https://www.thecable.ng/the-irrationality-of-the-cbn-interest-rate-hike/amp?/the-irrationality-of-the-cbn-interest-rate-hike

The irrationality of the CBN interest rate hike.
 
By Kunle Oshobi
 
Rising from the Monetary Policy Committee meeting of the Central Bank of Nigeria (CBN) on Tuesday, Olayemi Cardoso the CBN governor held a press conference and announced an increase in the Monetary Policy Rate (MPR) which is the benchmark for interest rates used by banks in the country. The MPR was increased by 400 basis points from 18.75% to 22.75 %. As if that wasn’t enough the committee also increased the Cash Reserve Ratio (CRR) from 32.5% to 45% effectively meaning that banks will now be allowed to lend out less money from their deposits and it will be at higher interest rates when they do.
 
According to the CBN governor, the liquidity tightening exercise was being done to combat inflation which had risen to 29.9% as of January while explaining that the hike in inflation was due to major factors such as rising costs of energy, high fiscal deficits, and lingering security challenges. Ordinarily one would have assumed that having identified the factors causing the inflation, what the CBN or the government should have done was to address those factors rather than tightening the liquidity in the system that has no direct correlation with the present cause of inflation in the country.
 
However, this will not be the first time that the CBN has resorted to liquidity tightening in their attempts to curb inflation as Prof Kingsley Moghalu a former CBN deputy governor reminded us that during his stint at the CBN, they also applied the same strategy to tackle inflation. While I will defer to Prof Moghalu being a professor of economics who has been involved in managing the economy of the country at the highest level, the rationality of attempting to fight inflation using the liquidity tightening strategy in an economy such as ours eludes me.
 
Elementary economics tells us that inflation occurs when there is “too much money chasing too few goods”, as a result of this the often-recommended remedy to fight inflation is to reduce the money supply thus the increase in interest rates and CRR to increase the cost of funds and reduce money in circulation.
 
This works perfectly in the Western world where virtually everyone has access to consumer credit and any increase in interest rates will affect their spending pattern. However, in Nigeria, consumer credit is almost nonexistent in our banking industry and as such increase in interest rates is unlikely to affect consumer spending, rather it will negatively affect businesses and those in the productive sector that we need to produce more so that costs can come down.
 
Effectively speaking, a hike in interest rates will not affect the spending pattern of an already impoverished society that doesn’t have access to consumer credit. Rather it is those in the productive sector that we need to support to improve their productivity as a way of fighting inflation that will be negatively affected by the interest rate hike as it will increase their cost of production which they will pass on to consumers thus fueling the inflation that the CBN is attempting to curb.
 
What needs to be done to fight inflation is for the CBN to work hard on stabilizing the exchange rate of the Naira as the falling value of the Naira is the number one cause of inflation in the country today. To achieve this on a sustainable basis, they will have to promote policies that will increase dollar inflows into the country such as promotion of non-oil exports and blocking the leakages in the oil industry.
 
To promote non-oil exports, the CBN ought to be making more funds available to exporters and encouraging banks to do likewise instead of tightening up the liquidity in the system and making it more difficult for them to access loans at reasonable interest rates. With more funding available to exporters, we can be rest assured that there will be increased foreign exchange inflows into the country which will go a long way to stabilizing the value of the Naira and curbing inflation.
 
On the side of the federal government, what needs to be done to fight inflation is to take drastic measures to improve the security situation in the country so that farmers can return to their farms and increase food production. On the issue of the high fiscal deficit, this is probably the second highest cause of inflation in the country today as demonstrated by the fiscal irresponsibility of the Buhari administration that illegally obtained over 23 trillion Naira in ‘Ways and Means’ advances from the CBN for reasons that we are yet to unravel. Sadly, the current administration has continued to increase the deficit as evidenced by this year’s over-bloated budget. 
 
To fight inflation, the federal government needs to make massive cuts in its expenditure budget to reduce the deficit while also stopping taking loans from our local banks to fund their excesses and crowding out the productive sector from getting access to the same loans.
 
