In continuation of its efforts to tighten liquidity and curb speculation on naira, the Central Bank of Nigeria (CBN), last week, mopped up over N200 billion from circulation. This is as calls for the apex bank to reduce interest rates continue to grow. TONY CHUKWUNYEM writes
Given that hardly does a week pass these days without some major foreign exchange pronouncements emanating from the Central Bank of Nigeria (CBN), it was clearly predictably that developments in the nation’s forex market would be one of the issues discussed at the Bankers’ Committee meeting held in Lagos last Thursday.
At the usual briefing for journalists, Managing Director, Stanbic IBTC, Dr Demola Sogunle, disclosed that the Committee was satisfied with the successes recorded by the CBN in its battle to ensure a stable forex rate.
He said: “We have acknowledged the positive development in the forex market, which has seen a gradual convergence between the parallel market and the special foreign exchange window for investors and exporters.”
He said confidence was beginning to return to the Nigerian economy, adding that the improvement in inflation rate, exchange rate and increased portfolio investment in the Nigerian Stock Exchange (NSE) are all positive signs of brighter prospects ahead for the country.
He said : “Over $2 billion has been registered as inflow. Year-to-date, we have seen over $5billion intervention from the CBN and with the new window, over $2billion which is just about 30 per cent of the liquidity in that market. We have achieved convergence on the basis of demand and supply mechanism not by fiat.”
Also, at the end of that meeting, the banking watchdog unveiled plans to mop up a total of N200.322billion from the banking system, through a special Open Market Operation (OMO) at the rate of 16 per cent per annum.
According to the Acting Director in charge of Corporate Communication, CBN, Isaac Okorafor, the decision to mop up liquidity was in reaction to the maturity of N206 billion on Thursday, June 15, 2017. He explained that the apex bank decided on the rate of 16 per cent per annum due to the falling rate of inflation.
Data released by the National Bureau of Statistics (NBS) just before the Bankers’ Committee meeting showed that annual inflation in the country eased for the fourth straight month in May, falling to 16.25 per cent from 17.24 per cent in April. A separate food price index, however, showed that inflation fell marginally to 19.27 per cent, from 19.30 per cent in April.
Indeed, 24 hours after the meeting, the CBN drained the N200 billion in a 181-day special treasury bill auction at 16 per cent. That sale was followed by another auction of N85.78 billion worth of 305-day treasury bills at 18.60 per cent. It also sold N1.05 billion of 174-day paper at 18 per cent.
Traders said the debt sale reduced the level of naira liquidity in the money market and pushed up the overnight interbank lending rate to 15 per cent, up from 6.7 per cent where it closed the previous day.
Calls for rate cut
Interestingly, however, 48 hours before the Bankers’ Committee meeting, the Senate had convened a roundtable attended by the CBN, the Nigeria Deposit Insurance Corporation (NDIC), commercial lenders as well as stakeholders in the financial sector, at which it called for a reduction of interest rates, warning that efforts to revive the economy will fail if rates remain high.
The President of the Senate, Bukola Saraki, while declaring the forum opened, stated that as much as Nigerians commended the government’s new initiatives for economic growth: “they are also worried and have complained to us bitterly about the impossible interest rate regime our businesses face today to survive.”
Besides, he said : “It is inconceivable that businesses anywhere can survive on a 25 to 30 per cent interest rate regime. How can investors anywhere survive on these rates? How can they create jobs and make returns? But this is the situation our businesses currently live with.
“The Senate fully appreciates the economic complexities that determine interest rate regimes. It fully recognises that high inflation times call for interest rate hikes and such other arguments. But unless businesses are able to survive, inflation and all other market conditions alone will not make the difference.”
According to a bank official who attended the session, which was held behind closed doors, the CBN Governor, Mr. Godwin Emefiele, told the gathering that while the banking watchdog agreed with the Senate’s views that interest rates should be reduced, he emphasised that there was also the need to consider the current economic climate in which lenders were operating.
He said the CBN was mindful of this, adding that this was why it set aside special intervention funds at nine per cent for key sectors of the economy.
But last Thursday, employers of labour under the aegis of Nigerian Employers Consultative Association (NECA) added their voice to those calling on the CBN to review interest rate downwards.
The President of NECA, Mr. Larry Ettah, said that the current high interest regime in the country was part of several policy misalignment by the government, which was responsible for stagnancy in the economy.
He said: “It is accepted practice in economic management in most jurisdictions that the correct posture in a recession is a reflationary fiscal policy and monetary easing, including reducing interest rates. Instead the CBN has maintained tight monetary policy and raised interest rates.
“We are of the view that this approach is sub-optimal and has failed. It is based on an erroneous assumption that tight monetary policy would constrain inflation and temper pressures on the naira. Instead, the actual experience confirms that Nigerian inflation is driven by cost elements usually currency devaluation and food and energy prices, while naira values are shaped by oil prices and the foreign exchange reserves rather than monetary conditions, especially as CBN has maintained administrative control of the currency value.”
Consequently, he said : “We call on the CBN to now move towards lowering interest rates and specifically to reduce the Monetary Policy Rate (MPR), which has been kept at 14 per cent since July 2016. Another dimension of the negative implications of current interest rate policy is the phenomenon of ‘crowding out’ of private sector access to credit by credit to government. Data from the CBN demonstrates that credit expansion to government is outgrowing by large margins credit to the private sector.”
Analysts point out the Minister of Finance, Mrs Kemi Adeosun, had made a similar call for a cut in interest rates last September, which was also rejected by the CBN. She had contended that such a move would enable the government to borrow domestically in order to boost the economy without increasing its debt-servicing costs.
The minister said: “We need lower interest rates, because when we are borrowing and interest rates go up, it increases our cost of debt service and it reduces the amount of money that is available to spend on capital projects. The attempt was to manage inflation and the trade-off for the economy right now is that what is a bigger problem: Is it growth or inflation? For me it is growth. I would rather seek growth. We can manage inflation. I think for us, at the moment in the Nigerian economy, growth is the most important thing.”
CBN insists no rate cut
Significantly, in rejecting the Minister’s call, the CBN Governor argued that rate cuts in the past did not lead to banks giving credit to the real sectors of agriculture and manufacturing, adding that a cut in interest rate at a time inflation was rising, could worsen the nation’s economic situation.
Emefiele said: “The issue here is that when you say reduce the interest rate, there are two possibilities here. You are saying be cause you want that to push credit to the private sector at lower rate, or two which I have had the fiscal authorities talk about, is to be able to borrow at lower rates and spend. Our view at the Monetary Policy Committee (MPC), which was exhaustively discussed, was that in the past, there was a time when MPC decided, not only to reduce the policy rate, but, indeed, also increased the Cash Reserve.
“After we did that, because we did not see the impact of credit to the private sector, we needed to further redo the Cash Reserve Ratio (CRR). During that first section, we reduced the CRR from 30.5 to 25 per cent. It provided an opportunity for about N1 trillion to be injected by CBN into the economy or made available to banks.
But rather than loan this money to consumers or agriculture and manufacturing sectors, we found that those credits went to traders, who used them to demand for foreign exchange, which ended up putting pressure on the foreign exchange market. That was what happened.”
In fact, despite the growing calls for a rate reduction and the fact that inflation now seems to be on a downward trend, the widespread consensus among financial analysts is that CBN will not change its position until it has achieved forex stability.
As analysts at FSDH Merchant Bank put it in a recent note: “We believe that the MPC may not change the current tight monetary policy stance except the inflation rate drops to the region around 11-12.5 per cent and the exchange rate remains stable.”
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