Les Leba: Sanusi’s tall story on high interest rates

by Les Leba

Sanusi Lamido Sanusi

The stupendous profits posted by Nigerian banks at a time of contracting industrial activities and the current high unemployment rate is ample testimony of who are the actual beneficiaries of CBN’s curious strategy for maintaining economic and price stability.

Nigeria’s hope of early economic rejuvenation and growth may have been sadly foreclosed by Lamido Sanusi, in a recent presentation to the House Committee on Banking and Finance in Abuja, when he noted, in spite of the clarion demand by industrialists that “although the CBN has put in place several monitoring measures to ensure stability in the economy, it was not possible to guarantee the delivery of low interest rate, due to the harsh business environment in the country”.Consequently, while the Central Bank benchmark rate in those successful countries with inclusive growth and supportive social welfare is generally below 3%, our CBN policy rate may rise above the current outrageous level of 12%, and sustain cost of funds to a beleaguered real sector at well-over 20%.   Undeniably, no economy can grow optimally without those loans, which are universally, primarily provided by commercial banks.

A banking licence from any country’s Central Bank permits domestic banks to lend up to 10 times the value of cash deposits collected from customers; the banks would in turn cover the inevitable cash short-falls from such lending, whenever necessary, by borrowing directly from the CBN at marginally lower rates.Consequently, the level of inflation in any country is primarily a product of demand and cost of funds, as prices of goods and services would ultimately rise or fall in relation to the prevailing cost of borrowing, which, itself, is predicated on CBN’s benchmark lending rate to the banks.   Notwithstanding, Sanusi maintains that “the likelihood of the interest rate coming down in the current environment is very low; in fact, there is a higher likelihood of interest rate going up than coming down”, because, according to the CBN Governor, low interest rates will “reverse all the gains we have had on stability”.

Discerning observers may however, consider this assertion to be a deliberate misrepresentation of the apex bank’s performance under the existing 2007 CBN Act, which defines the CBN’s core mandate, in Sanusi’s words, as the “delivery of price stability, protection of the external value of the nation’s currency, management of the country’s reserve and ensuring financial stability”.

Regrettably, although Nigeria’s current year-on-year average inflation rate may indeed have remained stable at an average of about 10% over the years, but certainly, such high inflation rate, which obliterates income values every 10 years, actually, poisonously underpins our beleaguered economy with the consequences of rapidly dwindling purchasing power and consumer demand with reduced employment opportunities.

Paradoxically, Sanusi blames this debilitating state of affairs on the fiscal policies of the federal government, and insists that “we can only see a moderation in the lending rate, when government borrows less, and (if) the rates paid by government for such borrowings come down….   If government is borrowing at 13 – 14%, and funds huge fiscal deficits, (i.e. government expenditure exceeding revenue), the private sector will have to pay even higher interest rates”.

Regrettably, however,   there is little hope that such fiscal deficits would be reduced anytime soon, especially when the Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, recently expressed concerns about revenue shortfalls caused by massive crude oil theft and dwindling export demand.

In reality, Sanusi is actually being economical with the truth on the impact of cost of government long term borrowing as the cause of high interest rates.   The CBN has in fact, successfully hoodwinked Nigerians, including the National Assembly and the media from recognizing the negative impact on interest rate, whenever the apex bank itself, borrows from the money market in order to control perceived “excess” money supply in the system, with its sale of treasury bills bearing over 10% interest rate, when, in fact, similar loans in better managed economies may not exceed 2%. It is obvious hypocrisy for Sanusi to decry the cost of government’s long term loans (3 – 10 years) at 13 – 14%, while remaining silent on CBN’s reckless constant crowding out of the real sector in the credit market, when the apex bank borrows hundreds of billions of naira it intends to simply keep idle at rates above 12% (for short term – 360 days loans).

The stupendous profits posted by Nigerian banks at a time of contracting industrial activities and the current high unemployment rate is ample testimony of who are the actual beneficiaries of CBN’s curious strategy for   maintaining economic and price stability.This obtuse monetary strategy also encourages foreign investors to borrow at less than 3% from abroad and obtain returns of up to 12%, when such foreign loans are deployed into the purchase of ‘risk-free’ treasury bills issued by the CBN!

Alarmingly, however,   Sanusi also maintained that “the low rate of industrial activities is not so much the result of high interest rate but the result of our infrastructural deprivations, such as power, security, or indeed, storage facilities and cold rooms”….   It is not about moving interest rate down or up; most of the SMEs do not have access to credits because the environment does not allow businesses to thrive”.   Haba! Mr. CBN Governor.   Who is the government?

Indeed, if lending rate to SMEs, for example, was as low as 3% as in successful economies, rather than the current level of over 20%, surely, there will be greater motivation for entrepreneurs to borrow and “conveniently” accommodate the forced additional cost of power, security, storage, etc, from the savings of a benign interest rate regime!

The cost of procurements for both machinery and materials in all sectors, including agriculture, which are dependent on credit for operational growth, would fall and ultimately translate into a more competitive economic and business environment with unbound employment opportunities, with industrial regeneration and improvement in mass social welfare.

Ultimately, the truth of course, is that cost of funds will never be industrially friendly, so long as CBN continues to create the spectre of excess cash every time, it substitutes naira allocation for dollar-derived revenue.   Curiously, while the CBN’s self-styled own dollar reserves continue to bloom, ravaging poverty deepens nationwide.

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Read this article on the Vanguard Newspapers

 

Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

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