“The continuation of a tight monetary regime would have the following outcomes: persistence of high interest rate, deepening of the unemployment crisis, financial intermediation role of the banks will continue to be undermined, recovery of the real economy will remain sluggish, capacity of enterprises to create jobs would continue to be inhibited, stock market recovery would continue to be slow and the capacity of banks to support the economy would remain severely constrained.”

The above is an excerpt from the response of Nigeria’s oldest Chamber of Commerce to Central Bank’s Monetary Policy Committee (MPC) decision to retain its Monetary Policy Rate (MPR), i.e. its benchmark lending rate, at 12%.  

Incidentally, the MPR is the rate at which banks borrow from the CBN to cover their immediate cash shortfalls from time to time; thus, the higher the cost of such borrowing, the higher also will be the rate at which banks advance credit to the real sector.  For example, CBN’s lending rate of 12% to commercial banks instigates current borrowing cost of 20 – 28% to the real sector.  

High cost of borrowing increases production cost and makes made-in-Nigeria products uncompetitive against imported substitutes, which are generally aggressively supported with conversely lower single digit interest rates in their home economies.  

The Lagos Chamber of Commerce is evidently not alone in its blunt condemnation of CBN’s retention of 12% MPR.  Speaking on the negative impact of this development on micro-businesses, the President, Association of Micro-entrepreneurs of Nigeria, Saviour Iche, noted that CBN’s benchmark lending rate had been “highly unfavourable and destructive to indigenous businesses as some deposit money banks charge as high as 19 to 25% interest rates on loans given to MSMEs.”

The Manufacturers’ Association of Nigeria (MAN) has also decried the high cost of doing business in Nigeria.  At its recent 45th Annual General Meeting, Rev. Isaac Agoye, Chairman of the over 600-member strong Ikeja Branch of MAN, called on government to reduce inflation and interest rates by formulating good monetary policies. 

In the light of the above it is pertinent to ask why CBN’s MPC appears to have turned deaf ears to demands for reduced cost of funds to the real sector.

On its side, the CBN has explained that “the MPC was faced with three choices: namely increase in interest rates in response to the uptick in headline and food inflation; a reduction in interest rates in view of declining core inflation and Gross Domestic Growth (GDP), and retaining current monetary policy stance in view of conflicting price signals and global uncertainties.”

MPC apparently “considered and rejected option one, as being potentially pro-cyclical considering the structural nature of recent inflationary pressures.  While acknowledging the merit of the arguments in favour of option two; it was also rejected as likely to send wrong signals of a premature termination of an ‘appropriately’ tight monetary stance.”

Therefore, “MPC resolved to retain the MPR which determines the rate at which banks lend to their customers at 12%”.

Regrettably, CBN appears unable to formulate a model that would reduce high rates of interest and inflation or strengthen the naira rate of exchange, as demanded by the real sector.  In reality, however, these critical variables are not mutually exclusive, as the apex bank would want us to believe.  

The common causative factor  to these variables is the burden of excess liquidity; in other words, if we could cure the systemic disease of too much cash, the variables of interest and inflation rates would fall to levels that support industrial regeneration; exchange rate would also become stronger and induce increasing purchasing power of income earners.  This would in turn stimulate aggregate consumer demand and ultimately positively drive industrial and economic growth and employment.

Instructively, however, excess liquidity will remain untamed so long as CBN impulsively expands money supply, whenever it unconstitutionally substitutes naira allocations for export dollar-derived revenue.  This obtuse monetary payments model is poisonous to our economy.  

Ultimately, excess liquidity begets high MPR, which in turn increases cost of funds to the real sector, and inevitably fuels spiralling inflation, as it pitches increasing naira balances against fewer goods and services.  Excess liquidity also pitches bloated naira sums against auctions of limited dollar sums in the market, thus instigating a weaker naira with less purchasing power and lower aggregate consumer demand, which ultimately leads to, industrial contraction and increasing rate of unemployment.

Conversely, the plague of excess liquidity would be dispelled by reduction of money supply; fortunately, this will be possible if CBN adopts non-negotiable dollar certificates for the payment of monthly allocations of dollar-derived revenue.  Lower interest and inflation rates and stronger naira will become realisable with such a payments model, and regenerate industrial and economic welfare rapidly.