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LOWER INTEREST RATES? WHAT M.A.N. MUST DO
BY: LES LEBA
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; in other words, this is CBN’s admission that single digit interest
rate can only be achieved by XXadministrative fiat,XX contrary to its claims of promoting a free market. 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
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(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 XX(compare with N500bn in 2010)!XX 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!
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“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 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!
“However, Soludo’s, unfortunately feeble attempt to right the wrongs in the system had been 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 its attendant negative train of events. Nigeria will take a turn for the better
and vision 2020 will become a more realistic objective!”
Save the Naira, Save Nigeria!!
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