Kemi Adeosun throws weight behind calls to ease lending rates, as CBN decides tomorrow

Nigeria’s Finance Minister, Kemi Adeosun, would be earnestly hoping that the Monetary Policy Committee (MPC) lowers benchmark lending rate to moderate domestic borrowing costs for government and the private sector, ahead of tomorrow’s monetary decision.

The MPC members are meeting for the first time since state statistics bureau, the National Bureau of Statistics (NBS), officially confirmed that Nigeria’s economy was in recession.

The last time the 12-man committee met, which was in July, the benchmark lending rate was revised upwards by 200 basis points to 14 percent from 12 percent. A decision the committee said was necessary to lure investors after headline inflation accelerated to 16.5 percent in June and amid a global array of negative rates in key frontier markets.

Despite easing by one percent month-on-month, July inflation remained on an upward swing, touching an 11 year high of 17.1 percent.

As indications point to another rate hike, Adeosun, who spoke at an interview on CNBC Africa on Monday, said “We need lower interest rates because when we are borrowing and interest rates go up, it increases our cost of debt service and it reduces the amount of money that is available to spend on capital projects,” she said.

“The attempt was to manage inflation and the trade-off for the economy right now is what the bigger problem is: Is it growth or inflation? For me it is growth. I would rather seek growth. We can manage inflation. I think for us, at the moment in the Nigerian economy, growth is the most important thing.”

The fall in international commodity prices have dragged down the economies of most commodity exporting countries in sub-Saharan Africa, and has meant the region’s GDP expanded only 1.7 percent in annual terms in Q1, the slowest pace since Q4 2009, according to the World Bank.

Nigeria, hard hit by low oil prices and output declines, saw its economy contract 0.36 percent and 2.06 percent in the first and second quarter respectively, its worst economic crisis in 25 years.

Spiralling inflation and rising unemployment is biting hard on Africa’s most populous nation. Opting to jerk lending rates up at the last meeting meant the CBN handpicked managing inflation over inducing growth.

Godwin Emefiele, the Central bank governor and chair of the MPC, in an interview with select journalists over the weekend, admitted the need to stimulate credit flow in the economy but sounded unwavering in attracting foreign portfolio investors with positive yields.

“In a time of recession you need to spend to achieve growth. However, on the other hand, you have to be very careful so that excessive spending does not result in sky-rocketing inflation,” Emefiele said. “That is why at the last MPC meeting, members tried to weigh the balance between growth and inflation and noted that if we allow inflation to grow at the rate that is so astronomical and uncontrollable, that could be a problem.”

In the wake of plunging petrodollars, the CBN hastily abandoned a currency peg which eroded foreign capital as it explores other avenues of encouraging dollar inflow. One of which is ensuring interest rates are attractive enough for portfolio investors.

“I must confess that I wasn’t optimistic that the FDI will come initially but with what we have seen in 3 months, almost $1 billion. I feel confident and very confident that there will be more inflow into the system and more and more people will have foreign exchange available for them to do their business. The rate may be high now, but there’s high possibility that with more availability of foreign exchange, the rate will come down,” Emefiele added.

Nigeria is joined by South Africa, the Democratic Republic of the Congo, Mozambique and Uganda in the economic turbulence.

Bright spots in Q1 were Kenya and Tanzania, where GDP growth is sustained by large-scale infrastructure development, while Ghana and Botswana also expanded healthily.

The Monetary Policy Committee (MPC) of the Bank of Ghana left its policy rate unchanged from July’s 16.7 percent yesterday, even as inflation sits at 16.9 percent.

Africa’s major economies are taking diverging approaches to monetary policy as they struggle to cope with volatile currencies, slumping growth and political meddling.

Kenya, Nigeria and South Africa are set to announce interest-rate decisions this week in an environment marked by accelerating price growth and an economic slump in some countries and attempts by politicians to prescribe policy in others.

While Nigeria’s central bank will probably take more aggressive action, South Africa, Kenya and Ghana are set to keep rates on hold, analysts predict.

Several economic experts have urged the CBN to slash lending rates, adding that high rates were fostering a misalignment between the monetary and fiscal policies and made it more difficult to steady the ship.  

Adeosun also said she was working with the debt office, Nigeria’s sovereign wealth fund and the pension industry to float an infrastructure bond to raise money for road and housing projects, but gave no specific details.

Nigeria had earlier revealed that it planned to set up a $25 billion infrastructure fund to invest in the transport and energy sectors.

Estimates of the cost required to bridge the deficit in power is $10billion per year for 10 years and $16 billion is required for transport over five years, totalling $26 billion.