Font size:
Print
WILL YOU BORROW BACK YOUR OWN MONEY AND
PAY 17% INTEREST? ...ASK CBN!
BY: LLES LEBA (Email: llesleba@hotmail.com)
Universal commercial practice recognizes that interest is the rent you pay for the use of some one else’s capital or in layman’s terms, some one else’s money. The rate of interest payable on a particular loan would generally be determined by the level of the perceived risk vis-à-vis ability to pay back the loan and the hope of a ‘reasonable’ return as profit. Generally, the higher the perceived risk, the higher the rate of interest and the expected returns. In this regard, lending to the private sector is generally regarded as fraught with risk in varying degrees and consequently attracts higher rates of interest. However, in economies with credible productivity, commercial lending rates do not exceed 10 percent. Indeed, in Europe and America, rates could be as low as below five percent.
On the other hand, Government borrowing through its offer for sale of treasury bills is universally, traditionally regarded as extremely safe investment as these obligations must be appropriately redeemed irrespective of political and other social distortions which may occur in the life of a nation. Consequently, government with focused administrations would widely adopt the instrument of treasury bills issue to borrow cheaply at rates between 1 – 5 percent from the capital market and also fine-tune money supply in line with monetary policy. Regrettably, however, our own Central Bank’s (CBN) tireless efforts to successfully patronize this same instrument for the smooth operation of the Nigerian economy has met with dismal and consistent failures which now threaten the welfare of the Nigerian masses.
The pivotal role of the CBN is to create an enduring enabling environment that will galvanize economic growth. The continuous collapse of the industrial sector despite several futile attempts at resuscitation has clearly demonstrated that our industries, particularly at the primary level of small and medium enterprises cannot survive under a double digit interest rate regime; even His Excellency, President Obasanjo has admitted this reality on several occasions. Commercial lending rates to the private sector, as would be expected take a cue from rates that government is willing to pay to borrow money from the capital market. These rates are indicated by the CBN through the adoption of a Minimum Rediscount Rate (CBN Base Rate) and also the Treasury Bill Rate. These rates currently stand at about 15 and 17 percent respectively! Compare these with average rates of 3 and 5 percent in serious minded economies elsewhere; our local commercial banks, in turn, consolidate their operational costs and profit on the Central Bank base rates and currently demand a rate in excess of 25 percent to beleaguered industrial, agricultural and commercial operators. It is worth noting that it would be suicidal to borrow at such high rates to realize an industrial entrepreneurial dream with over two years gestation, as the money borrowed would be almost doubled before the final products reach the market! Existing industrial operators on the other hand cannot carry the burden of such high interest rates and consequently constrain expansion, retooling and refurbishment projections to the detriment oftentimes of quality and efficiency. The additional cost of running generators and provision and maintenance of own infrastructure often become burdens too heavy to bear! The ultimate result is another factory closed! The consequent negative multiplier effects of increasing unemployment now pose a threat to our welfare and security. The devil, they say, finds jobs for idle hands!
In those countries with enduring productivity, commercial lending rates range between 2 – 5 percent. In these economies, with such low interest rates, the odds are not stacked against operators ab initio. Besides, industrial and commercial enterprises are supported by well articulated infrastructure and official encouragement while farmers are even supported with subsidies!
The question we now ask is “if all these adverse tendencies trail our own regime of high interest rates, why does the CBN stimulate and sustain this regime with its comparatively high Base Rate and Treasury bill rates of about 15 and 17 percent respectively?” How desperate can the CBN be to succumb without intimidation to pay 17 percent interest on a government borrowing that is generally considered to be risk free!! Why would any bank in their right business sense want to lend for a potentially risky private investment when it can give government its funds and go to sleep and later collect 17 percent interest at the end of the year! Why is the CBN so aggressively in competition with the private sector for the available funds in the capital market, in spite of the stifling effect of such action on industrial and economic growth and ultimately national welfare and security?
The Central Bank’s behaviour becomes even more bizarre when we take a look at the real ownership of the funds for which it is willing to pay an arm and a leg!
A few months ago, the CBN declared that its investigations revealed that close to 80 percent of the funds in the banking system belong to one government agency or the other. The CBN decided therefore that in order to curb the speculative and other sharp practices by the banks, particularly in the area of foreign exchange trading, it would summarily withdraw these funds for keeping in CBN coffers! The jitters that surged through the banking sector after only 10 percent of such government funds had been withdrawn made the CBN to beat a hasty retreat and suspend the directive.
Even a casual reader of this piece will be struck by the above scenario! So, you may wonder, if 80% of the funds belonged to government all these years why has the CBN been borrowing back (our) government money at ‘Shylock rates’?! Why has the CBN consciously continued to inordinately increase the burden of our national debt when we need not have incurred such magnitude of indebtedness in the first place?
It would be fair to say that a rational person (even our simple market woman) would not handle her personal finances with such recklessness!
So the question becomes louder, why does the CBN do it? Well, the overt explanation that can be gleaned from various CBN press/information releases is that such a drastic measure is required to mop up the excess liquidity (too much cash) in the system.
The pertinent questions now become “how did the cash in the system get so much and who continues to re-inject fresh cash after each mop up exercise every week or so?
Fortunately, cash is real and its source can therefore be diligently traced. A close look at the course of monetary policy in Nigeria will reveal that the issue of excess liquidity (too much cash in the system) is unleashed whenever the monthly revenue allocations are disbursed from the federation pool. When the allocations are paid into recipients (states, local government etc) bank accounts, the cash positions of those beneficiary banks are grossly distended and create a potential for unrestrained credit expansion by the banks. However, since the converted naira cash allocations were not matched or derived from any form of productivity locally, the resultant effect of unbridled credit expansion by the banks would be adversely inflationary with serious consequences for production costs and the value of the naira and purchasing power of the common man!
So it seems that the CBN is caught in its own web of consistently and inadvertently creating a mess and having to continue unsuccessfully to perfect a mopping up process! What we consequently have is an endless cycle that has destabilized the economy and impoverished our people even when it is patently clear that we are earning more vital foreign revenue in the face of reduced consumption! Our foreign reserves have now exceeded $13 billion dollars for the first time in 40 years, yet we are the third poorest nation in the world. Nigeria was better placed when we had half this value of reserves and consumed much more as evidenced in the past by the phenomenon of port congestions everywhere!
Fortunately, the situation is not as hopeless as canvassed from some unpatriotic quarters! The ghost of excess liquidity and the macabre dance of the CBN to contain it each time the federation allocations are disbursed will be successfully exorcised when the CBN refrains from changing the dollar revenue in the federation pool into naira at its own rate (different from DAS rate) before payment to beneficiary accounts. The need to find the naira cover for each unit of dollar to be shared is responsible for the distortions, dislocations and much of the corruption in our monetary and economic system. This arrangement engenders a system where there will always be too much naira in the system chasing the dollar!
A simple rational approach would be the payment of the dollar revenue in the federation pool to beneficiaries as registered dollar certificates; the beneficiaries, state, local governments etc would subsequently negotiate their certificates for naira with their bankers in a free and deregulated market. This arrangement would entirely exorcise the ghost of excess liquidity (too much naira) and create a scenario where too much dollars appear to chase scarce naira and also halt the CBN from further borrowing back our own money at reckless rates of interest! Commercial lending rates would fall to below double digit and industrial production costs will fall with a stronger naira, and the resultant improved purchasing power will generate demand and stimulate investment, employment and growth.
SAVE THE NAIRA, SAVE NIGERIA!
A HAPPY & PROSPEROUS NEW YEAR TO ALL OF US!! AMEN.
