Editorial: The Senate, CBN And High Interest Rate

Recently, the Senate mandated its committee on banking, insurance and other financial institutions to meet with the Central Bank of Nigeria and financial experts over what it considered high interest rate.

According to Senators who spoke in plenary, the interest rate of between 28 per cent and 30 per cent is too high and would soon cripple businesses and act as disincentive to entrepreneurship in an already depressed economy.

The lawmakers blamed the banks for fixing the high rate in order to keep making profits while SMEs and other start-ups, which “ironically employs about 88 per cent of our workforce and therefore the backbone of the economy”, lack financing of any kind, according to Senator Rafiu Ibrahim, Chairman of the Committee, who raised the motion.

“The current regime of high interest rate continues to place a major burden on business investment and household consumption spending in Nigeria, thereby negatively impacting on the survival of Nigerian businesses’’, he said.

Deputy Leader of the Senate, Bala Na’Allah put the problem on the doorstep of the banks: “The banks are run by a powerful cartel. They do what they like and jerk up interest rates”.

Senate President, Dr. Bukola Saraki was less relenting. “We cannot live in a country where companies are folding up, yet organizations are declaring mega-profits… there has always been the twin evil of exchange rate and interest rate”

There is no doubt that interest rate in the country is high and prohibitive to investments and entrepreneurship. It is also clear to everyone that the current exchange rate is abnormal, with the CBN pumping money every now and then to regulate and sustain the current regime.

But can interest rate be legislated by fiat? We earnestly think NO!. High or low interest rate is a function of the interaction among savers, lenders and the borrowers in an economy. And foreign exchange to a high degree depends on the production and consumption pattern of an economy.

At a micro-economic level, it is easy to point at the banks, the main institutions where these financial exchanges take place. But when the larger economic environment is taken into consideration, the picture becomes different and clearer and explains better the reason behind unstable or high interest rate.

For one, the economic, physical and legal landscape is riddled with such disincentive as to make thinking and planning a hard if not an impossible task.

At the infrastructural level, the existence of an all-year round motor able roads, potable water and electricity is patchy. People buy generators, buy fuel and diesel almost everyday and for the length of the production process to avoid sudden blackout from frequent public power outage. They dig their boreholes, grade their inner-city roads and provide security and such other amenities.

Currently inflation hovers around 17 per cent.

These micro and macro –economic challenges are risks that influence decision making in the market environment. In the face of these risk factors , how many savers would for example accept 5 per cent on savings if lenders ask for the same percentage for their loans?

Conversely, many will rush to save if the rate is, say 20 per cent at which instant lenders would want to give out at 30 per cent. This percentage will certainly be too high for borrowers. This is simple maths.

What this simply means is that if there is public sector commitment to the development of infrastructure and set targets for rapid economic growth, the rates will adjust accordingly and go down, even in the short run. Investors will be spurred by the economic activities because they would see an opportunity to reap returns on investments.

More interesting is the exchange rate regime, which, we believe is currently artificial as long as the CBN continues to pump money for its sustenance. It directives to banks to make forex available for economic, social and educational matters can only be sustained in the interim under the current inflationary pressure.

Currently the government has indicated interest to promote transparency and efficiency in the business space, shown support for local content in   public procurement and pledge to rigorously implement the budget. It’s Economic, Growth and Recovery Plan holds some promise for the economic diversification, growth and development of the country.

However, liquidity challenges arising from the mono-cultural dependence on oil, which is taking severe knocks from the international spot market in spite of recent oil prices rise amid record US gasoline demand, the virulent culture of corruption and high infrastructural deficiency and decay pose grave threat to the successful implementation of the aforementioned policies.

Even so, if the government sustains its current medium term policy of subsidizing production rather than consumption unlike we have had in the past, there is high possibility that Nigerians will come to see the reason in preferring and consuming home grown food to imported food, which impacts negatively on foreign exchange because of its dependence on demand and supply. Unavailable and scarce resources are spent on subsidizing foreign farmers whose economic environment is stable and predictable.

Still, the current rate of rice production needs to be sustained to do away with the scandalous importation of the five million metric tones of rice annually. The CBN’s Anchor Growers Program, for instance, should be deepened and structure to take in large participants such as farmer cooperatives, relevant SMEs and possibly National Youth Corp members. Nations whose people are fed by outsiders are fettered and unhealthy and will always be challenged creatively because the thinking that goes into production and the interaction with mother earth is missing.

Besides, we think there should be a uniform rate for private and public sector borrowers in the interim. The present situation whereby the government borrows at 18 per cent while the private sector does so at 25 per cent and 30 per cent is uncompetitive and prohibitive for domestic investors. Government has resources at its disposal, even before the advent of the TSA regime and should not be seen to be competing or shortchanging the private sector.

Indeed, what most investor’s value most in any economy is the security and confidence that government inspires through it policies and programs that encourage and follow due process, accountability and transparency: The rule of law in two words. The frequent face-off between the lawmakers and the executive is unhealthy for an emerging economy and further serve to demonstrate rivalry and not contest of ideas because the source of the disputes are often personal and partisan.

In the event, most businesses would rather take to portfolio business of selling and buying rather than investing in the real sectors such as manufacturing, agriculture and solid minerals, which are the main sustenance of an economy.

So the government needs to think through some of its policies that send the wrong signal about the economy to local and foreign investors.

Doubtless, the Senate is on course with its concerns for the economy, already reeling from a recession nobody is certain will abate soon, despite CBN’s assurances to the contrary.

But its Committee charged with looking into the high interest regime must take into consideration the larger market economic environment and scrutinize government policies that send wrong signals about the economy.

And, if it looked courageously, it would find that there are many of such policies, political, legal and economic that the government takes with the left what it has given with the right.

We believe that the Committee should take a holistic view of the economy. We also believe it should also include officials of the Ministry of Finance, the budget office and debt management office, besides the financial experts it plans to invite on board, to make room for a robust assessment of the problem and provide fitting solution.