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How Nigeria Can Achieve Single Digit Interest Rate – Experts

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For Nigeria to achieve the aim of single digit interest rate, the nation’s commercial banks would have to reduce their expectations and cost structure, economic experts have said.

The experts also urged the federal government to reduce its cost of borrowing and critically look into the issue of recklessness or insider loans in the banks through the Central Bank of Nigeria (CBN) “if we want to rapidly achieve single digit rate.”   

Chief executive officer of Global Analytics Ltd., Tope Fasua likened the possibility of having a single digit interest rate in Nigeria to achieving a very strong currency, which he said only happens when a nation’s economy is solid and has achieved all the basics.

Also, former director of the CBN who requested not to be named said the monetary and fiscal authorities have to look at both the demand and supply side of credit to the market. The bank supplies credit. Interest Rate is the price of credit. So, “the banks have to reduce their expectations and their cost structure in order for interest rates to go down,” he said.

Mr Fasua said executives of the banks may have to look at their remunerations and perks of offices, while shareholders have to be ready to put bank management under less pressure for profit and therefore dividend maximization.

The banks are also under immense pressure, not only from operational expenses, but also the amount of sterilisation they have to make from every deposit. For now, the banks have to make provisions for NDIC deposit, cash reserve, and liquidity ratio, which insiders say take up to about 40 per cent of all deposits from them, leaving them with only 60 per cent to lend. If they have to do this, they are naturally under pressure to increase interest rates.

However, “we must be certain that we aren’t seeking for this just for romantic reasons. I would say that lower double-digit interest rate and lower double-digit inflation is a price economics like ours should pay for GDP growth in the region of 15 per cent per annum. The problem is we are growing too slow,” Fasua said, urging, “We should try and grow faster.”

Nigeria currently operates 14 per cent benchmark Interest Rate which was fixed by the central bank since July 2016 and has remained so for 25-months. Beyond the official borrowing rate, borrowing from Deposit Money Banks or commercial banks takes from 16 to 22 per cent. There have been concerns that the commercial banks have remained apathetic about lending to the private sector as credit to private sector (CPS) continues to shrink. The problem had been largely blamed on the fact that federal government is borrowing at 18 percent from the banks through its treasury bills.

Professor of economics in the department of economics, University of Lagos, Olufemi Muibi Saibu drew a positive correlation from inflation to interest rate and argued that attempt to lower interest may trigger high inflation due to induced liquidity but lowering inflation may trigger a lower interest rate. Pointing to the linkage among these key macroeconomic variables, Professor Saibu said a lower inflation may lead to lower interest rate but a lower interest is more likely to lead to higher inflation. “As long as inflation pressure is building due to lowering interest arte and higher liquidity, definitely there is no way interest rate can be maintained at a lower level consistently and credibility without sacrificing much desired macroeconomic stability,” he said.

Professor Saibu said “the ability of CBN and monetary institutions in general to lower interest rate to a single digit from its current 14% bracket will likely not be feasible unless the inflation pressure declining consistently and monetary policy is credible.”

A member of the Monetary Policy Committee of the central bank, Robert Asogwa had expressed concern that the size of banking sector credit to the private sector was declining steadily despite the evidenced drop in the level of non-performing loans in the industry.                                                                                                   

Fasua who noted that the interest rate levels are hurting the private sector right now, said it is chiefly so because the Nigerian economy is not growing at the pace it should be. “If we were achieving double digit growth, there will be so much business coming for the private sector such that it could afford to pay current interest rates,” he stated.

The CBN had said it will not reduce the country’s official interest rate from the current 14 per cent until headline inflation drops to the targeted single digit level of between 6 and 9 per cent.

The International Monetary Fund (IMF) and other stakeholders have cautioned that the inflation rate will likely increase in the second half of this year. Some of the factors that are likely to jack up the inflation include pre-election spending and ongoing farmers/herdsmen crisis in some parts of the country.

Many experts believe that the spread the banks are making is extremely high between deposit and lending rates. That is hard to explain, even from the analogy of deposit sterilisation and operational expenses. Like the former CBN director, Fasua said the CBN should look at impressing on the banks that those spreads are arguably the highest in the world – banks take deposits at 5 per cent and lend at say 28 per cent! “The CBN through the MPC should try and be less squeamish and begin working on gradually reducing the MPR if the banks will take a cue and reduce their lending rates,” he said.

The other factor he said should be looked into is that banks hardly follow the MPR of the CBN. Lending rates are up partly because the banks have to make profits at very high levels to cover up for some of their loan loss expenses.

The IMF challenge is never that CBN should lower the rate rather that it should be watchful and restrain the effects of election spending on key fundamental indices, not only on interest rate and inflation. That is why, Saibu asserted that “Stability is much more important that lower rates and CBN has to weigh the benefits from the two in its decision.”



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