Site icon Nairametrics

IS IT TIME FOR THE CBN TO STOP CHASING INFLATION AND REDUCE MPR?

The Central Bank of every country sets benchmark rates which banks and other financial institutions rely on to determine borrowing cost. Depending on inflation, growth, exchange rate, objectives of the economy, the MPR is a useful tool on guiding the economy to achieve set objectives. For example, when there is a need to stimulate growth the Central Banks cut MPR and when the desire is to stifle inflation to increase it. By cutting the rates Banks can lend at lower rates to businesses thereby growing the economy and creating jobs. By increasing it banks increase lending rate thus discouraging businesses from borrowing more, thus reducing the money supply.

The CBN in Nigeria has for over 6 months held the MPR at 12% as it struggles to reduce inflation which stubbornly sits at double digits (12.7% for May). This off course means banks lend to businesses at rates above 18%pa resulting in many businesses being unable to borrow. At 12% MPR in Nigeria is one of the highest in the world. It is way above that of the BRICS (Brazil, India, China and South Africa) and way above developed economies. It is only matched by countries like Pakistan. See below;

 

News continues after this ad

Click in to expand view (Source Meristem Research)

MPR rates, like I mentioned, is directly proportionate to lending rates. Meaning that the higher the MPR the higher the lending rates. The negative effect this has on our economy is that, businesses in Nigeria cannot be competitive hence cannot grow. For example a South African Business like Shoprite can borrow at 6% and for a longer tenor to Invest in Nigeria at a return of 12% (barring exchange rate risk). Meaning, even if their investment is entirely financed by debt they still have a spread of 6% to enjoy as equity returns. A Nigerian business in contrast will not borrow at long term as banks do not offer such here. They also borrow at rates like 18% putting huge investments like that out of their reach. See Interest Rates of other countries compared to Nigeria below;

Click in to expand view

For Nigerian businesses to be competitive, there is a strong need for the CBN to abandon its futile and counter productive policy of hiking MPR to cut inflation. Inflation rate in Nigeria is even mostly influenced by Food Prices which incidentally are not heavily linked to lending. It is in my opinion more influenced by cost such as transportation, storage, spoilage etc. These cost are even out of the direct control of the CBN as they are predominatly purely cash in hand backed and mostly reside in the informal and unbanked sector of the economy, making harsh MPR rates counter productive.

Its time I think the CBN should embrace growth and device a different strategy that ensures banks can lend cheaper to productive sectors of the economy. They have started some of these policies by introducing several intervention funds, however, most are yet to access these funds due to strict and unassailable conditions tied to it. I also do not know why the spread between deposit rates and lending rates are still at double digits. It is as if inflation is only being catered for on one side and abandoned on the savings side.  To get us to grow at 12-14% which I believe we need to create jobs the CBN must rethink its present policy of double digit interest rates.

Exit mobile version