It is public knowledge that the excessive interest rate banks charge on loans and advances is a major impediment to economic development and even the health of the country’s financial system, Uche Chibuike, a member of the last Monetary Policy Committee (MPC) meeting held in Abuja, has said.
Chibuike is of the opinion that the Monetary Policy Rate (MPR) be reduced by 50 basis points to 11.50 percent, with interest rate corridor of +/-200 basis points; to retain Cash Reserve Ratio (CRR) at 12 percent, and to retain Liquidity Ratio at 30 percent.
Chibuike expresses fear on the consequences of high MPR and tight monetary policy stance of the MPC, which he says remain obvious.
It has for instance provided little incentive for the development of the real sector, which is central to the attainment of sustainable economic development in our country. This has been complicated by the increasing margins between the lending and borrowing rates in our economy, he says.
According to him, despite the high MPR, deposits in the banking sector continue to earn negative real returns. On the other hand, banks charge borrowers rates that double or even triple the MPR rates.
The consequence, he says, is that the high MPR is basically being exploited by the banks. Depositors are simply being forced to subsidise bank profits in an oligopolistic market. In the long run of course, both banks and depositors will lose. This is because there is always a positive correlation between the health of banks and that of the underlying economy. Any monetary policy model that does not recognise this fact cannot, in my view, be sustainable.
“The belief that banks in a rentier state where information inefficiency thrives will through moral-suasion behave in a less predatory manner with respect to interest rate policies is erroneous. The current data, which show that banks are gradually returning to their mega-profit declaration days sometimes with little respect for existing CBN rules, is clear evidence of this.
“We therefore need to do more to curtail the widening gap between banks’ deposit and lending rates,” he says.
Chibuike has always disagreed with the “popular view” that maintaining high MPR makes Nigeria competitive with respect to attracting Foreign Direct Investments (FDIs). This is because most of these so called FDIs are simply speculative capital looking for short-term profit outlets. This kind of capital does not develop economies.
He admits that attracting such monies usually help central banks to curtail exchange rate pressures. This however happens only in the short run. History has shown that speculative capital is always volatile and economically destructive in the long run. The reverse flow of such capital can easily put pressure on both currency exchange rates and the capital market. The recent pressure on the naira is no doubt, at least in part, a consequence of FDI flow reversals.
Few will also dispute the fact that speculative FDI is partly responsible for the current appreciation of share prices in Nigeria. Such influences are clearly not sustainable, he says.
Garba Abdul-Ganiyu, also a member of the MPC committee, decided in favour of a cut in MPR by 25 basis points in January to signal “a commitment to macro-economic stability now and, in the future and, to avoid history repeating itself at an even greater cost.” Nothing has happened between January and now to convince me that I made the wrong decision.
On the contrary, the underlying asset price bubbles in the major capital. Markets globally and, its “contagion effects” on the Nigerian capital market convinces me that the observed flows and market movements are not sustainable in Nigeria and globally,” he notes.