The
head of the apex bank of Nigeria has offered an intellectual
explanation as to why the interest rate has been high to the
inconvenience of people.
Godwin Emefiele
The Governor of the Central Bank of Nigeria, CBN, Mr. Godwin
Emefiele, at the Vanguard Personality Awards, last weekend took time to
explain why interest rate is still high.
He stated: “I sympathize with people when I hear the call on
the CBN to reduce interest rates. I share their goal of a reduced single
digit interest rate regime in Nigeria. But many people do not seem to
understand that in times of high inflation, reducing interest rates make
inflationary pressures much worse, with a second round effect of making
economic growth even less possible.
“It is also important to note that interest rates reflect both
cost of capital as well as cost of doing business. If we can approximate
cost of capital as the average saving interest rate, which is about 6
percent, what then accounts for lending rates at 25 or more percent? It
is cost of doing business. For example, a typical Nigerian Bank must
employ the services of policemen and other security people deployed
constantly to protect its branches. The bank must also provide a
significant amount for reliable electricity and broadband internet
services to keep its systems running. These expenditures only further
increase costs of doing business for lenders, a cost they must pass on
to borrowers.
“This is why the CBN’s fight to bring inflation down is
strongly connected to our quest to ensure that lending rates also come
down in due course.”
But the DG of LCCI, Yusuf, articulated the agonies businesses and
the entire economy are passing through in this circumstance of high
interest rate.
He stated: “We have monetary policy effects on business
confidence. The monetary policy regime has not been supportive of
efforts to rescue the economy. First, on account of interest rates, it
is ranging between 25-30 per cent. How can domestic investors invest
profitably when you are having an interest rate of 25-30 per cent?
“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. Because as they say, “An
economy gets the kind of investments it deserves.” It is the
incentives, the policy that determines the kind of business people will
do, and that is why there are so many disincentives for investors to go
into real sector (Manufacturing, Agriculture, Solid minerals)
investments because of the issue of cost of fund.
“How can you make any reasonable returns on investment at 30
per cent in agriculture, industry, property? Maybe it is buying and
selling which is even very difficult now. So, monetary policy regimes
have been big issue.
“Then, there is the challenge of the way government borrows.
Government’s borrowing has become a major problem for investors;
government is borrowing at 18 per cent, 20 per cent; zero risks, how can
the private sector compete? And that is why all funds in the economy
now are going into treasury bills, they are going into federal
government wallet, so that has made it very difficult for the private
sector to play its role in the economy in terms of this rescue mission.
“As it is now, there is no way you can compete with government
in the financial market, even the banks, they would rather buy treasury
bills and bonds than to give money to manufacturers. That is the kind of
investments disincentives or structure that the policy has created.”
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