Editorial
With the economy still smarting from the debilitating impact of COVID-19 pandemic, the high point being the 6.1 percent contraction in the second quarter, there is a lot to be said of last week’s hiking of the Monetary Policy Rate (MPR) rate from 12.5 per cent to 11.5 per cent as flowing from the simple logic of the urgent need to boost growth via cheaper credit in the circumstance that the country has found itself.
Central Bank of Nigeria (CBN) governor Godwin Emefiele, while noting that the “MPC was confronted with a difficult set of policy choices, requiring trade-offs and sequencing amidst declining economic growth and rising inflation, and bearing in mind its primary mandate of price stability and the need to support the recovery of output growth”, was nonetheless clear that the option would translate into “cheaper credit to improve aggregate demand, stimulate production, reduce unemployment and support the recovery of output growth”.
The development is a positive one no doubt. Given its traditional obsession with inflation targeting however, we do perfectly understand the apex bank’s dilemma as indeed the difficult choice it was forced to make in the circumstance. Headline inflation has been on the rise from 12.82 per cent in July to 13.22 per cent in August; the economy has also witnessed massive disruptions to supply chains following restrictions in the wake of the pandemic; the weather has been overtly too generous with flooding of farmlands reported in different parts of the country, the consequence of which food prices have hit the roof. And now to add the precipitous depreciation of the naira, the exchange rate which has also impacted in no small measure on the cost of doing business generally.
So much for its pragmatism, the development has no doubt re-kindled the debate on whether the country can continue on a trajectory that unduly favours traders and other short-term borrowers as against the long-term needs of players in the critical, real sector. The debate, if anything, is certainly not new. We recall that Kaduna State governor, Nasir El-Rufai, had in 2016 at a forum of Women in Business canvased that the Federal Government force down interest rates by legislation. Drawing upon the example of the United Kingdom whose inflation rate then hovered around seven to eight per cent, whereas its lending rate was one per cent, he had then stated matter-of-fact: “We must decide that businesses should be able to borrow at the interest rate that makes sense and politically lower rates to that level”.
Extreme as it might seem, it is certainly a measure not just of the mounting concerns about the twin issues of access and cost of credit to businesses, but the continuing but perplexing orthodoxy in which the apex bank, by some rather tokenistic financialism, would keep moving the MPC decimals up and down. Today, what is increasingly clear is that the current bank reference lending rate of 11.5 per cent is neither helpful to business nor make sense at a time the country’s peers like South Africa and Egypt have their interest rates hovering between seven and 9.25 per cent.
What the combined effects of the 2016 recession and the COVID-19 pandemic have done, in our view, is offer fresh opportunity for new thinking at the level of monetary policy management. Beyond the mere signalling which the latest measure by the MPC represents, is the need for a more comprehensive appraisal of the situation with a focus on the long-term needs of the real sector. Good enough, there are, already, pointers in this direction by way of the various financing interventions being undertaken by the CBN under which loan beneficiaries are charged considerably low interests, not just far below the MPC rate but also the rates charged by banks. However, such interventions, which are at best ad hoc can only endure for a time and season; it cannot be a substitute to a more reasonable, sustainable and competitive interest rate regime in a world where developed economies are known to set their rates at sub two per cent.
