High cost of borrowing: Who is fooling who?

Henry Boyo

The CBN’s Monetary Policy Committee decided, at its meeting last week, to retain critical monetary instruments, at levels that will discourage access to cheaper credit, particularly to operators in the real sector. Hereafter, CBN’s inability to acquiesce to pleas of the Finance Minister and several other financial experts to lower interest rates will be examined in the following interview format. Please read on:

Why do manufacturers decry high cost of borrowing?

There is a modest limit to which one can grow a business with personal savings; invariably, sustained growth and expansion usually require additional capital, which may be subscribed or borrowed. It is less risky, for example, to borrow for legitimate business, if loanable funds come with cheaper rates below 5percent, especially where gestation is necessarily extended; besides, easier access to cheap funds will generally support businesses to create more job opportunities. Furthermore, raw material inputs, similarly financed with low interest loans, will also reduce production cost, and positively sustain consumer demand with affordable prices.

Conversely, when it costs up to 30 per cent to borrow, as is currently the case, investors will naturally shy away from the risky gamble of providing their own infrastructure and paying N30 interest on every N100 borrowed. The investment climate and productive sector will invariably shrink, while imported products financed with much lower cost will flood our markets, to compel massive labor layoffs, as erstwhile viable local industries close shop.

CBN has been widely blamed for sustaining high interest rates, how does CBN instigate such rates?

The CBN has statutory responsibility, enshrined in the 2007 Act, to ensure that prices of goods and services, as well as cost of funds, remain within levels that would successfully drive the economy. So yes, by its actions and policies, CBN has the capacity to induce higher or lower cost of funds. The Monetary Policy Rate (MPR) is the prime instrument for this purpose, as it is the rate at which commercial banks borrow from CBN to cover their temporary cash shortfalls. Consequently, with MPR at 14percent, banks will also be inclined to lend to customers, at well over 20percent. Similarly, in successful economies where MPR is usually below 2percent, banks would be encouraged to lend to customers at below 10percent.

So, why is CBN sabotaging the economy with high MPRs?

A low MPR should expectedly stimulate borrowing and consumer spending, and this would be a welcome development, if annual inflation rate is sustained, below, say 2percent. Conversely, if inflation spirals closer to 20percent, any attempt to stimulate consumer spending by lowering interest rates will inevitably further ignite widespread price volatility to seriously challenge CBN’s prime mandate to maintain price stability. Thus, when high inflation rates already prevail, any additional cash injection or easier access to cheap funds, may ultimately gradually induce the Zimbabwe experience, where spiraling inflation and unrestrained excess printing of Zimbabwe’s currency compelled an inflation rate that drove the exchange rate to over $1=1,000,000,000 Zimbabwe dollars.

But some experts have advised that the best antidote to our comatose economy is to spend our way out of the recession?

Such experts are obviously either wickedly mischievous or regrettably grossly misinformed. Evidently, additional injection of Naira liquidity, into a market where, much too much Naira liquidity already outstrips production output, will inevitably trigger an inflationary spiral, to create serious challenges to productivity, and economic resuscitation. President Buhari will be well advised to be wary of experts who advocate a liberal increase in spending as a viable way out of our presently distressed economy.

Are you suggesting that the series of CBN cash interventions and billions of Naira government bailout funds are actually counterproductive?

Well, the answer is evident; so far, these serial interventions have not arrested the inflation spiral, and it is most certain that future interventions will only worsen matters so long as the undeniable presence of ‘Surplus Naira Liquidity’ continues to be a nightmare for CBN to manage.

How can surplus Naira be a problem, when manufacturers are literally howling for access to cheap funds; besides, why should any commodity with a market surplus, become more expensive to borrow?

The naked evidence of the distortional and oppressive burden of Excess Naira is when CBN regularly pays upto 15`percent interest rates to commercial banks to restrain private sector borrowers from easy access to cheaper funds, so that liberal spending will be curtailed to keep inflation from spiraling out of control and wrecking the economy. Incidentally, commercial banks, primarily, will earn over N500bn this year, as interest charges, as CBN borrows about N6Tn projected surplus Naira supply, to mop up the prevailing burdensome excess liquidity, by selling Treasury bills to banks with very high yields.

So, inexplicably, the cost of Naira loans will paradoxically become higher when systemic surplus Naira liquidity remains CBN’s albatross.

With such easy bountiful returns from CBN’s Treasury bills, why would commercial banks lend to the real sector; besides, what is the prime cause of excess Naira supply that persistently challenges a more responsible economic management?

You are absolutely right; it is highly unlikely that banks will service the real sector with cheaper funds, when government itself is borrowing trillions of Naira from them at such ridiculously high and oppressive interest rates; it is certainly less risky to lend to government than the real sector. However, perennial Excess Naira supply is the cumulative product of decades of CBN’s regular creations of Naira allocations as substitute for dollar denominated revenue. Thus, as dollar earnings increase, the greater is the threat from excess Naira supply and its train of regressive consequences.

Is the Naira exchange rate also a victim of Excess Naira supply?

Yes of course, Excess Naira supply is the prime cause of a weak Naira, because the Naira exchange rate will remain threatened so long as CBN persists in its regular auctions of small rations of dollars, in a money market that is, undeniably, embarrassingly suffocated with Naira surplus. Regrettably, the process of reducing the surplus Naira burden from the system attracts a distortionally high interest burden and also crowds out the real sector from access to cheap funds to grow their businesses and create more jobs.

However, the Naira will begin to appreciate if Naira liquidity is better managed and CBN ceases to substitute Naira allocations for dollar denominated revenue, and then for the Apex bank to subsequently turn round thereafter, to auction the same dollars in a market flushed with excess Naira supply.

Is there a more progressive way of dealing with the Excess Liquidity problem?

There are two plausible strategies which can work together to reverse our economic distress.

First, the mandatory Cash Reserve Requirement (CRR) for banks must be gradually modulated to an equilibrium level that would eliminate the need for CBN to compulsively borrow to remove excess Naira supply from the custody of commercial banks. The need for CBN to borrow will cease at that equilibrium level, so that banks will ultimately have no choice but to enthusiastically court the real sector with modest interest rates, if they must also stay in business. Alternatively, banks can be directed to conversely pay a token fee below 2percent for CBN to warehouse their surplus funds, as is currently practiced in successful economies.

Secondly, the CBN should also stop replenishing the pool of systemic excess liquidity, by persistently substituting Naira allocations for distributable dollar income to the constitutional beneficiaries of the federation pool.

Punch