CBN’S DISENABLING 12% MPR: STILL NO LIGHT IN THE TUNNEL
BY LES LEBA
“The Lagos Chamber of Commerce and Industry (LCCI) was lately reported to have decried as ill advised and insensitive, the retention of the Monetary Policy Rate (MPR) at 12%, by Central Bank’s Monetary Policy Committee (MPC).
“In the statement the Chamber noted that “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.” (Punch 22/11/2012, pg 28).
“Incidentally, the MPR is the rate at which banks borrow from the Central Bank 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.
“Such high cost of borrowing increases production cost and also makes made-in-Nigeria products uncompetitive against imported substitutes, which are generally aggressively supported with conversely lower single digit interest rates in export economies.
“Similarly, speaking at a media parley recently, on the negative impact of this development on micro-businesses, the President, Association of Micro-Entrepreneurs of Nigeria, Saviour Iche, noted that the CBN’s benchmark lending rate had been “highly unfavourable and destructive to indigenous businesses as some deposit money banks charge as high as 19 – 25% interest rates on loans given to MSMEs.” He further noted that “…tough access to credit facilities does not create room for Micro, Small and Medium Enterprises to grow in Nigeria and this is seriously affecting Nigerian industrial development negatively”.
“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 the Monetary Policy Committee appears to have turned deaf ears to such demands, especially when it is clear that steady industrialisation, increasing employment opportunities as well as enhanced social welfare will become possible with much lower MPR.
“On its side, the CBN has explained that “the Committee was faced with three choices, namely, increase in interest rates in response to the ‘upward trend’ in headline and food inflation; a reduction in interest rates in view of declining core inflation and Gross Domestic Growth, and retaining current monetary policy stance in view of conflicting price signals and global uncertainties.”
“The Committee apparently rejected option one, as being “potentially pro-cyclical, considering the structural nature of recent inflationary pressures”. Option two was equally rejected on the grounds that it was “likely to send wrong signals of a premature termination of an ‘appropriately’ tight monetary stance”.
“Therefore, “the Committee 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 interest and inflation rates or strengthen the naira exchange rate, as required to galvanise 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 index to these variables is of course that of the ever-present burden of excess liquidity. In other words, if we could cure the systemic disease of excess naira supply, 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, which would in turn stimulate aggregate consumer demand and positively drive industrial and economic growth and employment, while service charges on our national debt will fall.
“Instructively, however, the scourge of excess liquidity will remain untamed so long as CBN impulsively expands money supply, whenever it unconstitutionally substitutes naira allocations for export dollar-derived revenue. Thereafter, the CBN inexplicably turns round, to contain its self-instigated systemic cash surplus with higher Monetary Policy Rate, thereby stifling credit expansion. Ultimately, the CBN is also forced to borrow money it does not need at unduly high cost, when it sells treasury bills to restrain commercial bank lending to other customers!
“Consequently, excess liquidity begets a high MPR, which is poison to our economy, as it instigates higher cost of borrowing to government and real sector, and inevitably fuels spiralling inflation, as it pitches increasing naira balances against less goods and services. Excess naira liquidity also predicates a weaker naira and ultimately reduces aggregate consumer demand and industrial activity with increasing unemployment also as collateral. Furthermore, a weaker naira similarly increases fuel prices and the inevitable burden of trillions of naira for subsidy payments.
“Conversely, the plague of excess liquidity will be dispelled by significant reduction of money supply; fortunately, this will become possible if CBN adopts non-negotiable dollar certificates for the payment of monthly allocations of dollar-derived revenue. Lower interest and inflation rates and a stronger naira will also become realisable with such a payments model, and industrial and economic welfare will be regenerated rapidly with increasing employment opportunities.”
The preceding is the text of an article earlier published in November 2012, with the title “RETENTION OF MPR AT 12% INSENSITIVE, SAYS CHAMBER OF COMMERCE”. Yet again, the CBN’s Monetary Policy Committee recently held its quarterly meeting on 22/05/2013; regrettably, in spite of the recognition of the attendant disenabling impact on the economy, the Committee retained its MPR at the economically disenabling rate of 12%! Evidently, its precursor, the monster of excess liquidity still remains untamed!!
SAVE THE NAIRA, SAVE NIGERIA