I think the Central
Bank of Nigeria’s policy rate is still too low! After nearly two days
of meeting early last week, the CBN’s rate-setting committee (the
Monetary Policy Committee) agreed to raise the policy rate by 25 basis
points. The problem with discussing the monetary policy rate (MPR) in
this country is its apparent divorce from the other indices it ought to
bear on. Ideally, the policy rate matters because in the ordinary
course of their doing business, banks borrow from each other daily. And
if they cannot borrow from what is referred to as the “interbank
market”, then recourse is to the central bank as lender of last resort.
Therefore, as the rate at which the CBN lends to the industry, the
policy rate should drive all other banking industry rates. Raise this
rate, and banks’ rates go up. Cut it, and rates trend down. The central
bank can thus generally maintain a handle on money in circulation in
any economy.
Now, this mechanism
doesn’t quite work well here. Before last week’s increase (at 6.25%)
banks in the country offered walk-in depositors about 1% on their
deposits. Folks with a lot more financial muscle could get close to 5%.
Borrowers, however (i.e. the very important borrowers) were paying
anything from 9% to 10% on their loans. Within this context, the MPR is
a baseline rate only for lending activity. For deposit taking, it is
clearly meaningless. It gets worse. With core inflation at 10.9% as at
December last year, rates offered by the banks at that time meant that
retail depositors lost N10 annually for every N100 they tried to save
with a bank. In response to this, the MPC argued in its communiqué last
week that “extremely low returns paid to savers and depositors…poses
a major dis-intermediation risk and is inconsistent with developmental
goals of financial inclusion”. Add the cost to savers and depositors of
inflation, and the only reason why it is not better to keep these
monies under the pillow, is that government is, again, not responsible
enough to ensure the safety of life and property across the country.
The CBN’s policy
rate is also associated with another level of responsibility — fiscal
responsibility. The policy rate is the main plinth of an inverted
pyramid. In between this rate, and the upturned “base” of the pyramid,
are the various rates that financial services institutions charge for
their many products and services. At the top of it all, the “base”, are
the rates earned by bonds and treasury bills. So, the lower the policy
rate, the lower the rates earned by holders of bonds and treasuries.
Governments borrow with these instruments. In other words, the argument
here is that low policy rates help keep government borrowing costs
down. Now, we’ve established that retail savers and depositors suffer a
“haircut” by keeping their monies with the banks; but it would seem
that the losses are more widespread. Even holders of bigger funds can
only buy fancy government debt with low coupons. Add inflation to this,
and they lose too. Government gains, however. Low rates help keep
governments’ cost of borrowing artificially low, ensuring governments’
almost irresponsible recourse to the domestic debt market (to finance
salary increases, for instance); and denying these funds to private
sector uses.
Any economy is
generally more inefficient under these kinds of arrangements. But it
would seem that ours is even more so. According to the CBN, credit to
the private sector contracted by 4.92% last year. In other words,
except for those institutions with access to the savings of
family/friends, or to retained earnings, the private sector would not
have invested in new processes or technologies last year, and may
indeed have had to scale down operations if it could not buy enough raw
materials. On the other hand, aggregate credit to the federal and
sub-national governments grew by 67.83% and 19.17% over the same
period. Remember that 70% of governments’ spending here is on recurrent
items.
Why not then have the MPC raise the policy rate in such a way that
by the end of the year, it is above inflation. That way, we get the
levels of savings necessary to drive our domestic investment needs, and
price loanable funds in a way that gives the right of first refusal to
the most efficient users.
