Emefiele: With Inflation at 18.3%, It’s Not Rational to Cut Interest Rate


Obinna Chima

As the Central Bank of Nigeria’s Monetary Policy Committee (MPC) prepare to commence its last meeting for 2016 tomorrow, the CBN Governor, Mr. Godwin Emefiele, has signalled the likelihood of the retention of the monetary policy rate (MPR), the benchmark interest rate.

Emefiele, who gave the indication when he delivered a keynote address at the annual bankers’ dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos Saturday night, pointed out that although interest rates are a veritable tool for curtailing inflation, with inflation at 18.3 per cent; “the CBN would be abjectly failing on one of its cardinal objectives if it cuts interest rates at this time.”

The comment, the CBN governor, however stressed, was solely his opinion and should not be interpreted as those of the board or management of the CBN or those of the MPC.

According to him, although he remains a strong believer in low interest rates, discussions around low interest should be based on facts, rather than politics or emotions.

“For those who say we need a rate cut to spur growth, we need to remind that high inflation is highly inimical to economic growth. Indeed, many empirical studies have estimated the threshold level at which inflation becomes significantly growth retarding to be 11 percent for developing countries.

“With ours at 18.3 per cent, one must question the judgment of cutting interest rates at this time. Finally, I think it is important to underscore that interest rates reflects not just the cost of capital but also the cost of doing business, and so we need to also look at interest rates from the perspective of the lender.

“Given that most banks have decided 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. Notwithstanding these facts, we will continue to use moral suasion to encourage commercial banks to be more considerate in interest charges on customers,” the CBN governor said.

Emefiele revealed that given the sharp drop in oil prices, Federation Account Allocations to states had dropped by an average of about N2 billion monthly per state, which partly explained their inability to meet some basic recurrent expenditures including payment of workers’ salaries.

Similarly, average inflows of foreign exchange into the CBN have fallen by over $2.3 billion every month over the last 26 months, he said.

In view of the ongoing difficulties in the economy, Emefiele said the country would have been better prepared to deal with the current downturn if the government had managed the resources during the period of economic boom effectively. Pointing out that every economy goes through phases of booms and bursts, peaks and valleys, highs and lows, prosperity and difficulty, Emefiele argued that,”Contrary to correct policy prescriptions during times of boom, we opened up our economy to “all-comers” and dropped all capital controls.” “At some point, we received more than US$23 billion in “hot money” in foreign portfolio inflows (FPIs) in the country in a particular year.

“Monies that could easily evaporate at the slightest hint of an economic slowdown. Recall that in September 2008, Nigeria’s FX Reserves hit a whopping US$62 billion, even after we had spent about US$12 billion settling our external debt obligations. What did we do with the money?

“We set up BDCs and started giving out FX cash to them. At some point, we even had Class A BDCs that could collect as much as US$1 million per week. On average, we sold about US$6 billion per year for frivolous reasons. Over the 11 years that we were practising this, we sold more than US$66 billion.

“None of these monies were used to build factories or to create jobs in Nigeria. None of these were used to build hospitals or schools in Nigeria. Imagine what this money would have meant to us if we had that amount in our FX Reserves today,” he lamented.

Lamenting further, Emefiele said, rather than build on the one-time burgeoning base of agricultural production and manufacturing we had, policy makers then invested less in power, infrastructure, education, and health.

“As our schools began to dilapidate and teachers went on incessant strikes, we sent our children overseas even for primary school education. As doctors preferred to practice in the US and UK and hospitals lacked even hand gloves, we embarked on a medical exodus abroad even for basic diagnosis.

“As our manufacturing companies started closing especially for lack of power, we gladly substituted them with seemingly cheap imports while inadvertently exporting jobs and importing poverty to our country.

“Contrary to what I have heard some commentators and “arm-chair” policy analysts assert, the size of our FX Reserves and the value of the Naira critically depend on our lifestyles and on the value and types of imports we allow into this country. Imagine for a minute that 90 percent of the things you buy in Shoprite stores across the country are imported: the eggs and avocado peers are from South Africa, the meat is from Zambia, and Moet Champagne is from France.

“In fact, Shoprite revealed in June 2013 that it believes Nigeria has space for up to 800 Shoprite stores, and that the seven outlets it already had then sold more Moët & Chandon champagne in 2012 than its South African stores combined!,” he added.

All these developments, Emefiele noted, had direct impact on the country’s FX Reserves, recalling that when he assumed office in June 2014, FX Reserves had fallen from the aforementioned high of US$62 billion in 2008 to only US$37 billion!

Yet, demand for FX has reached an all-time high of over US$1.2 billion per week or US$4.8 billion per month.

“What then can we do to remedy this situation? Is it our inflexible destiny or collective decision to rely so much on other countries for her basic needs? What kind of future do we really want as a people? I do not think that one policy decision from any arm or agency of government can answer all these questions,” he said.

To these end, Emefiele prescribed policy options such as investing in basic infrastructure including roads, bridges, airports, railways, and information technology is not only good in terms of immediate job creation; improving power supply in the country; pursuing growth-enhancing fiscal policy; the need to pay closer attention to agriculture and agribusiness; consider attracting selected private sector leaders who will commit themselves to invest in certain agricultural produce on a large scale while government may need to give some incentives to encourage them to invest, explore opportunities for more revenue, among others.

Speaking on recent developments in the global economy, Emefiele said: “You will all agree with me that recently there were two major unexpected outcomes in two countries that were clearly globally dominant both economically and militarily. These countries are also strong supporters of free trade and globalisation.

“The first was the BREXIT vote while the second is the outcome of the recently concluded elections in the United States. These two events and the trends of public discuss raging in France and Germany are bound to change or alter trade policies and international economic cooperation between the countries and the world at large.

“Two very key issues in the British referendum and the USA elections were Immigration and economy ; particularly free trade. The outcome of the referendum and elections centered around the desire of the citizens to take back their sovereignty ; which they believe had been been concessioned away by their past leaders.

“As for the USA election, the President-elect promised to be tough on immigration and to protect US industries to ensure that US jobs are no longer exported to other countries; while , for those industries that had left the US, they would be given incentives and encouraged to return the industries back to the US.

Also the Chair of the US FED yesterday, signalled that interest rate hike will come sooner than later on the back of a strong US economic report. These two countries have no doubt set a tone which may be followed by other countries. The main issue for us as a country is to examine the implications of these actions on not only free trade and dumping in Emerging and Frontier markets but also on the entire world order.

“For Nigeria , the question is: how prepared are we to shield our teaming masses and our country to manage the ultimate fallout? Let me state that we must critically analyse the implications of the anticipated changes and prepare strategies as to the best ways to tap into the opportunities that may be thrown up or minimise the challenges that may arise therefrom.”