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Drop in interest rate will relieve ailing economy

by Business News Report

A drop in interest rates will be a great relief to the ailing Nigeria economy. This is the consensus of bankers and industrialists sampled in a survey.
According to a proposal before the Armed Forces Ruling Council, the monetary authorities have asked for a 2% drop in CBN rediscount rate from 15% to 13% effective next January.
A manager with Nigeria-Arab bank told The Republic that a drop in interest rates will be a great relief to customers. According to him, most borrowers are having difficulty with the new rates of interest. It has scared would-be borrowers to ask for loans, he pointed out.
According to him, if the situation is allowed to continue much too long banks may face a situation where there is lot of idle cash balance in their vaults.
Another banker, an area manager with Owena Bank said that the present high interest rates have not really encouraged saving mobilisation. Most Nigerians he said still have not come forward to save with banks in order to take advantage of the high interest offered. This is said left lots of cash out of the banking system,

According to him, what the new interest rate arrangement has succeeded in doing is realignment of banks portfolio. Big customers he said, have only moved money out of their demand deposit to call or time deposit accounts.
The effect he said is that banks would have to pay more in interest to fixed deposit account than before. The increase in deposit clientele with the deregulation of interest rates has been very marginal both in terms of domestic and international banking.
Research economists with the United Bank for Africa and Union Bank said that the objective of deregulation of banks rates has been over taken by events.
They contended that the inflow of foreign capital expected from the exercise has not materialised.
According to them the high interest rates coupled with the falling naira has really not been in the interest of the economy. They argued that economic growth has been stalled in the last quarter as industrialists have found it increasingly difficult to borrow. It is said that up to now there are no known new local and foreign investments in the country. This they said is not in the best interest of the country as what Nigeria needs now is new investment to get people to work and boost industrial utilisation through a kind of loose monetary policy.
At the ministry of finance an official said they see no reason for a reduction in interest rates. An under secretary in the ministry, said that the high interest rates were not the reason industrialists cannot secure loan from banks.
According to a principal secretary in the ministry (they ministry of finance) could not stand aloof to see what they mastermind thrown back at them as unworkable so soon. “It is as if one is asked to pass a vote of no confidence in himself he concluded.
The Republic further gathered that the ministry is seriously opposed to a drop in interest rates and has in a preliminary discussion on the budget argued against it.
CBN officials have however said they could not comment on the situation as they have already made their views known to government. Some of the officials had in a protest letter immediately after the deregulation, told government tat the prime rate was unrealistic going by the social and economic situation in the country.
Since the deregulation many well-meaning Nigerians as well as industrialists have called for a downward revision of interests rates.
At a seminar in October, Chief Allison Ayida, a one time super permanent secretary said that the prevalent interest rates were doing more harm to the economy than good.
According to him, the government made a mistake and should not wait too long before correcting the situation.
According to Professor Ayo Ogunsheye, OFR, the former president of the Lagos Chamber of Commerce and Industry, the downturn in the Nigeria economy which began more than five years go has worsened. All the economic indicators such as the Gross Domestic Product, GDP, the industrial index, inflation, unemployment, idle capacity in industry bear witness to the bad state of the economy.
In 1986, the GDP at constant 1977/78 factor cost, according to CBN annual report for 1986 was N25,290 million. This represents a decline 3.3 per cent of 1985.
This same bank half year Report for 1987 gives an indication of a further fall in the country’s GNP giving a negative growth rate. Industry sources said that capacity utilisation fell drastically from about 38 per cent between 20 per cent and 30 per cent in 1987.
In some sectors it was as low as 10 per cent. In the last quarter of this year, sales volume of most company they said have fallen and many companies are experiencing cash flow problems.
Some other companies have had to close down their factories. As a result of this poor performance of the industrial sector, many workers were retrenched and this further aggravated the unemployment problems in the country.
The consensus is that a drop in interest rates will reduce the cost of borrowing and thus production cost.
This it is believed will motivate domestic investment and push the economy towards growth.

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