Nigeria’s maximum lending rates topped 30% in June for the fourth consecutive month in 2017. Maximum lending rates in Nigeria tipped 30% in March 2017, the first time since 1999 as a combination of government borrowing and forex policy kept rates high.
Why lending rates remain high
Government borrowing – As explained in this article, the Federal Government has increased its borrowing from the debt markets since the crash in oil prices. To ensure the funding pipeline continues, government has offered mouth-watering rates borrowing at yields as high as 20%. With government borrowing at such rates, it becomes inevitable that the private sector will be borrowing at much higher rates, thus 30%.
Forex control – The Central Bank is also pursing a forex policy that is aimed at stabilizing Nigeria’s exchange rate against the dollar by sucking out naira from the economy. The CBN for example has borrowed over N1 trillion in Open Market Operations (OMO) at rates as high as 19%. The OMO is a monetary policy tool used to control the supply of money by either borrowing from the financial system at higher rates or lending at lower rates.
When will lending rates crash
Lending rates could crash due to a combination of one or more of the following activities.
Reduce MPR – Lending rates will only likely drop first when the CBN reduces its benchmark MPR rates below the current 14%. This will be the first signal to markets that government is looking at reducing rates.
Reduction in OMO purchases – Next will be when the CBN open market operations reduces drastically and the CBN quits mopping up liquidity at such rates.
Inflation rates – Another major indicator that lending rates are likely to drop is when Nigeria’s inflation rates at least drop to single digits. Nigeria’s inflation rate is currently 16.1% and has been trending downwards since its high of 18.7% in January this year. However, it is still a good 6 months to single digits assuming it continues to drop at the same trajectory.
Oil prices – A sustainable rise in oil prices could also help crash lending rates. Nigeria’s relies on oil sales for its external reserves, so it is likely that a further rise in oil prices will impact government’s borrowing from the debt markets. It is instructive to note that the Nigerian government is already looking at reducing its concentration of borrowing from the local debt market and is considering focusing its lending efforts on the foreign debt market. Foreign lending provides cheaper rate (7-8%) despite its attendant currency risk as is considered a better option if the proceeds are well utilized.