Why CBN can’t cut interest rate now – Emefiele

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LAGOS, NOVEMBER 20, 2016 – Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, has said that the apex bank would be failing in its duties if it cuts interest rates, especially in this period when the economy is in recession.

He also revealed that the intervention schemes set up by the CBN have led to the creation of 6.7million jobs. Emefiele stated these while delivering the keynote address at the annual Bankers’ Dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos last Friday.

The CBN governor, however, clarified that this was his personal view and not that of the apex bank’s Board or its Monetary Policy Committee (MPC). Nigeria slipped into recession for the first time in 25 years in the second quarter, largely due to low global oil prices. Crude oil sales account for about two-thirds of the government revenues.

The banking watchdog floated the naira last June, resulting in the local currency falling on the interbank market from N197/$ to N305 per dollar.

The move was expected to lead to gradual narrowing of the gap between the official and parallel markets’ exchange rates of the naira. However, the naira has continued to exchange at around N460 to the greenback on the parallel market.

In recent weeks, the State Security Service (SSS) has been raiding forex dealers trading above N399/$ in a bid to narrow the gap between the official and parallel markets’ rates. As a result of the raids, the naira was quoted at 455 to the dollar at the parallel market yesterday firmer than 460 per dollar the previous day and stronger than N470 to the greenback a week ago.

The apex bank has been unable to stop the naira’s slide on the parallel market, where importers go to buy dollars due to severe hard currency shortages in the system. Meanwhile, the decision to hike or not to hike interest rates is expected to be one of the major issues that the MPC would discuss at its last meeting for the year which begins in Abuja tomorrow.

According to the CBN Governor, although he desires a low interest regime and in fact announced this as one of his stated goals when he assumed office in June 2014, the current high rate of inflation makes it difficult for the regulator to cut interest rates.

He said: “In response to recent calls by notable persons and groups on the Central Bank to reduce the country’s high lending rates, I think it is important that I share my views on this issue. Let me first state that I have long been a believer in low interest rates. In fact, when I unveiled my vision for the CBN on resumption as Governor in June 2014, reducing interest rates was one of my cardinal missions.

Yet, it is important that we discuss this issue based on facts, rather than politics and/ or emotions. “First, interest rates are a veritable tool for curtailing inflation and with inflation at over 18 per cent; the CBN would be abjectly failing on one of its cardinal objectives if it cuts interest rates at this time.”

He also debunked the argument that a rate cut in this period would spur growth, pointing out that many empirical studies have estimated the threshold level at which inflation significantly starts to impede growth for developing countries to be 11 per cent. “With ours at 18.3 per cent, one must question the judgment of cutting interest rates at this time,” Emefiele stated.

In addition, the CBN boss pointed out that since interest rates reflect not just the cost of capital but also the cost of doing business, it was important to consider the issue from the perspective of lenders.

He said: “Given that most banks have to individually provide security, power, and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high interest rates.” According to him, despite the fact that it was currently not feasible to impose a low interest rate regime, the banking watchdog, “will continue to use moral suasion to encourage commercial banks to be more considerate in interest charges on customers.”

He reiterated that one of the main reasons why the CBN stepped up its development banking role was to reduce the effects of high interest rates on customers, noting that beginning with the Agricultural Credit Guarantee Scheme in 1977, the regulator had intervened through various developmental programmes, at single digit interest rates.

He noted: “To date, the CBN has disbursed about N393 billion in 490 projects under the Commercial Agriculture Credit Scheme. The CBN has also disbursed N23 billion under the Anchor Borrowers Programme, N79.8billion under the MSME Scheme, and N236.4billion under the Power and Aviation Intervention Fund. Combined, these schemes have created over 6.7million direct jobs and a lot more indirect jobs.”

The CBN helmsman, whose speech was entitled: “Policy options for reversing Nigeria’s economic downturn”, advised the Government to pay closer attention to agriculture and pursue import-reducing policies. He also stressed that for the nation to get out of recession, it needed to rebuild its infrastructure and explore opportunities for more revenue.

He suggested that the government could consider taxing every phone call that lasts more than three minutes as well as introducing minimal property taxes across the country.

He said: “I think we can consider introducing a negligible telecom surcharge to be entirely borne by the initiator of a call. In order to protect the poor and vulnerable amongst us, we could structure it to only take effect after the third minute of talk.

Some analyses have indicated that the government could earn about N100 billion per annum from this alone. Obviously this surcharge will mainly be borne by middle and upper class people since I do not know many poor people who make calls for more than 3 minutes!

“We could also consider introducing minimal property taxes across the country. This not only raises money for the government, but also could be a veritable weapon against corruption, since it creates a database of who really owns homes in this country.”

The CBN Governor urged Nigerians to endure the “short term pains” they were going through as a result of the apex bank’s foreign exchange policies, stressing that it was an opportunity for the country to look inwards, diversify the economy, produce locally and create jobs for unemployed youths.

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