Why the CBN’s reduction of the monetary policy rate is toothless and misguided

The Monetary Policy Committee of the Central Bank of Nigeria, yesterday, Tuesday November 24, 2015 took two important decisions. First, it decided to reduce the monetary policy rate (bench mark interest rate) from 13 percent to 11 percent (this is the first time in six years that that rate has been reduced). The monetary policy […]

The Monetary Policy Committee of the Central Bank of Nigeria, yesterday, Tuesday November 24, 2015 took two important decisions. First, it decided to reduce the monetary policy rate (bench mark interest rate) from 13 percent to 11 percent (this is the first time in six years that that rate has been reduced). The monetary policy rate is the rate at which the central bank will lend money to any bank in the country and serves as a bench mark by banks to determine at what rate to lend to customers. The second decision taken was to reduce the Cash Reserve Requirement ratio from the current 25 percent to 20 percent. The cash requirement ratio is the proportion of the total customer deposits that each bank must have within its vaults or with the CBN as reserves at any time. Both of the above measures do one thing and one thing only – they increase the amount of funds available to banks. Analysts have conservatively estimated the new funds projected to be available at about N550billion. Whether banks will lend these funds to the private sector or not is another matter entirely.
The CBN was quite clear in its communiqué after taking the above decisions that its primary objective for doing what it did was to stimulate economic growth and reduce unemployment. Its specific targets are the real sector (parts of the economy that is actually concerned with producing goods and services), the infrastructure, agriculture and solid minerals sectors. These objectives are extremely laudable but they, once again, herald clearly that our central bank has run out of ideas on how to perform its core duties of monetary and fiscal policy management, especially coming after their banning of 41 items recently.
Consider the following statement of the Central Bank Governor, in his communiqué after the MPC meeting, “The MPC was particularly concerned that the previous liquidity injections embarked upon through lowering of the CRR in the last MPC has not transmitted significantly to improved credit delivery to key sectors of the economy“. What has changed since that last attempt to increase funds in the system that would now make banks lend that money to customers? The truth is banks are not lending to customers because of the fear of defaults on loans and even when they lend, they lend at significantly higher rates of between 26 percent – 30 percent after factoring in the aforementioned default risk. Paradoxically, these high interest rates charged by banks on loans are a significant factor for customers defaulting on those loans which have created a chicken and egg situation (which one comes first).
Commercial banks after the implosion of the oil and gas sector in the last 18 months and the attendant losses that hit them are prepared to really only invest in government bonds or in financing government or blue chip companies funded contracts or consumer loans for those companies’ employees. How does adding another N550billion change that? Banks have now got to the stage where they would much rather park excess liquidity in their vaults than face any possibility of losing it to a Nigerian business man, who would divert the funds to finance his third or fourth wedding ceremony.
Some analysts have posited that the reduction in monetary policy rates would lead to a reduction on interests charged on loans to customers by banks thereby reducing the cost of doing business for SMEs and stimulating the economy. However, this also doesn’t take into cognisance the fact that the 2 percent reduction might be swallowed up by banks factoring in the MPR/CRR reduction into higher default risks, which means interest rates on loans might not come down at all or might reduce by just one or two percentage points.
To be also considered is the possibility that the US Federal Reserve would increase their interest rates in December at the Reserves’ monthly meet. If that happens, a lot of liquidity might be squeezed out of the Nigerian bond market as funds flee to domiciles with higher rates returns and better security outside Nigeria. This would then create a need for Banks to take up the excess slack so all the new funds might still be used to buy government bonds.
In addition, increasing lending to a sector like the mineral sector in a world where commodity prices are dropping rapidly could create a similar situation as the one being witnessed in the oil and gas sector now. Massive investments that current prices would not be able to repay in the future.
Femi Akinfolarin, a lawyer, writes from Lagos.