THE Central Bank of Nigeria (CBN) at its Monetary Policy Committee (MPC) meeting held on September 22 in Abuja, reduced the Monetary Policy Rate (MPR) by 100 basis points from 12.5 per cent to 11.5 per cent. The move, according to the apex bank, will encourage more bank lending and stimulate economic activities. The MPR, which is the lending rate of the CBN to Deposit Money Banks, often determines the cost of funds. Ten members of the MPC reportedly voted to retain the Cash Reserve Ratio (CRR) and Liquidity Ratio at 27.5 per cent and 30 per cent respectively. As expected at such crucial decision-making meeting, opinions were divided on the appropriateness or otherwise of the reduction in benchmark lending rate and its impact on lending rate at a time of looming recession. All the concerns seem legitimate.
The CBN Governor, Godwin Emefiele, explained why the MPC took the decision. According to him, the fiscal policy of the government which is constrained at the moment cannot lift the economy out of its current contraction of -6.01 per cent given the paucity of funds arising from weak revenue generation and low crude oil prices. Additionally, the economy is saddled with lack of fiscal buffers, high burden of debt services and public debt profile of N31trillion. The CBN boss is concerned about the continued uptick in inflation for 29th consecutive months, which rose to 13.22 per cent in August. The increase in headline inflation is said to be largely driven by the persistent rise in food component which increased to 16 per cent in August 2020 from 15.48 per cent in July 2020.
In the light of this, the CBN opines that reducing MPR will enable the commercial banks to lend more to stimulate growth and increase aggregate supply, which would dampen prices in the immediate term. The CBN decision may have been taken to prevent the economy from falling into another recession. It is feared that the economy will be hard hit if it falls into the looming recession after the 2016 experience which Nigeria exited in 2017. However, some economic experts who expressed surprise at the decision of the CBN, insisted that the apex regulator should have maintained the status quo in lending rate because of the spike in inflation.
They also submitted that the inflationary pressure and the increase in electricity tariff and the pump price of petrol will exert more pressure on the economy. All the same, we believe that the decision to cut benchmark lending rate is a good development. At least, it has shown that the CBN is aware of the relentless calls for a reduction in interest rate. It is a marked departure from the past when it declined repeatedly to reverse course on lending rate. We think that the best way forward is for the apex bank to significantly reduce the interest rates. At present, the lending rate in Nigeria is obviously one of the highest in the world. Therefore, further reduction in the interest rate will guarantee access to borrowing, boost manufacturing output and stimulate production and economic growth.
Without doubt, reducing the interest rate to a single digit will impact the economy positively provided the banks will align their operations with the policy. Therefore, we enjoin the CBN to ensure that the financial institutions release enough funds to the real sector to boost economic activities. The CBN should not put its eyes off the ball especially at this point of global uncertainties caused by the COVID-19 pandemic. There is need to handle the domestic market with utmost care, using proper fiscal and monetary policy measures to make it strong to withstand any adversity.
Without a drastic reduction of interest rates, the economy is bound to stutter no matter the ongoing diversification efforts. At this time that emphasis is on exports and boosting of key sectors such as agriculture, mining and other non-oil sectors, holding interest rates above 10 per cent is not likely to bring about the anticipated economic recovery. Besides, high interest rates may lead to capital flight and closure of more businesses in the country. It is worth emphasising that Small and Medium Enterprises (SMEs) need more credit to stimulate economic growth. In all, it is advisable that the CBN might consider further reduction of the MPR rates at the next MPC meeting.