Home Chambers Nigeria: High Interest Rate Will Hurt Economy – LCCI
Nigeria: High Interest Rate Will Hurt Economy – LCCI

Nigeria: High Interest Rate Will Hurt Economy – LCCI

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The Lagos Chamber of Commerce (LCCI) has commended the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) decisions of Friday, January 24, 2020, which expressed concerns on Nigeria’s rising debt profile and the associated sustainability concerns and warned that the tightening of the Cash Reserve Ratio (CRR) would spike inflation.

The MPC were worried about the use of Debt-to-GDP ratio as a measure of debt sustainability; the vulnerability of the country’s economy to external shocks and the imperatives of building buffers and the risk of excess liquidity from maturing OMO bills.

Other areas of concern were on the need to rationalise fiscal expenditure and reduce cost of governance as well as the need for government to address structural and security issues in order to strengthen domestic productivity.

However, the LCCI also warned that the monetary tightening position that resulted in the upward review of the Cash Reserve Requirement (CRR) from 22.5 per cent to 27.5 per cent would have negative impacts on the country’s economy.

These impacts, according to the Director General of LCCI, Dr. Muda Yusuf, include the “reversal of the current downward trend in interest rate, which has begun to impact positively on the economy, especially the real sector.”

In addition, the chamber noted that the monetary tightening could have adverse effect on deposit mobilization, which could impact negatively on the financial intermediation role of deposit money banks.

“A high interest trajectory (which the tightening policy portends) will impact negatively on investment growth especially in the real economy. The prospects for increased job creation may be further dimmed. “The recent rebound in the stock market would suffer a reversal as interest rate increases and money market instruments become more attractive to investors.

“We believe that what the economy needs at this time are policy actions aimed at stimulating investment to boost output, create jobs and ultimately moderate inflation. Monetary policy tightening will negate the realization of these objectives,” Yusuf said.

He also said that it is pertinent Nigeria to prioritise growth in domestic investment and foreign direct investment (FDIs) over foreign portfolio investment (FPIs). “Persistent focus on portfolio flows would continue to propel the Central Bank of Nigeria to keep interest rates high. This is inimical to investment growth and job creation endeavours.

“On the argument that the recent hike in CRR will help moderate inflation, we contend that food inflation is the bigger issue that needs to be dealt with in the inflation equation. Over the past few years, food inflation has stubbornly remained in double-digit territory since June 2015 while core inflation trends in single digit.

“We believe that food inflation is not driven by liquidity nor is it a monetary phenomenon. The continuous uptrend in inflation is driven largely by cost-push factors rather than demand-pull factors. Against this backdrop, the way forward lies in fixing the structural problems fuelling inflationary pressure as monetary policy instruments will have almost no impact in moderating inflation.

“We note that the acceleration in food inflation to 14.67 per cent in December 2019, the highest in the last twenty months. In our view, food inflation is driven by cost of production, transportation cost, processing costs, very low productivity in agricultural activities at the primary level, security issues, seasonality and climate change. These are more important issues to address and beyond what monetary policy actions can resolve,” Yusuf said.

He warned that “a high interest rate trajectory at this time will hurt the economy. It will become increasingly difficult to unlock investment and jobs in real estate, manufacturing, agriculture, mining, infrastructural deficit, if the economy is taken back to the path of high interest rate regime.

Additionally, we recommend that the implementation of the CRR should be within a framework that allows for automatic adjustment that reflects the dynamics of bank deposits. The failure to have this could result in a situation where the CRR of some banks will shoot up to as high as 40 percent, or more which poses a risk to the stability of the financial system. As deposits level changes (rises/falls), cash reserves in the custody of the Central Bank should be automatically adjusted.”

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