By Jerry Uwah
Kemi Adeosun and Godwin Emefi ele are not on the same page in the thorny issue of interest rates. Th e minister of fi nance wants single digit interest rate purportedly to accelerate economic growth. However, with infl ation still retreating grudgingly after heading perilously close to 20 per cent, Emefi ele as governor of the Central Bank of Nigeria (CBN) sees low interest rates as pouring fuel into a burning house. Ironically, the two key offi cials of the federal government are supposed to maintain symbiotic relations. CBN’s monetary policy should complement the federal government’s fi scal policy. But the reverse has often been the case. When the economy slipped into recession in the fi rst quarter of 2016, the monetary policy of the CBN and the fi scal policy of the federal government were running in opposite directions.
Th e federal government battled recession by borrowing extensively to stimulate the economy. Th e CBN on the other hand battled infl ation by persistently mopping up liquidity and worsening recession in the process. At the moment, the apex bank sees the arduous task of taming infl ation as its primary assignment and has done everything to stabilize prices by persistently mopping up liquidity and making it expensive to borrow. With prime lending at 19 per cent, the cost of funds is very unfriendly in an economy that is battling recession.
Th e economy of Japan has been in recession for several years and the economic tacticians in the world’s third largest economy battled recession with a nearzero lending rate. Th e aim is to stimulate consumption and production with cheap funds. Th e CBN monetary policy is informed by an entirely diff erent philosophy.
Th e apex bank sees infl ation in a recessionary economy as a strange phenomenon conjured by the tumbling value of the naira and Nigeria’s shameful dependence on imported goods, especially refi ned petroleum products and food items. It believes that the only way to stem infl ation under that circumstance is to escalate the cost of funds and deter reckless creation of risk assets by banks. Th e argument is that if traders have access to cheap funds, they would import consumer goods that could be produced locally.
Th at would mount enormous demand pressure on scarce forex and engender a disorderly depreciation of the naira. Th e CBN is convinced that Nigeria’s infl ation is cost-pushed and not a factor of demand. Th e only way to fi ght the imported infl ation is to strengthen the naira by tightening the noose on liquidity. Infl ation has climbed down from 17.65 to 16.1 per cent in fi ve months.
Th e credit for that goes to the apex bank’s tight rein on liquidity and the improved funding of the foreign exchange market. But the war against infl ation has not been won. Th ere are fears that if the liquidity squeeze is relaxed, the torrent of funds that would fl ood the economy through cheap borrowing could get infl ation rate surging again. Th at economic logic informed the decision of the monetary policy committee of the CBN when it voted overwhelmingly last month to keep the monetary policy rate (MPR) at 14 per cent.
Th e federal government is not comfortable with that decision. Many believe that the federal government has a selfi sh reason for demanding cheap funds. Government needs low interest rate to tame the ballooning cost of servicing its massive debts. It borrows billions of naira monthly to pay salaries. Because government is very active in the money market, its risk-free debt instrument now attracts an appalling yield of 18 per cent for 90-day Treasury Bills. Th e federal government is worsening the situation in the money market by borrowing extensively and expensively to fund recurrent expenditures.
It is starving the private sector of funds that could be invested in projects that would create jobs. Th e truth, however, is that the economy needs low interest rates to grow. However, the high cost of funds is a factor of Nigeria’s astronomical cost of doing business. When a bank mobilizes funds at 12 per cent and factors in the high cost of power generation, bullion vans and security personnel for moving money around, staff salaries and the cost of protecting bank directors from kidnappers, it cannot lend at anything lower than 20 per cent to its prime borrowers.
Th e federal government is primarily responsible for Nigeria’s high cost of doing business which eff ectively dictates the cost of funds. Government is responsible for the high cost of imported fuel, epileptic power supply, deplorable roads that escalates transportation cost and deteriorating security problems. Infrastructure defi cit and insecurity all gang up to escalate infl ation and make single digit interest rate an impossibility. Besides, government has not eased the merciless grip of retailers and transporters on the nation’s price mechanism. Retailers of food items exploit consumers by over-pricing their wares.
Transport fares only climb. Th ey hardly go down. Th e bus fare from Ajegunle Toll Gate, Ogun state to Agege in Lagos went up from N100 to N150 when construction of the over-head bridge in AbuleEgba instigated crippling traffi c bottlenecks. Governor Akinwunmi Ambode fi nished the project right on target and commissioned the bridge on May 27. Unfortunately the transport fare adamantly refused to drop. Th e cost of doing business has to tumble fi rst before interest rate follows. Otherwise, Adeosun and Emefi ele would always sing discordant tunes.
