Towards a beneficial lending rate

LAST week at its latest bimonthly meeting, the Central Bank's Monetary Policy Committee (MPC) raised the monetary policy rate (MPR) from 10.0 per cent it set in April to 10.25 per cent. But the action was a vacuous ritual as bank credit to most borrowers had for a long while stood at rates ranging from 18 to 28 per cent; and they are unlikely to change. Such high lending rates are not business-friendly. The comatose real sector and the dearth of private sector participation in infrastructural development may be traced largely to prohibitive interest rates.

The MPC's assessment of the economy was less than factual. For example, the first and second quarter growth projections of 6.4 per cent and 6.6 per cent for GDP, which fell within brackets hitherto deemed satisfactory by the apex bank, were ascribed to the non-oil sector. In the face of greatly reduced gas supply occasioning widespread and lengthening power outages, escalating costs of diesel and cement, delayed budget and restrictive monetary measures, the above growth projections are unconvincing.

Also contrary to the MPC's claim that there was accretion to foreign reserves, the US$59.16 billion recorded in May was 0.9 per cent less than $59.70 billion posted in March. Inexplicably while the foreign reserves could support 38 months' imports in March, the amount in May could only cover 27 months' outlay. Did the steep rise of 40 per cent in monthly forex disbursement from $1.57 billion in March to $2.17 billion in May (the actual amount sold in April and May was $5.25 billion) result from increased imports of capital and consumer goods, heightened disinvestment and capital flight or resurgence of treasury looting?

As always, at the core of CBN's economic management problems and reasons adduced for pushing up the MPR was growing inflation that purportedly arose from fiscal injections and private expenditures. To prosecute its losing war against unrelenting inflation, the MPC chose to "continue and even strengthen" various monetary measures that have failed time and again. Even so, administering those ineffectual measures currently cost the taxpayer about N500 billion annually by way of unearned interest income payments to banks in order to mop excess liquidity from the system. That is unconscionably wasteful.

Because the CBN has long exhausted the usual monetary tools which apex banks in focused economies deploy to successfully fight inflation without achieving the desired results in Nigeria, the CBN has resolved to set up a technical committee to invent fresh anti-inflation securities, which would further swell banks' unearned income while they do not lend to the real sector at competitive rates. That is undesirable.

Two weeks ahead of the MPC recommendation, the Bankers' Committee raised alarm that the release of excess crude account and other statutory revenue had bloated money supply with imminent adverse economic implications. Practically justifying that standpoint, CBN Director Charles Mordi disclosed that the apex bank had by mid-May injected about N2 trillion into the economy this year. That amount was far in excess of desirable increase in money supply for the whole year.

Yet another $2 billion from the excess crude account is scheduled to be released this month with other monthly allocations queuing up. Remarkably, excess crude account and monthly allocations are disbursed all at once which swamps the financial system. It should be pointed out that the outcries of CBN and other banks, which enjoy the sympathy of the Federal Government, are creating the false impression not only that high oil prices are unwanted and present government earnings are more than enough for the country but also that foreign direct investment funds cannot be absorbed despite the state of the economy.

It is quite clear that the real technical advice for the CBN inheres in the economic truism that when government budgets and expends actual revenue as is purportedly the case in Nigeria, there is no distended money supply and consequently the economy cannot experience crippling inflation. Besides substantial portions of funds released to the various governments over the years were not ploughed into the system but got looted and were even transferred abroad. Such leakages reduce liquidity and should really make the incidence of inflation very remote.

On the contrary, high inflation has persisted. It is therefore necessary to examine the nature of funds released and expended by government. For instance, technically, out of the N2 trillion cited earlier, only non-oil revenue accounting for about 20 per cent of the total sum injected is actual revenue that is non-inflationary. The balance of 80 per cent of the funds disbursed in place of dollar accruals to the Federation Account represent advances under Section 38 of the CBN Act 2007. The amount advanced already exceeds the permissible limit for this year and it is also superfluous. At any rate, under the law such advances, which enlarge money supply unnecessarily, should be repaid with actual naira revenue in the same fiscal year, a condition which the CBN has consistently neglected thereby unleashing the implacable inflationary pressures on the economy.

For beneficial economic impact, dollar earnings as inchoate revenue should be translated into non-inflationary actual naira revenue. Hence dollar accruals to the Federation Account should be shared in the form of dollar certificates or alternatively paid into special dollar domiciliary accounts with the CBN as partially proposed by the CBN last August. The beneficiaries may then convert piecemeal as need be their respective dollar allocations into actual naira revenue for domestic transactions via commercial banks at a commission below 1.0 per cent, a far cry from the N500 billion being wasted currently as earlier noted. Because commercial banks are constrained to operate within optimal money supply levels that are consistent with the stipulations of Section 2 of the CBN Act 2007, there is no excess liquidity or harmful inflation.

The process simply ensures that public sector dollar earnings (and by extension available public and private sector foreign exchange) is swapped in the first instance for genuine end-user investors' naira at market exchange rate with any excess dollar supply being sold to the CBN for naira by commercial banks strictly as a last resort.

That way all-round low and stable economic prices, a beneficial MPR of about 3.0 per cent and competitive lending rates of below 8.0 per cent for all genuine local investors and foreigners alike as in some Asian Tiger economies become easily attainable thereby creating conducive conditions for a thriving private sector-driven economy that spews huge tax revenue for government. This is the road for turning Nigeria into a haven of economic boom that is compatible with the ample resource endowments.