“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.  Even before the withdrawal of this liquidity, they were already charging over 20% interest rates and I think that is alarming.  …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%, 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 5% and 3%.  But they are giving certain segments high deposit rates.

“…But the fact that we are leaving the banks as we are running a free market system, 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 (banks), but I am puzzled as to why.  I think there is a structural problem within the banks and our banking system and their pricing.”

The above is an excerpt of the Finance Minister, Dr. Ngozi Okonjo-Iweala’s responses to ThisDay Editiors, on the seemingly intractable challenge of the dysfunctional interest rates structure. 

It may indeed be best practice for a country's Central Bank to enjoy autonomy in formulating and executing strategies and decisions that would sustain price stability (i.e. low cost of funds, minimal inflation and appropriately priced currency).  Nonetheless, the monetary policy directions of Central Banks and the fiscal policy objectives of the Executive branch of government must be in harmony to avoid conflict in the product of their respective actions;  for example, the high interest rates currently induced by CBN’s policies deflates the real sector and challenges government's expectation for industrial and agricultural expansion to promote increasing job opportunities, and by extension, improved social welfare, while it simultaneously increases our debt burden in spite of minimal infrastructural impact.

This realization of the stifled objectives of government led to Dr. Iweala’s above lamentations!  Regrettably, the enabling 2007 CBN Act does not finely define parameters for judging acceptable level of price stability; consequently, CBN could still claim that it has successfully maintained stability, even when interest and inflation rates remain ‘stable’ at such high rates that depress economic growth.

Consequently it is necessary to circumscribe CBN’s jealously guarded autonomy with clear parameters, which define success and failure; thus best practice monetary management must sustain lower single digit inflation and interest rates as obtains in successful economies elsewhere; therefore,  CBN's monetary policy rate must never exceed, say, 2% of the international bench mark  of the London Interbank Offer Rate (LIBOR).  Failure to engender inflation rates below 4% should also lead to the resignation of the Governor and dissolution of CBN’s Monetary Policy Committee. 

The Finance Minister also expressed her consternation at the huge gap between high lending and very low deposit rates.  Instructively, however, best practice interest rate structure can never be attainable with the ever-present burden of surplus cash or excess liquidity in the system.  

Consequently, any viable strategy must attack the root cause of systemic surplus cash, which curiously does not translate to liberal availability of cheap credit to the real sector!!  In spite of the distractive serial arguments to the contrary, undoubtedly, such surplus cash evolves, whenever CBN substitutes naira allocations for dollar-derived revenue.  This singular factor poisons successful management of the economy, as it instigates the odd reality of government borrowing back its own funds from banks and also crowding out the real sector from available credit.  Indeed, excess funds also fuel inflation and facilitates ample opportunities for corruption.  Indeed, Dr. Iweala needs no longer search for the cog in our economic wheel of progress!  

Furthermore, excess naira supply instigates downward pressure on the naira, especially when we earn increasing dollar revenue!  Worse still, a weaker naira increases fuel subsidy and may pose a threat to subsidy-free tariff in the power sector.

Incidentally, some critics may observe that before the 2007 CBN Act, which consolidated CBN’s power, cost of funds were between 17 – 20% (still very high rates) throughout the Finance Minister’s first term in office, but there is little evidence that she did anything about it, even when there were no constitutional constraints.  Nevertheless, Dr. Okonjo-Iweala's intended meeting with banking sector operators will certainly be meaningless, if the root cause of surplus cash is not addressed.  

The option of creating a development bank suggested by the Minister may actually turn out to be a wasteful duplication of the functions of the existing Bank of Industry (BOI).  Furthermore, the creation of selective low interest rate by fiat for such a bank together with CBN’s tight monopoly of 80% of forex supply may also not be compliant with Dr. Iweala’s support for a truly free market system!

Advisedly, the BOI funding should be heavily supplemented to increase its territorial spread and ensure that cost of funds and other ancilliary charges do not cumulatively exceed 7% in place of oppressive cumulative charges above 20%, which manufacturers recently decried.  Furthermore, in line with best practice in successful economies elsewhere, agriculture loans should not exceed 2% also cumulatively 

Instructively, Dr. Iweala’s dilemma on conflicting economic strategies will be resolved once CBN cuts the umbilical cord that feeds the money market with excess cash by stopping its usual capture of monthly dollar revenue and substituting same with bloated naira sums!