It is expected that an administration that exists on a common agenda will obviously speak with one voice because they have a common agenda, and of course meet at various fora to iron out different issues before arriving at a common decision.
This is the ideal scenario, but it was a matter of media battle when recently the Minister of Finance, Mrs. Kemi Adeosun and her counterpart at the apex bank, Mr. Godwin Emefiele, spoke from different sides of the tongue as regards the issue of bank interest rates.
The Minister had urged the Central Bank of Nigeria to consider cutting the current 14 per cent benchmark interest rate by banks, to support government stimulus plan to borrow cheap funds locally, to bail out the economy.
“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.
Adeosun’s suggestion has been based on the government’s sincerity in tackling the problem of recession, but CBN Governor totally disagree with her suggestion, claiming that lower interest rate is not the solution.
Emefiele argued that a cut in the rate at a time inflation was rising could worsen the nation’s economic situation. He also noted that the apex bank was certain that cutting rates without appropriate fiscal plans may not help the economy, calling on fiscal side to fasten the budget-implementation process.
“I am more confident of inflow of foreign investment today, than he was during the last MPC meeting, adding that $1 billion had come into the economy in the past two months.
However, the issue, which had dangled among the committee of Monetary Policy Committee (MPC), had analysts pitching tents with the Finance Minister, expecting the CBN to heed the suggestion, in order to stimulate borrowing from banks to finance productive activities to grow the economy.
An Economists, Mr. Bismarck Rewane, who is also in support of the call for a reduction in interest rates, argued there is no other way forward but to reduce the interest rate. He added that during recession in Britain, the country brought down interest rate, and the same with the United States when they faced the same crisis and today, they are doing fine, “so we also need to bring down the interest rate”.
Another expert, Akpan Ekpo, who doubles as an academic professor, also described the move as ‘‘the only way to fast track the recovery of the economy. The interest rate must be reduced to close to single digit, in order to stimulate the real sector, now it is an average of 25per cent and that is too high. The sector is dead now, when you are in a recession and the real sector is dead, then the recession will last for long”
But contrary to suggestions, the CBN Governor noted that inflation had begun to recede since the bank’s last MPC decision, which indicates that the decisions were having expected effects on the economy.
The monetary policy committee of the CBN had at the end of its meeting in July raised the MPR to 14 per cent from 12 per cent. At the meeting, all the members of the MPC voted to keep interest rate at 14 percent, while cash reserve ratio and liquidity ratio were also maintained at 22.5 percent and 30 percent respectively. But some economists are predicting that it will keep the key interest rate at 14 per cent, while others say a cut is inevitable.
The CBN governor has hinged his refusal of Kemi’s request on the fact that the CBN needs the high interest rates to attract inflow of dollars into the Nigerian economy. Stakeholders noted that with the CBN managed external reserves on a free fall, Emefiele needs high interest rates to attract foreign investors to come and invest in Nigeria debt instruments in a bid to ensure that the country does not run down its external reserves. They added that a lower interest rate would not do the magic.
Data released by the National Bureau of Statistics (NBS) shows that since the CBN began to raise interest rates in March and moved for a flexible exchange rate, there are signs that foreign investors are getting interested in the Nigerian market again. The NBS data shows that the country recorded capital inflow of $1.04 billion in the second quarter of 2016, 46.58% increase over the inflow recorded in the first quarter of the same year.
In deciding not to cut rates, Emefiele cited the increase in capital inflows in the second quarter as a sign that the purpose of using higher interest rates to attract dollar inflow into the country is working.
But analysts at United Capital disagreed with the CBN governor in a note to investors released after the CBN made its announcement.
They however, maintained that the CBN has one last opportunity to cut interest rates before the end of this year in its last MPC meeting slated for November20 and 21. United Capital notes that the last meeting should provide the CBN with an opportunity “to make the crucial decision of whether to continue to jettison growth concerns by maintaining a tight monetary policy stance in a bid woo the foreign money managers and stabilize the FX market, or return to a monetary easing mode which will align more with the fiscal objectives of the government, effectively completing a one-year cycle of monetary policy flip-flop.”
But on whatever divide the interest rate falls, it is worthy of note that both revered financial institutions meant well for the economy. While the Finance Ministry under Kemi Adeosun steadfastly wishes to enable home grown economies to grow and respond adequately to the biting recession, the Central Bank under Godwin Emefiele is desirous of seeing enough foreign currency pumped into the financial system to ease the pans of recession and in fact draw the country out of recession.
In actual fact, both institutions meant well, but the CBN must understand that the more the bank interest is increased the more the effect is felt on the citizens, who eventually bear the brunt.
Consequently, it will be in the best interest of all and sundry if the government could do all within their power to ease the pains and burdens of the Nigerian citizens at the time. Any measure therefore, to be introduced should not in any way increase the excruciating pains the people are already going through.