The National Leader of the All Progressives Congress (APC), Asiwaju Bola Ahmed Tinubu, has called on the Central Bank of Nigeria (CBN) to leverage the coronavirus(COVID-19) pandemic to lower interest rates in the country.
The former Lagos State Governor, who stated this in a position paper entitled, The Case Against High Interest Rate in Time of Contagion, said “high interest rates are a fundamental drag on national economic growth while lower rates will spur domestic investment and production. This creates both jobs and wealth. High rates serve only to suppress these vital factors. Lower rates will have some negative short-term impact on inflation and the exchange rate.
However, in a twist of irony, the economic dislocations caused by the coronavirus serve to mitigate those temporary negative consequences. If there is a time to reduce interest rates, that time is now.” Highlighting the negative impacts of high interest rates on business in the country, he said: “The economic fallout from the coronavirus may present the best, most pressing case for revising the CBN’s high interest rate policy. The undue rates penalise domestic investment and consumer borrowing. This reduces both aggregate domestic supply and to a lesser degree, aggregate domestic demand.
The chronic gap between domestic supply and demand has been filled by bloated levels of imports and encouraged an overvalued exchange rate that the high interests have helped produce. In normal times, the high interest rates also attract significant foreign financial speculation, the ever-ominous hot money. While in the short-term, the foreign speculation boosts financial inflows. Over time, as compound interest payments become due on these foreign investments, the nation will lose an ever-increasing amount of money to satisfy foreign debt obligations.
In the short run, high rates seem to attract foreign capital and spur the economy while giving it discipline against inflation. In the longer-term, all of this is untrue. High rates give us the worst of both worlds. They stifle domestic investment and incomes while pushing up inflation and exposing an ever-increasing share of our financial system to foreign manipulation and dependence.
“The Central Bank of Nigeria has demonstrated its financial agility by establishing a growing number of special financing programs for various industries and sectors of the economy. While these programs look good at first glance, they also expose important contradictions in the CBN’s position.
The special schemes are an implicit admission that normal rates stifle investment borrowing and thus suppress the economy.
The extraordinary schemes would not be required if the general interest rate was at a proper level. By establishing the special programs, the CBN attempts the impossible. On one hand it defends the general rate as prudent. On the other, it proliferates special exceptions in order to spur investment borrowing that the general rate has heretofore stifled.