The lack of coordination between the
nation’s fiscal and monetary authorities has become manifest as the Central
Bank of Nigeria, CBN, yesterday, refused to cut interest rate, as suggested by
the Minister of Finance, Mrs. Kemi Adeosun. The Finance Minister had on Monday,
called on the CBN to lower interest rate, so the government could borrow
domestically to boost the economy without increasing debt servicing costs. But
Governor of the CBN, Mr.Godwin Emefiele, who briefed the press at the end of
the Monetary Policy Committee, MPC, meeting in Abuja, said rate cuts in the
past did not result in banks giving credits to the real sectors of agriculture
and manufacturing as instructed. He said a cut in the rate at a time inflation
was rising could worsen the nation’s economic situation. Emefiele said:
“Whereas the Minister of Finance has called for a reduced interest rate at this
time, the MPC decides otherwise. Minister of Finance, Mrs. Kemi Adeosun and
Governor of the CBN, Mr.Godwin Emefiele, Minister of Finance, Mrs. Kemi Adeosun
and Governor of the CBN, Mr.Godwin Emefiele, “Basically, like I said, both the
monetary and fiscal authorities have the intention to achieve growth, but the
direction through which we want to achieve it may differ as long as you still
achieve the growth. “The issues here, just as we have read in the communique,
is that when you say reduce the interest rate, there are two possibilities
here. “You are saying because 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 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. Past rate cuts channeled to traders “These were intended to
lower rates and encourage spending, particularly to the private sector. After
we did that, because we did not see the impact of credit to the private sector,
we needed to further redo the CRR. During that first section, we reduced the
CRR from 30.5 to 25%. “It provided an opportunity for about N1trillion to be
injected by the CBN into the economy or made available to the banks. “But
rather than loan this mony to the banks or loan them to the consumers, or
agriculture and manufacturers, like we said in the communique, we found that
those credit 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. “Subsequent to that, we said since this money wasn’t deployed
directly, we would also be reducing the CRR, then from 25% to where it is right
now, which is 22.5%. That was going to provide between N350 billon and N500
billion through that avenue. “But we said we are not going to allow the banks
to really have the cash until they send proposals to the CBN for primary agric
projects, new manufacturing projects and other projects that will spur
industrial capacity and manufacturing output. “I must confess that the
proposals we received were mainly for the purpose of refinancing the liquidity
of the banks and we thought that was not what we wanted and that is the reason
we have been a little circumspect about raising some of these liquidities. “But
we are looking at the books and very few of them that have submitted proposals
for agric, new manufacturing projects will be considered in due course. “The
second part of it was that yes, if you lower interest rate, what that will do
is that it will make it possible for the fiscal authorities to borrow at lower
rates. “We are saying fine, if they borrow at lower rate, it simulates
spending, what that does is that it simulates demands for goods by providing
cash or money to be spent without taking actions to boost industrial capacity.
“When you take actions to boost manufacturing output, what happens is that you
will see a situation where you have too much money chasing too few goods, which
will also worsen the inflationary condition in which we are now. FX inflow
above $1 b since July “That is why we are saying the option that we will like
to adopt is, while the fiscal is going ahead to spend, what we want to do is
retain the rates where they are. “When you say retain the rates where they are,
you are saying you want to defend a tight situation so that it will again, as
we said at the last meeting, encourage the inflow of capital. “But I was not
that optimistic, but today, I can report that I am looking optimistic because
between July and now, we have seen inflow of foreign exchange (FX) of above $1
billion.” Emefiele said he was hopeful that with the improved inflow of foreign
exchange into the country, the value of the nation’s currency would soon rise
to the benefit of the economy. He, however, said the economy was still faced
with “elevated risks on both price and output fronts.” All monetary policy
instruments were retained at their current levels. Monetary Policy Rate, MPR,
at 14 per cent, Cash Reserve Ratio (CRR) at 22. 5 per cent; Liquidity Ratio at
30 per cent and asymmetric window at +200 and -500 basis points around the MPR.
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