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Senate’s wonderment at high interest rate -By Lekan Sote

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Lekan Sote

Lekan Sote

Last week, the Senate invited the Central Bank of Nigeria, commercial banks, and their Organised Private Sector victims, to a stakeholders meeting on the runaway bank interest rate. The Senate says Nigerian banks are a cartel that makes astronomical profits, but retrenches workers, and causes losses to investors.

Senate President Bukola Saraki, (a goody-two-shoes?), who wants banks to be sensitive to their corporate social responsibilities, must understand that the CSR is not done by lowering lending rates. You do the CSR after making good profit.

Also, Saraki wrongfully thinks that recent CBN interventions can stabilise the naira’s exchange rate. No sire. The oil glut, fuelled by America’s sale of shale oil, and dismal performance of Nigeria’s petroleum refineries that operate below 25 per cent of installed capacity, reduces dollar revenue, and pressures the naira.

The foreign exchange market will not stabilise with a CBN that routinely cranks out inappropriate monetarist policies for Nigeria’s import-oriented economy. Indeed, it is a combination of monetarist, fiscal and macroeconomic policies that affect interest rate, and not the other way round. The Yoruba are of the opinion that knocked-knees, or K-legs, skewed the load on the porter’s head.

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The CBN’s promise to increase interventions to the real sector will be ineffectual, like its textile industry intervention loan. Nigerian governments borrow partly because tax revenue is inadequate to foot the bills of governance. The bottom line on the Income Statement of most Nigerian companies is lean.

If government got sufficient tax, municipal bonds would be mere monetarist policy tools for managing the economy. The 17 per cent interest paid on government bonds raises interest rates, and crowds out the commercial houses from accessing bank loans.

The Debt Management Office recently announced two Federal Government of Nigeria Savings Bonds: A two-year instrument, due for June 2019 at a rate of 13.189 per cent, and a three-year bond that matures in June 2020 at the rate of 14.189 per cent.

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In May, the CBN’s Monetary Policy Committee retained, for the umpteenth time, the benchmark 14 per cent interest rate. The MPC stayed this course because it is of a noticeable reduction in inflation and exchange rates, with a bullish stock market. Em, “Idonbilivit!”

The CBN alleges that beneficiaries of previous lower interest rates converted the facilities obtained into foreign exchange, (as a speculative instrument, it seems), instead of deploying it to the intended manufacturing and agricultural purposes.

Reduction in inflation rate is doubtful when the costs of consumer items are high, and the fluke improved exchange rate is due to the frenzied CBN intervention, which affects only the black market exchange rate. The needle of the CBN-imposed exchange rate didn’t flicker on bit.

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Despite the CBN’s claim that the manufacturing sector made some improvements in April and May 2017, most trading on the stock exchange is in the service sector-specifically, the banks, insurance companies, finance houses, (and understandably) manufacturing’s alcoholic beverages sub-sector.

Be wary because the CBN, and not the National Bureau of Statistics, reported in May that the manufacturing sector expanded for two consecutive months – the Purchasing Managers’ Index, which the CBN claims rose from 51.1 in April to 52.5 basis points in May 2017, notwithstanding.

The CBN may have drawn its confidence from the NBS’ cautious projection that the Nigerian economy will exit the recession, which it slipped into in the third quarter of 2016, by June 2017. Even with the assurances of the NBS, you must still keep your fingers crossed.

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A lame real sector, whose foreign exchange needs is provided by an oil sector that is less than 10 per cent of the Gross Domestic Product, comes with a default of foreign exchange shortage, and scarcity of imported consumer and other goods.

The recent force majeure by Shell Petroleum Development Company may compromise Budget 2017’s crude oil production and revenue targets, though Bonny Light temporarily rose by less than one per cent as a result.

With the quantum devaluation of the naira, from N199 to the dollar, to N305, the CBN inflicted additional 33 per cent inflation on the economy. When grafted to what Acting President Yemi Osinbajo reports as 17.24 per cent inflation rate, (the NBS says it is 16.25), you’ll see that the CBN’s foreign exchange intervention is mere crocodile tears.

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Where critical infrastructure is lacking, and there is no faithful implementation of macroeconomic policies that can rev up the real sector, banks will prefer to invest in safer government securities, even if the returns are low.

The high interest rate of 25 to 29 per cent charged by the banks is to ensure the return of their loan principals with a reasonable interest element. A debtor that pays N29 for four successive years would have repaid the principal of N100, plus interest element of N16, even if he defaults for the remaining six years of a 10-year tenor loan.

If he loses his collateral, that is kosher profit for the bank. Those who know how the mechanics of annuity payments work will tell you that a bank that gets full repayment of its loan principal (in any form), with an interest element, and collateral got a good deal.

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When banks add profits from such transactions to interest received from investment in government securities, all add up to even bigger overall profit. Senator Saraki, a former bank director, surely knows that this economic principle adds up to good maths for banks.

Saraki and the Senate should however take a look at the extortionate levies, the hidden charges, levied by banks on customers. These are monthly account maintenance charge; commission on transaction; and monthly SMS alert charge.

Others are commission on electronic money transfers; signature confirmation charge; counter cheque charge; MasterCard monthly fee; the inexplicable stamp duty charge; and the charge paid after a customer makes more than three withdrawals from the ATMs of other banks in one month.

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The Senate should goad the Executive arm to redirect government policies into critical infrastructure, not step them down for parochial Constituency projects as it did in the 2017 Budget. This will encourage investment by banks, and foreign direct investors, in the real sector. Otherwise, no can’t do. You don’t run profitable business as a do-gooder.

Surely, the Senate knows that, even at the best of times, governments don’t always have the financial capacity to fund all their projects, and so may have to approach the capital market. That is why the Nigerian Constitution requires the National Assembly to approve domestic and foreign debts for the purpose of the Federation or any State.

That also justifies the N2.36tn deficit in the N7.44tn 2017 Budget recently signed into law by the Acting President. A budget deficit, in everyday English, means borrowings to finance government expenditures.

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By the way, concerned economic and financial experts are worried that the Federal Government is borrowing N2.23tn, out of which N1.84tn will be used to service debts, and probably apply the remainder to fund recurrent expenditures, like salaries, travels, seminars, and entertainment in the Government House.

The interest rate of a skittish economy that lacks a productive real sector can be likened to an untamed wrangler; sustained productivity is the only horse bit that can rein in its high interest rate.

Twitter @lekansote1

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