News on the catastrophic effect of the novel COVID-19 pandemic on economies, lives and livelihoods isn’t fresh anymore. Countries, businesses and households have resorted to ways of living with the deadly virus and returning to normalcy while hoping for a vaccine as the ‘ultimate saviour’.
In Nigeria, however, the ‘plague’ which will – if not eradicated – continue to impede the growth and development of the economy as well as the welfare of its economic agents, especially households, is the poor and myopic policies of the country’s decision/policy makers. These policies are detrimental to growth and development.
The impact of the financial repression policy by the Central Bank of Nigeria (CBN) has rendered unattractive Nigeria’s investment environment, especially in the fixed income space. Domestic investors particularly are forced to either opt for low yield investments or invest in riskier asset classes or one which requires large capital outlay.
Financial repression, a term which describes policies that lead savers to earn returns below the rate of inflation in order to allow banks to provide cheap loans to companies and governments, reduce the burden of repayments. It was effective at ensuring the federal government is able to borrow at extremely low interest rates.
Now, what typically defines Nigeria’s fixed income securities is the deeper negative real return with the consistent acceleration in Nigeria’s inflation rate. Return on Nigeria’s one-year bond, for example, is 3.094 percent. When inflation is adjusted for at 12.8 percent, this puts real return at -9.7 percent approximately.
While financial repression policies in themselves should drive investments via access to cheap debt capital to companies and households, to impact positively on economic growth, this may not be the case in Nigeria.
Nigeria’s prime lending rate – a rate that commercial banks charge their most creditworthy corporate customers – as at June stood at 15.65 percent according to data from the CBN. This reflects the credit risk still inherent in the economy made worse by the devastating effects of the COVID-19 pandemic.
To most businesses, especially MSMEs which account for about 95 percent of businesses in the country and contribute 50 percent to GDP, the cost of obtaining credit is high and unaffordable.
It is sad to note that the policies of the CBN, among other things, have successfully made borrowing cheaper for an entity whose expenditure accounts for just 12.6 percent of GDP—an entity whose debt levels have skyrocketed over the years with no economic growth to justify its debt accumulation.
It is also a sad story that the CBN-induced low-interest-rate environment has left the economy with more losers and less gainers. More importantly, it is encouraging the federal government to borrow more. The focus should be how the FG can unlock dead capital, instigate a private sector-led economy through deregulation of key sectors; provide good business climate and boost non-oil revenue rather than amass debt.
Recently, the CBN also announced that interest on local currency savings deposits will be negotiable subject to a minimum of 10 percent per annum of Monetary Policy Rate (MPR). This takes the savings interest rate from 3.9 percent to 1.25 percent per annum or 0.104 percent per month.
While this policy discourages savings and increases banks’ profitability while aiming to boost economic recovery, we see it boosting consumption and ultimately pressuring further already accelerating inflation rate. In the end, households are worse-off.
We understand the need to boost economic growth and hope for a V-shaped recovery. However, policies that erode investors value aren’t one of such economic boosters. There are low-hanging fruits the country can pluck to steer recovery or exit the impending recession early enough.
We advise that policies must be thought through critically before they are enacted else after the COVID-19 pandemic is gone, the country will still have bad policies to worry about.
