By Shola Ogunniyi
The Nigeria’s Central Bank is coming up with some admirable palliatives but has refused to cut its Monetary Policy Rate (MPR) for quite a time and shows no sign it may cut it in the near term. Monetary Policy Rate refers to the amount that is charged by the CBN for lending to banks in the performance of its function of lender-of-last resort and it is a signal of the desired direction of monetary policy. Though it has cut the rate for its intervention facilities from 9% to 5%. The intervention rate is the gross rate it allows the deposit money banks (commercial banks), microfinance banks, and other participating financial institutions to charge the end users of its (CBN) intervention facilities. The intervention rate has limited coverage because it does not apply to the all sectors of the economy. So, few users of fund have access to it. The present rate of 5% is however a welcome development in the face of COVID-19 pandemic. On the other hand, most Emerging Markets’ Central banks are cutting their key interest rates. Ghana cut in March 2020 to 8-year low . Egypt cut in March 2020 to its lowest level since early 2016. South Africa cut in April 2020. Turkey also cut in early April 2020. Late last month, India made the biggest rate cut since 2009. The present MPR of the CBN rate is 13.5%. The rate was at 14% in May 2016 and remained so till March 2019, when in a surprise move , it was cut to 13.5%. The main question is: why has the CBN refused to cut its own key rate? There are two key reasons for this , among others, in my view.
Firstly, it is because of the inflation rate. According to the latest National Bureau of Statistics ( NBS) figures, the headline year on year inflation rate was 12.26% in March 2020 from 12.20% in February 2020. Food inflation at 14.98% in March 2020 from 14.90% in February 2020. Core inflation at 9.73% in March 2020 from 9.43% in February 2020 and most analysts have predicted it will increase in the coming months as a result of COVID-19 pandemic. If the CBN cuts below both the core and headline inflation rates, the real return rates will be negative. The real return is the difference between nominal interest rate (the rate earned by the depositors on their funds) and inflation rate. If the inflation rate is greater than nominal interest rate, the real return will be negative. This will be a loss of value for the fund across time. Though most savings account holders in Nigeria have been receiving negative real return over the years so long as the nominal return on savings rate remains in a single digit. This may not be a problem for savings account holders that perform frequent withdrawals (they have denied the banks the stable use of the fund anyway). But it is counterproductive for those savings account holders that leave their funds for a long term such as a year. Their real return will be negative. Few people like negative rate and this phenomenon of high interest rate is making things difficult for the CBN or so it seems. The inflation history in Nigeria has hardly been a demand-induced one. It has been largely imported- inflation and cost -push inflation. To some extent as well, the government annual fiscal deficit financing also contributes to high inflation especially if it is financed by the domestic banking system and the Central Bank of Nigeria. Imported inflation happens when the high foreign prices of raw materials used in Nigeria are passed on to the final consumers in form of domestic high prices. Cost push happens when other key inputs sourced locally and used in the production processes or provision of services are relatively expensive. Again, the consumers tend to bear the price increase especially if the products or services are essential, which means the demand for them is price inelastic. On account of this, increasing MPR to fight inflation rate has been ineffectual. Most commercial banks’ lending rates are well above 20%. It is only the prime borrowers that enjoy less than that. To address this, the CBN has intervened in some areas in the real sector of the economy; essentially guaranteeing sum portions of the loan extended to these sectors. However, it is doubtful if the CBN can continue to do that, then again, the measures do not have a wider reach. Furthermore, the major factors contributing to high inflation in Nigeria are structural in nature. Such as unstable power supply , low technological base and know-how, problematic transportation system especially from the rural to the urban areas, security and insurgency. Insurgency and farmer-herder clashes have greatly worsened the availability of agricultural outputs especially the cash crops. These structural challenges, in all fairness to the CBN, are beyond its capacity and not within its core mandates They are for the fiscal authorities to handle.
The second reason is that the CBN has its eyes fixed on the overseas debt investors (Foreign Portfolio Investors). To be candid , the CBN and by extension Nigeria federation requires foreign currency particularly the United States dollar which is the world number one reserve currency. It is offering them high returns by segregating the Open Market Operation to focus strictly on the foreign funds and to some extent local banks. According to the CBN, OMO is its instrument for controlling money supply which allows the participation of banks and Foreign Portfolio Investors only. No other domestic investors are allowed in OMO participation both at the primary and secondary markets. The OMO rate currently is at 12.79%. It was high as 15% early this year. The CBN stance here is understandable. It wants to prevent some people from round tripping the system and restricts those who have taken loans from its intervention facilities from investing at OMO higher rate without performing any worthwhile economic activities. At the same time, it desires more inflow into the foreign reserve especially as the demand outweighs the supply over for quite a time till now . The Nigeria foreign reserve was around (gross US$44.7 billion ; liquid reserve US$43.7 billion in April 2019) after a year the figures stood at (gross US$33.7 billion ; liquid US$33.15billion. But then the FPI is too volatile. It has high volatility from the outflows’ end at the slightest indication of an economic/financial crisis. To address that anomaly, Nigeria government will require a substantial increase in Foreign Direct Investment (FDI) and a more long-term equity participation from foreigners. For sure, Nigeria competes for foreign funds (FPI) with its peers and neighbours. One of the surest ways to attract such funds is via high interest rate. High interest rate, other things being equal, tends be a plus for foreign reserve accretion. The snag with this approach is that right now most foreign investors are catering for their problems at home because of COVID-19 pandemic. So, they may not come for now until the coast is clear. We will then ask the question: why don’t you cut your interest rate now? Well, we should not forget that there are still existing funds with it. It needs to protect it. The Central Bank of Nigeria is clearly in a dilemma of sort. It is maintaining a stable exchange rate, ensuring price stability and at the same times upholding stable and low interest rates. These are difficult objectives to achieve in this environment.
The CBN policy decision on OMO has however helped the rate on the Treasury Bill (TB) to fall. Since most non-bank domestic investors and other big players such as Pension Fund Administrators ( PFA) , Insurance companies are no longer allowed to participate in OMO, they have shifted to TB segment. This has depressed the TB rate. Yet the TB rate is not a reference interest rate for the overall economy. Currently, the cost of fund is still high for an average borrower in Nigeria. The next Monetary Policy Committee (MPC) meeting of the CBN comes up in May 2020 but it remains to be seen whether the Committee members will be dovish (cut rate), neutral (maintain rate) or increase (hawkish). I personally believe the hawkish stance is out of the way for now.
Shola Ogunniyi is a Risk Advisor and wrote from Lagos, Nigeria.
Twitter: @Obzzzy