continued to charge high interest rates on loans, especially at the retail end of the credit market. Maximum and prime lending rates have continued to rise, while rates on consolidated demand, savings and terms deposit declined, further worsening the gap between the average lending and deposit rates
Giving reasons why the CBN should revise the high interest rates policy, Tinubu said: such rates penalise domestic investment and consumer borrowing; reduce aggregate domestic supply and, to a lesser degree, aggregate domestic demand.
According to him, the chronic gap between domestic supply and demand has been filled by bloated levels of imports which encouraged an overvalued exchange rate that the high interest rates have helped produce.
Explaining how high interest rates affect the economy, he said in normal times, they attract significant foreign financial speculation, the ever-ominous hot money, which provides short-term boosts to financial inflows.
But over time, as compound interest payments become due on these foreign investments, the nation loses an ever-increasing amount of money to satisfy foreign debt obligations.
On CBN’s intervention programmes in many sectors of the economy, Tinubu explained that while they look good at first glance, they expose important contradictions in the apex bank’s position.
He said the special schemes are an implicit admission that normal rates stifle investment borrowing and thus suppress the economy.
For Tinubu, if the financial sector functioned properly, servicing the needs of the economy in general, there would be no need to constantly resort to specialised sectoral plans for concessionary lending below regularly available rates of interest.
He said each such scheme is evidence that the overall financial system is fragmented in a manner that artificially reduces investment and the positive consequences increased investment has on growth, production and employment.
“The extraordinary schemes would not be required if the general interest rate was at a proper level. By establishing the special programmes, the CBN attempts the impossible. On one hand it defends the general rate as prudent.
On the other, it proliferates special exceptions in order to spur investment borrowing that the general rate has heretofore stifled,” he added.
He said the practice of defending the naira in an import-dependent economy like Nigeria drains funds to support the exchange rate that could be better invested in strengthening the productive capacity. “If we went to a freely floating exchange rate, the naira would devalue.
This means our currency is overvalued in terms of our trade with the outside world. This overvalued exchange rate is buoyed by high interest rates.
Yet to maintain both interest rate and exchange rate levels simultaneously over time requires that money be siphoned from use in the productive economy in order to prop up both rates,” he said.
Furthermore, he said over time, high rates cause more inflation than they prevent. “In the initial phase, high rates might lower inflation.
However, an economy is dynamic not static. Feedback loops created by the initial high rates will eventually encourage inflation,” he said.
He explained that the suppressed levels of private sector activity will result in higher levels of government borrowing than otherwise would be the case had private sector incomes and productivity been unhindered by the high rates.
He said borrowing at higher rate makes domestic firms to charge high prices in order to achieve profit levels sufficient to repay their high interest loans, leading to higher inflation.
On borrowing, Tinubu said interest payments on bonds computed as compound interest, compels the country to pay an increasing percentage of its dollar intake through oil sales to service the interest charge on the foreign debt.
This, he said, leads to enormous pressure to cover widening gap between foreign debt calculated at compound rates and foreign currency revenues which tend to remain flat and linear, if not decline during times of economic weakness.
Subsequently, debt servicing as a percentage of overall public and private sector spending increases, causes more naira to be misdirected; exchanged into dollars instead of being used for productive economic discourse that would create wealth and jobs on these shores.
“To maintain the exchange rate, we must sacrifice both naira and dollars that could have been invested in strengthening our productive capacity and job creation.
Instead of bolstering the economy, we give these financial resources to international finance arbitragers who care little for our well-being, who invest little in our productive economy and who gain too much influence over our national economy as insensitive creditors,” he stated.
“My position has always been one of reticence to foreign denominated debt due to repayment challenges. However, if we need foreign currency to buy items essential to protecting the nation from the coronavirus, now is the time to borrow.
The World Bank and other DFIs have said they will grant loans at concessionary rates. We should hold them to their word and demand a renegotiation of existing loans or debt relief,” he advised”.
Lower interest rates, he added, will allow for longer-term mortgage notes, real estate would become a better functioning collateral for investment borrowing not only for the housing industry, but for the general economy.
He called on financial authorities to consider formulating regulations that banks must reduce the high interest rates on existing business loans to the new lower general rate.
This, he said, can be achieved through regulations requiring banks to automatically roll-over existing loans at the lower rate or regulations stating this must be done if the borrower so requests.
