THE decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to cut the Monetary Policy Rate (MPR), also known as the baseline for interest rate in the economy, from 14 per cent to 13.5 per cent, may boost economic activities and attract investment inflow into the country. However, we believe that the marginal interest rate reduction may have little impact on the economy unless the move by the CBN is used to open doors to further rate cuts in the future, especially if macroeconomic conditions continue to improve and inflationary pressures ease further.
The MPR is used to determine bank lending rates and the cost of credit to borrowers. The move at the end of the MPC bimonthly meeting is the first rate cut since November 2015. The rate has been held at 14 per cent since July 2016, a decision the CBN had stoutly defended was to support the naira and curb inflation. However, other key parameters were not affected as the MPC retained the Cash Reserve Requirement (CRR) at 22.5 per cent and Liquidity Ratio at 30 per cent.
But some financial experts were surprised that the CRR, which is regarded as a much more important determinant of the monetary policy instrument of the CBN and which would have freed more credit in the banking sector was retained. Nevertheless, the CBN Governor, Mr. Godwin Emefiele, explained that the rate cut was in the overall interest of the economy, and the need to refocus on monetary tightening in order to increase the level of credit from the banking sector to businesses.
He said that the new direction became imperative against the backdrop of the outcome of the recent general election and strong inflow of foreign direct and portfolio investments into the economy. The projected 2.3 per cent growth rate for 2019 was also given as one other driving factor for the decision. But, the committee advised that the rebasing of the Gross Domestic Product (GDP), which was last done by the National Bureau of Statistics (NBS) in 2010, has now become necessary. Since relative price and the structure of the economy do change over time, it is necessary to update the base year once again.
While we do not doubt the fact that the marginal cut in the key interest rate is a step in the right direction, we do not believe that it is enough to boost the economy. We say this because the economy is still wobbling and requires a big push to engender growth. In other words, a 0.5 percent cut is not enough to boost lending to the private sector and other businesses. At the moment, the cost of production remains very high. Therefore, we urge the CBN to begin a steady interest cuts across the key macroeconomic parameters.
Other things should be put in place for the reduction to have a profound impact on the lending rate. For example, the CBN should continue to pursue more aggressively its intervention policy in terms of ensuring that banks give loans at single digit interest rates. In this regard, the apex bank must ensure that the Small and Medium Enterprises (SMEs) and other industries have access to loans to boost industrial growth.
It is crucial that the CBN should not ignore the seeming looming risks to inflation and the expected rise in liquidity from the late passage of the 2019 budget, the likely review of the Multi Year Tariff Order (MYTO), its impact on electricity prices, and the prospect of an increase in national minimum wage – all of which are likely to push inflation for the rest of this year.
Another concern is that while foreign exchange stability may have benefitted both from relatively rising oil prices in recent times and increasing portfolio inflows into the economy, the interest rate cut equally raises vital questions about government’s reform plans, one of which is the plan to increase Value Added Tax (VAT). This may exert upward pressure on consumer prices and the disposal income of Nigerians.
Moving forward, we urge for a more complementary policy synergy between the federal government and the CBN. This has become necessary because it is not clear how much a marginal MPR cut of 50 basis points will really deliver in terms of growth. Government should devise new policies that will grow the economy steadily, at least above 2 per cent, to make it withstand both domestic and external shocks.