The first thing I have to say is that we have a central bank that is autonomous and it is the best practice to make these decisions. We may not be happy about it and I am bold to say we are not happy about high interest rates. As I said before, it is tough for our entrepreneurs to function. However, I just want to say that it is very easy now to blame the central bank for withdrawing this liquidity, have you looked at our banking sector? Even before the withdrawal of this liquidity, they were already charging over 20 per cent interest rates and I think that is alarming.
They were already charging very high interest rates and we need to interrogate why. Structurally, what is the issue? And we are not willing to ask our banks that question. So as the minister of finance, I have been very concerned about that. Even if the monetary policy rate (MPR) is 12 per cent, inflation is coming and there is no reason why the spread. It is too high! Why are real interest rates in the Nigerian economy so high? Deposit rates are extremely low and Nigerian savers are earning as low as five per cent and three per cent.
But they are giving certain segments high deposit rates. So those segments that have high liquidity are made to enjoy higher deposit rates. This is also why we are looking at government’s accounts in banks. If you notice recently, we took several strong steps, because we wanted our IGR to go up. We had estimated that by second quarter we would make N58 billion from IGR sources and it was not coming. We asked the agencies to remit and they were not forthcoming. So we got permission from the president to take very strong stance, which was to make sure that they don’t open an account without the authorisation of the Accountant General of the Federation (AGF). We went and we were able to recover N34 billion. We had to go that far and we are still going to get the N58 billion that we estimated.
But I will be the last to say that government should interfere in monetary policy decisions. We have passed those days where you sit down and ask government to interfere in interest rates fixing and charges by banks. Those were the antiquated policies that we used to do. But by the fact that we are leaving the banks and we are running a free market system, which does not mean that you have to have this kind of behaviour. Private sector credit has gone down. I plan to have a meeting with the banking sector operators to really understand what is going on.
That is why we are really going to set up the development bank. I am not trying to bash them, but I am puzzled as to why. I think there is a structural problem within the banks and our banking system and their pricing. They will tell you that they have to buy power and they have to buy generators and diesel, but even when you factor all that in, in my mind, it should not be as high as it is. Then you find that some favoured people get loans at 12 per cent, whereas the ordinary person on the street will not be talked to.
As CBN raises Benchmark interest rate to 12 percent, inflation rose to 10.3 percent in September from previously 9.3 percent in August
Once again at the beginning of fourth quarter, the country’s Federal Reserve Bank; the Central Bank of Nigeria (CBN) raises the monetary policy rate (interest rate) to a new high of 12 percent from previously 9.25 percent. There is no surprise with the new hike knowing quite well that CBN has been aggressively engaged in the tightening measures of its monetary policy and assiduously mopping the monetary base liquidity. But the margin of the hike at 2.75 percent from the previous rate was astounding. The capital market was anticipating at least a 10 percent hike but the muscular CBN jumped interest rate to 12 percent.
The reason given by the Governor of Central Bank, Mr. Lamido Sanusi for the hike was to strengthen the relatively malleable Nigeria’s currency naira. Although naira is weakening but it is not necessarily in a dire straight either it is totally collapsing to require such a drastic hiking of the interest rate to 12 percent. Subsequently Naira responded and appreciated against dollar due to the aggressive move; it did rally in the market and closing good the next day after the hike of the interest rate.
Vanguard Newspaper reported that “naira opened at 157.40 against the dollar at the interbank, firming from Tuesday’s close of N158.90 and up six percent from the record low of 167.8 reached before the CBN imposed several monetary tightening measures at an emergency meeting on Monday.” It was reported that Central Bank of Nigeria (CBN) at auction market sold $519.67 million at price rate of N150 for a dollar. On the previous day before the recent interest rate hike $400 million was traded at N156.91.
Other than the strengthening of naira, the unmentioned reason for the interest rate hike might be to get the economy ready for the removal of fuel subsidies. The idea is to utilize the monetary tightening policy as bulwark from the eventual higher inflationary trends as the subsidies are removed.There is no doubt that inflation will spike momentarily for a short time as fuel subsidies become history. Although Sanusi’s CBN was mum on fuel subsidies as propelling force for 12 percent monetary interest rate, but the writing is on wall. The development buttressed that the removal of fuel subsidy is a sure banker and there is no more orbiting around it, the government has finally made up its mind.
But the move to fix naira from its fall by CBN is not sustainable for the ‘shock therapy’ cannot solve the problem of naira permanently. The Sanusi’s CBN appears to be riding on momentum rather on fundamental; Nigeria has a structural imbalance that the tickling by CBN is quite minuscule to make a long term impact on the monetary affairs of the country and the strengthening of naira. Nigerian economy is based on oil and such an economy without diversification lacks the strong fundamental to sustain a viable and strong currency. When Nigeria sits up and makes the necessary changes in the way she runs her economy, the malleability of naira can be checked. The reactionary posture by policy makers is not the panacea to the falling naira.
