Minister of Finance, Dr. Ngozi Okonjo-Iweala, while inspecting a cold rolling mill facility in Ilorin last week was reported to have said that the current regime of interest rates in the country was too high for the productive sector of the economy. She described the 20 percent lending rate being charged by commercial banks on loans obtained by industries as outrageous. The minister stated this in Ilorin, Kwara State, during her pre-commissioning visit to the ultra modern cold rolling steel mill complex of the KAM Industries, Ilorin.
The statement coming from her, the Minister of Finance and Coordinating Minister of the Economy is serious enough to call for soul searching on the part of government key functionaries. For several decades now, interest rates have always been a problem in the Nigerian economy. There has been no government, since the late 1980s when interest rates were deregulated, that has not complained about high interest rate in the country.
So far, none has been able to address the issue. It is certainly shocking to the financial sector and those, who are literate in economic matters to hear her voice out her frustration in the open. That interest rates are too high in Nigeria for the development of the real sector is no longer news, what will be news is if interest rates drop to a single digit for investors to access credit easily. As an economist and a development banker, Dr. Okonjo-Iweala knows too well that high level of interest rate is detrimental to the economy. It is surprising however, that she has to wait until she saw what an indigenous entrepreneur has done in the face of harsh economic environment for her to say that the current regime of interest rate in Nigeria is unsustainable.
The expectation of Nigerians, when she was announced as the minister of finance and the coordinating minister of the economy, was that she would use her vast experience at the World Bank as a development economist to harmonise monetary and fiscal policy in this government.
But unfortunately, this seems not to be the case. Dr. Okonjo-Iweala is the Chairperson of the Goodluck Jonathan administration’s economic management team. It is obvious that issues of fiscal and monetary policy conflicts are not resolved at the economic management team weekly meetings. The Central Bank Governor, Sanusi Lamido Sanusi, in his usual candour has made it clear to those who care to listen that the mandate of the CBN is to manage inflation. For this reason, the CBN monetary policy committee has kept monetary policy rate at 12 percent in the bid to tame perceived threat of inflation. Monetary policy rate is the barometer that swings the direction of interest rate in an economy.
Banks are allowed to charge about four percent above the policy rate. Here already, the prime lending rate will be 16 per cent. Given the structure of Nigerian banks that they run on 90 days deposit and the very high cost of running the institutions, it is fairly difficult for them to lend long-term as well as not charge high interest rate to cover their cost, as doing so will lead to mismatch of funds. The CBN has not helped matters. In recent times, in an attempt to fight inflation, it has unwillingly withdrawn about N1trillion from the banks being 50 percent of public sector deposit in banks. This has created some scarcity of funds. Going by the law of supply and demand, the price for money will go up when available funds cannot go around those who need it. Here is where government has been taking undue advantage, because it can afford to borrow at any cost.
Certainly, the banks have not helped the economy either. The gap between deposit rates and lending rates has always been too wide for comfort. This is where policymakers have failed yet again. The government has not asked the banks why they pay as low as three per cent on deposit and charge borrowers as much as 21 percent. Is government not supposed to protect the interest of depositors? Are the banks the ones that make the policies? What then is the role of the CBN in regulating the banks, just to fight inflation and every other thing can go haywire?
A drop in interest rates will be a great relief to the ever ailing Nigerian economy. This is the consensus of bankers, industrialists and economists. The question has always been how do you achieve this in Nigeria? The government is aware that a drop in interest rates will be a great relief to customers. Local investors are having difficulty with the current rates of interest. It has scared off would-be investors to approach the banks for loans. Yes, if the situation is allowed to continue much longer, banks may face a situation where there is lot of idle cash balance in their vaults. The current interest rate arrangement has succeeded in realignment of banks’ portfolio. Big customers, who can negotiate favourable terms of interest on their deposits, are known to arm-twist banks and move money out of current account to call or time deposit accounts. This is what is encouraging Ministries, Departments and Agencies of government to fix their allocations as deposit for the “oga at the top” to earn interest on. This is why many top government functionaries do not see any need to address this issue.
The reality is that high interest rates coupled with the falling naira has really not been in the interest of the Nigerian economy. In real terms, the downturn in the Nigerian economy which began more than 20 years ago has worsened. The industrial index, inflation, unemployment and idle capacity in industries bear witness to the bad state of the Nigerian economy. Capacity utilisation has fallen drastically from about 56 per ent to 45 percent. In some sectors, it is as low as 30 percent. In the first quarter of this year, sales volume of most companies had 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 have been retrenched and this has 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. This will not be achieved by mere wishes. It requires conscious efforts by all economic agents in Nigeria, Madam Minister.
