On July 27th, the CBN Monetary Policy Committee (MPC) announced that it was increasing Monetary Policy Rate by 200 basis points to 14%. This meant that lending rates across board will technically increase by 2%.
In taking this decision, the CBN harped on one major talking point; that it would increase foreign exchange liquidity in the market.
“Consequently, members were of the view that an upward adjustment in interest rates would strongly signal not only the Bank’s commitment to price stability but also its desire to gradually achieve positive real interest rates. Such a decision, it was argued, gives impetus for improving the liquidity of the foreign exchange market and the urgent need to deepen the market to ensure self-sustainability. Members were of the opinion that this would boost manufacturing and industrial output, thereby stimulating growth which is desired at this time”- Excerpt of CBN MPC Communique
This was the main reason why interest rates increased across board. According to the CBN, by increasing interest rates, foreign investors will be attracted to Nigerian securities (such as bonds & treasury bills), thereby increasing forex inflow into the country. So are we getting the benefit of this decision? Have we seen improved liquidity in the system? Surely the answer is a resounding NO!
For most economists, the issue was far from interest rates. Interest rates alone wasn’t going to give us the break that Nigeria required. The apathy to invest in Nigeria was much more than interest rates; foreign investors don’t have confidence with those overseeing the affairs of our economy.
At the time the CBN issued its monetary policy communique, the exchange rate at the black market was about N377. As at Friday, August 26th, barely a month later, the exchange rate at the Black Market was going for N410/$1. Exchange rate at the official inter-bank market also hit an all time high of N365 on Monday as the market remained starved of liquidity. Liquidity is so thin in the market that trades are thought to be non existent for hours until the CBN intervenes. No one, it appears, is attracted to the interest rate increase. Oh well, banks are benefiting!
This probably confirms once again that another policy of the CBN has failed to work as promised. Nigerians are running out of patience as it appears that none of the policies of the Central Bank has worked as planned. It’s been a deluge of policy failure s, worsening the situation of things at every single turn. When will the people who have the power actually stop this accumulation of policy failures?