Financial Freedom Nigeria

Digging Deep

Is CBN Plunging Nigeria into Economic Crisis?

By Martins Itua

The CBN’s Nigerian Treasury Bills (T-bills) results during the August 3, 2016 auction show rates of 15.440% for 91 days, 18.0589% for 182 days and 18.500% for 364 days. When the Central Bank of Nigeria offers rates as high as 18%, what this means is that customers who wish to invest their money will prefer to invest in T- bills with the CBN. The added incentive to invest in T- bills beyond the attractive rates is the fact that it offers much lower risks than putting your money say in fixed deposits in a commercial bank or indeed in investment instruments such as commercial papers issued by corporates.

For commercial banks to be able to attract the same customers who want to invest in T-bills and get them to put their money in fixed deposits or savings accounts, they must increase the rates being offered as higher risk should attract a higher return. The implication is that commercial banks now have to compete with the central bank for customers, they either have to increase their rates or find other ways to retain their existing customers or get new ones.

It is obvious that the central bank seeks to reduce the money in circulation by selling T-bills at such rates to make them attractive to potential investors. But what the CBN doesn’t seem to understand is that by adopting this approach, there are unintended consequences that have more far-reaching implications on the economy.

First, since commercial banks need to offer competitive rates to their customers, they will have to pass this to their lending rates. So if a bank is offering you as much as 17% for fixed deposits, they will charge upwards of 25% to offer you a loan. In an economy where we are trying to encourage productivity and enterprise, this clearly means that millions of SMEs will be unable to access loans from banks. Any SME that is borrowing money at such ridiculously high rates is likely to fail from the onset. But this will be clearly understandable if the intention of the CBN is to stifle business and prevent them from accessing loans for their businesses.

However you look at it both in the short and long term, this new CBN Monetary Policy Rate will fundamentally undermine and frustrate the plan of President Buhari’s administration to jumpstart and diversify economic activities, encourage real-sector led investment in manufacturing and industrial activities, create the badly needed jobs and grow the economy. The Federal Government needs to urgently understand that it stands the risk of completely shutting down the entire real sector if the current rates set by the CBN are not reversed. Or what moral right will the CBN have to set rates for commercial banks when they are in price competition to get customers?

In order to properly situate this CBN’s policy, let us examine what the United Kingdom did in the wake of the BREXIT. Following the United Kingdom’s referendum to exit the European Union, the exchange rate had fallen and the outlook for growth in the short to medium term had weakened markedly. The Bank of England’s Monetary Policy Committee (MPC) at its August 3, 2016 meeting decided to set monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. The MPC voted for a package of measures designed to provide additional support to growth and to achieve a sustainable return of inflation to the target. Amongst other things, this package comprises a 25 basis point cut in Bank Rate to 0.25%.

What the CBN should seek to do is drive down interest rates to single digits and set bench marks for commercial banks to follow but it has done the exact opposite of that. For our economy to grow in line with the plan of the federal government, our businesses must have access to borrowing rates that make doing business profitable. Otherwise, what you would have is lip service and rhetoric because the real sector of our economy will continue to suffer for as long as businesses are unable to borrow from banks.

As you cannot have a government within a government, the federal government can insist that the CBN makes policies that support its goals to jumpstart real sector activities. If they are unable to set new policies to support this goal, then government must show CBN management the door. The other option available to the government to bypass the monetary policy of the CBN is by creating a specialised development bank to function as the provider of cheap loans at single digit to Nigeria’s critical and strategic sectors such as industrial, manufacturing and agricultural/food processing sectors. The Bank of Industry is supposed to play this crucial role.

If the CBN was seeking to stabilize the foreign exchange on the other hand and encourage investment in view of the recent devaluation, it will continue to drive yields up to attract foreign investment into the country. This is a short term response as these are not foreign direct investments but portfolio investments. It may therefore be that the original problem caused by the exit of the JP- Morgan Index has finally led to a painful process that can ruin the productive base of the economy as inputs by manufacturing sector become more expensive further leading to general rise in price of goods and services.


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