Tinubu yesterday reiterated his call for the apex bank to slash interest rates so as to stimulate activities.
Tinubu, in a paper he wrote titled: “The Case against High Interest Rates in Time of Contagion,” and obtained yesterday, said keeping interest rate high would remain a fundamental drag on economic growth.
He explained that lower rates would spur domestic investment and production, which would result in job and wealth creation.
The former Lagos State governor, however, noted that lower rates would have some negative short-term impact on inflation and the exchange rate.
“However, in a twist of irony, the economic dislocations caused by the coronavirus serve to mitigate those temporary negative consequences. If there is a time to reduce interest rates, that time is now,” Tinubu said.
According to him, the economic fallout from the pandemic may present the best, most pressing case for revising the CBN’s high interest rate policy.
He added that undue rates penalise domestic investment and consumer borrowing.
This, he stated, reduced both aggregate domestic supply and, to a lesser degree, aggregate domestic demand.
“The chronic gap between domestic supply and demand has been filled by bloated levels of imports and encouraged an overvalued exchange rate that the high interests have helped produce.
“In normal times, the high interest rates also attract significant foreign financial speculation, the ever-ominous hot money. While in the short-term, the foreign speculation boosts financial inflows.
“Over time, as compound interest payments become due on these foreign investments, the nation will lose an ever-increasing amount of money to satisfy foreign debt obligations,” he said.
Tinubu explained that in the short run, high rates would seem to attract foreign capital and spur the economy while giving it discipline against inflation.
But he argued that this would, in the longer-term, be untrue as high rates would give the worst of both worlds.
“They stifle domestic investment and incomes while pushing up inflation and exposing an ever-increasing share of our financial system to foreign manipulation and dependence,” he said.
He, however, said the CBN had continued to demonstrate its financial agility by establishing a growing number of special financing programmes for various industries and sectors.
According to him, while such programmes look good at first glance, they also expose important contradictions in the CBN’s position.
He said: “The special schemes are an implicit admission that normal rates stifle investment borrowing and thus suppress the economy. The extraordinary schemes would not be required if the general interest rate was at a proper level.
“By establishing the special programmes, the CBN attempts the impossible. On one hand, it defends the general rate as prudent. On the other, it proliferates special exceptions in order to spur investment borrowing that the general rate has heretofore stifled.
“This complex CBN rear-guard action does not serve the greater purpose. It merely prolongs the inevitable: We must retreat from high interest rates if we want investment borrowing to attain levels that actually increase private-sector growth and job creation.”
He said prosperous nations had built their success based on the sustained ability to use credit to generate high levels of domestic investment as well as allow for significant consumer financing.
“The high interest rate financial model runs contrary to the ideals of a progressive democracy to which Nigeria aspires.
“A nation cannot become a genuine democracy while access to credit remains under a semblance of authoritarian lock-and-key.
“Lending schemes under which a central bank has sole authority to prescribe lower interest rates may appear to open the system.
“In truth, they do no such thing. Instead, they merely move the discretionary power to give financial concessions from where it formerly resided (the military in times past) to the central bank,” Tinubu said.
He explained that the global economy would not rebound in several months if not longer.
He said: “We must seek ways to inject liquidity into the economy and foster activity. Should the CBN lower rates as well as allow for longer-term mortgage notes, real estate would become better functioning collateral for investment borrowing not only for the housing industry, but for the general economy.