The Governor of the Central Bank of Nigeria, CBN, Mr. Godwin Emefiele, at the Vanguard Personality Awards, last weekend took time to explain why interest rate is still high. He stated: “I sympathize with people when I hear the call on the CBN to reduce interest rates. I share their goal of a reduced single digit interest rate regime in Nigeria. But many people do not seem to understand that in times of high inflation, reducing interest rates make inflationary pressures much worse, with a second round effect of making economic growth even less possible. “It is also important to note that interest rates reflect both cost of capital as well as cost of doing business. If we can approximate cost of capital as the average saving interest rate, which is about 6 percent, what then accounts for lending rates at 25 or more percent? It is cost of doing business. For example, a typical Nigerian Bank must employ the services of policemen and other security people deployed constantly to protect its branches. The bank must also provide a significant amount for reliable electricity and broadband internet services to keep its systems running. These expenditures only further increase costs of doing business for lenders, a cost they must pass on to borrowers. Muda Yussuf “This is why the CBN’s fight to bring inflation down is strongly connected to our quest to ensure that lending rates also come down in due course.” But the DG of LCCI, Yusuf, articulated the agonies businesses and the entire economy are passing through in this circumstance of high interest rate. He stated: “We have monetary policy effects on business confidence. The monetary policy regime has not been supportive of efforts to rescue the economy. First, on account of interest rates, it is ranging between 25-30 per cent. How can domestic investors invest profitably when you are having an interest rate of 25-30 per cent? “There are no incentives for domestic investors to even play significant role, and these are the kind of things that shape economy and the investments people do. Because as they say, “an economy gets the kind of investments it deserves.” It is the incentives, the policy that determines the kind of business people will do, and that is why there are so many disincentives for investors to go into real sector (Manufacturing, Agriculture, Solid minerals) investments because of the issue of cost of fund. “How can you make any reasonable returns on investment at 30 per cent in agriculture, industry, property?     Maybe it is buying and selling which is even very difficult now. So, monetary policy regimes have been big issue. “Then, there is the challenge of the way government borrows. Government’s borrowing has become a major problem for investors; government is borrowing at 18 per cent, 20 per cent; zero risks, how can the private sector compete? And that is why all funds in the economy now are going into treasury bills, they are going into federal government wallet, so that has made it very difficult for the private sector to play its role in the economy in terms of this rescue mission. “As it is now, there is no way you can compete with government in the financial market, even the banks, they would rather buy treasury bills and bonds than to give money to manufacturers.   That is the kind of investments disincentives or structure that the policy has created.”

Read more at: http://www.vanguardngr.com/2017/03/interest-rate-high-cbn/

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