Emefiele: CBN to Ensure Growth-friendly Interest Rate Regime

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Godwin Emefiele
The Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele

Chika Amanze-Nwachuku, Ndubuisi Francis and Obinna Chima in Awka

The Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele has assured Nigerians that the central bank would continue to explore measures that would see that interest rates are supportive of domestic production.

According to him, the Bank would continue to fine tune measures to ensure and guarantee a stable exchange rate regime.

Emefiele said this in a keynote address at the on-going 24th Seminar ​for Finance Correspondents and Business Editors, organised by the CBN in Awka, Anambra state.

The theme of the conference is: ‘Import Substitution and the Dynamics of Interest and Exchange Rates Management in Nigeria.’Emefiele was represented by the CBN’s acting Director, Corporate Communications, Mr. Isaac Okoroafor.

The National Bureau of Statistics (NBS) last week revealed that the Nigerian economy exited recession by expanding marginally in the second quarter (Q2) of the year. The NBS figures showed that the economy grew by 0.55 per cent (year-on-year) in Q2 2017.

To this end, Emefiele said with on-going recovery in economic performance, he was optimistic that improved outcomes would be recorded in the central bank’s work towards taming inflation, bringing down interest rates and guaranteeing exchange rate stability.

He disclosed that the CBN has been consistently devising ingenious approaches to solve peculiar challenges and would continue to learn from the experiences of other countries, particularly developing nations.

“By the early 1980s when the country witnessed its first major economic crisis, further measures were enacted to curtail other imports and these were extended to all imported products by end-1983.

“This was also a period when most developing countries set out to industrialise, irrespective of their comparative advantage.

“It culminated in the adoption of IMF-sponsored Structural Adjustment Programme(SAP), with the major objective to reduce Nigeria’s dependence on foreign produced goods. An evaluation of the performance of SAP may be beyond the scope of this presentation,” he added.

He, however, recognised that administrative measures to reduce imports may not be compatible with current trends in economic management that lean towards free markets. “While these may not be completely dismissed, I would like to note that fundamentals of the domestic environment need to be promoted to support domestic production and invariably curtail imports.

“The CBN recognises these challenges in its role provide economic advice and support the federal government’s aspirations economic growth and development.

“Within the core remit of formulating and implementing monetary policy, the interest and exchange rates serve as major instruments for CBN’s support for import substitution,” he said.
According to Emefiele, interest rates are a major incentive (or disincentive) to carry on industrial production activities.

They are the key price for capital and largely determine the ability to engage in profitable domestic economic ventures.
Economic theory dictates that low interest rate will boost incentives to procure loans to engage in production, and vice versa.

He therefore noted that it was imperative that authorities endeavour to keep interest rates at reasonably low levels.

More so, he stressed that the rate of inflation is a major determinant of the level of interest rates, adding inflation erodes the real returns on financial assets (denominated by interest rates) and it is necessarily required that such rates should be above the price index in other to guarantee real positive returns.
The CBN Governor pointed out that the lower the monetary authority is able to keep inflations rates using monetary policy, the lower it can force down interest rates and make it more attractive for users of funds to access credit.
In addition, he described exchange rate as another essential determinant that may support local production efforts.

“Most domestically-produced goods have foreign substitutes, and the exchange rate serves to allocate the comparative prices of domestic and foreign goods.

“It, therefore, determines the attractiveness of domestic production to support import substitution.
“In Nigeria, the first attempt to deregulate the foreign exchange market was aimed at stimulating export and industrialisation through import substitution, during the implementation of SAP. It was a cardinal requirement for monetary management in Nigeria that required the removal of administrative controls and led to the emergence of a second-tier foreign exchange market.

“The foregoing presents quite useful references to the activities of the CBN in recent times. The Bank has consistently sought to formulate interest and exchange rate policies that are conducive to the development of domestic private industrial activities, while taking due cognizance of other macroeconomic variables,” he said.

Continuing, he pointed out that a major challenge has been structurally-induced inflation, which he said presents a dilemma to policy makers on whether to align the rates with socially desired or policy consistent outcomes.
“Indeed, the CBN has embarked on massive monetary stimulus through direct interventions in sectors that hold immense benefits for the broader economy.

“Such interventions have been in agriculture, micro, medium and small scale enterprises (MSMEs), power sector, aviation and youth entrepreneurship, among others. These measures were necessitated by the liquidity (and credit) crunch that followed the global financial crises,” he added.