The source of foreign exchange to Nigeria’s economy is limited. The major source of dollar to the economy is through the export of crude oil and remittance coming from Nigerians in Diasporas particularly from North America. Another weakness in the economy is its inability to sustain or hold to those dollars flowing into the economy. This is because the economy and country lack the necessary infrastructures that can hold on to the dollars in the economy. Paucity of social infrastructures, poor security and underdevelopment contributes to capital flights. The country is becoming unattractive to foreign investments and dollars.
The problem with Nigerian economy and particularly with Naira is akin to football team that never soccer a goal in matches and always loses due to lack of training and planning.Although a team might have some good players but without training, planning and coordination it will never succeed. Nigeria has intelligent men and women but it has failed to map out a pragmatic and strategic framework to transform the nation’s economy.
In September inflation rose to 10.3 percent and this shows that the tightening monetary measures employed by CBN maybe waning. There is so much CBN can do with its monetary policy and if care is to be taken the success that CBN achieved may even reverse. This is why it is important that propping of naira and the battle against inflation must come with comprehensive strategy and economic reforms spearheaded with the executive fiscal policy.
Another thing sticking out with the 12 percent hike is the underpinning contradiction coming from CBN policy makers. The appreciation of naira will result in a sharp demand of dollar and CBN may not satisfy the demand. A contradiction that arises from the strength of naira is contrary to devaluation of naira that CBN is planning for near future. It is not logical to make naira stronger, simultaneously planning to devalue the currency in near future. The withdrawal from the country’s foreign reserve to defend naira has lowered the Nigeria’s reserve from $31.75 billion at the end of September to $30.86 billion as of October 7. The battle to save naira is expensive to the country therefore Nigeria must look beyond monetary tightening measures.
For the second time Central Bank of Nigeria (CBN) raised the benchmark interest rate to 7.5 percent from the previously 6.5 percent. The one point ascension of the interest rate was part of the aggressive monetary policy tightening by the apex bank to hold back the inflation and soldified the gain made that was buttressed by the receding inflationary trend. The February rate of inflation has receded to an annual 11.1 percent, although a point behind the targeted 10 percent but a good development. Central Bank of Nigeria Communiqué No. 75 of the Monetary Policy Committee Meeting, March 21-22, 2011 was signed by Governor Sanusi stated that the, "Members of the Committee voted unanimously for further tightening of monetary policy because of heightened risk of inflation. The Members specifically pointed out the rising international food and energy prices, the impact of import costs on domestic prices, the challenges that fiscal stance posed to the external value of the Naira and the likely front-loading of public expenditure in the election period. Against this background, the following decisions were taken:
For the second time Central Bank of Nigeria (CBN) raised the benchmark interest rate to 7.5 percent from the previously 6.5 percent. The one point ascension of the interest rate was part of the aggressive monetary policy tightening by the apex bank to hold back the inflation and soldified the gain made that was buttressed by the receding inflationary trend. The February rate of inflation has receded to an annual 11.1 percent, although a point behind the targeted 10 percent but a good development.
Central Bank of Nigeria Communiqué No. 75 of the Monetary Policy Committee Meeting, March 21-22, 2011 was signed by Governor Sanusi stated that the, "Members of the Committee voted unanimously for further tightening of monetary policy because of heightened risk of inflation. The Members specifically pointed out the rising international food and energy prices, the impact of import costs on domestic prices, the challenges that fiscal stance posed to the external value of the Naira and the likely front-loading of public expenditure in the election period. Against this background, the following decisions were taken:
1. A majority of 9 to 3 Members voted for an increase in MPR by 100 basis points from 6.50 per cent to 7.50 per cent. The 3 Members voted for a 50 basis points increase;
2. A unanimous decision to,
a. Retain the symmetric corridor of +/- 200 basis points;
b. Retain the current CRR of 2.0 per cent and the liquidity ratio of 30.0
per cent; and
c. Extend the CBN guarantee on interbank transactions and
guarantee of foreign credit lines by three months from June 30, 2011
to September 30, 2011."
The aggressive raise of the benchmark interest rate may actually get the task accomplished by quick reduction of inflation. But in long term it may defeat the primary purpose by reverting back to credit crunch at the monetary base. It is logical to gradually hike the interest rate methodically as the market is examined and stability re-enhanced and re-enforced.
The 7.5 percent raised maybe too aggressive, Afripol subscribed to rather a gradual ascend at half point addition at 7 percent. The point is not lost at what monetary policy committee is trying to accomplish in steming down inflation and consolidating the gain made so far. To mop up the liqudity in the market so fast may not bring the relative balance and stability needed in the market. The gradual process of drying of the liquidity at monetary base does not have a shock effect on the market. Therefore raising the benchmark interest rate to 7 percent rather than 7.5 percent would have been better.