The CBN needs to reverse itself on the MPR and advise the federal government on the need to tackle the real issues causing inflation as they have identified instead of punishing the productive sector with higher interest rates for the sins committed by the federal government.
 
Kunle Oshobi, a development economist, author, and management consultant writes from Lagos.

Kunle needs to stop writing nonsense from his house in Lagos.

His view on this issue is myopic and limited. After pointing out that Kingsley Moghalu, a Professor of economics, said they used the same strategy during his tenure; Kunle went on to paint a picture of economics as understood by a secondary school student.

Make no mistake, I firmly believe that Tinubu and Cardoso are a couple of plagues to Nigeria and Nigerians. But raising the interest rate is not a bad strategy.

Here's why:

First of all, Emefiele printed a boatload of NEW money last year. The plan was to take the old currencies out of circulation and have them replaced with the new.

Tinubu threw that plan into the dustbin.

What do we have?

A shitload of new money plus a shitload of old money. All of money are left swimming around somewhere in an economy where REAL production remains virtually the same.

The result is that we have a LOT more money than goods in the economy. That includes Forex, too. That's one of the reasons why inflation is running like a Lagosian chasing down a bus.

By increasing the MPR and CRR, the bank wants to take the excess volume of unproductive money out of circulation.

So instead of a "big man" to come buy your family land from under you and hold the land without doing anything with it, he'll put his money in tge bank and be collecting a nice chunk of monthly interests on it.

It's the soft life, baby!

So instead of selling your land to a "big man" for big money, you'll be FORCED to sell it to a regular struggling Joe for a "reasonable" amount.

Thus by raising the rates, they have forced you to sell the land at more reasonable price.

Now when this interaction is replicated multiple times across different Individuals, the price of land will become more reasonable. And inflation is reduced.

Same with other products.

Don't forget that reduction in inflation will have a positive effect on the exchange rate, too.

Plus, the argument about manufacturers and businesses not having access to funds is moot. Banks and governments have special programmes for them.

The economics on this is sound,!

This works perfectly in the Western world where virtually everyone has access to consumer credit and any increase in interest rates will affect their spending pattern. However, in Nigeria, consumer credit is almost nonexistent in our banking industry and as such increase in interest rates is unlikely to affect consumer spending, rather it will negatively affect businesses and those in the productive sector that we need to produce more so that costs can come down.

They took textbook jargon and implemented it forgetting the difference between our credit system and that of the advanced nations makes all the difference here.
The rampant form of consumer credit in Nigeria are the loan apps whose interest rates already are above 22-23%.
SMEs MSMEs mostly take loans for critical assets and equipments needed and not for consumer patterned spending. Workers take loans for one time purchases like cars, houses, land or businesses.

Aesthetics will fail us if we do not embrace import substitution on time. This is just a postponement of the day of reckoning.

RepoMan007:
They took textbook jargon and implemented it forgetting the difference between our credit system and that of the advanced nations makes all the difference here.
The rampant form of consumer credit in Nigeria are the loan apps whose interest rates already are above 22-23%.
SMEs MSMEs mostly take loans for critical assets and equipments needed and not for consumer patterned spending. Workers take loans for one time purchases like cars, houses, land or businesses.

Aesthetics will fail us if we do not embrace import substitution on time. This is just a postponement of the day of reckoning.

Do u guys ven follow the updates and Stats from MBS??
We've had less import in the last 9months and even gained more from Exports toward the last quater of 2023 yet u think this sudden 100000% increase in importation is the only way out

U talk as if Nigeria hasnt been import-dependent since ages yet $ never rose to this level


I think most of u who think "Textbook Jargon" wouldnt work here in Nigeria actually think theories are being passed with no proper tests, arguement, reality checks and counter arguments

U prolly failed Economics in your waec and Neco...Thank Goodness, U didnt need it to advance your University education

Tinubu did NOT go to any university, let alone studying accountancy. You are treating a leper with antibiotics meant for simple venereal disease.

When Emefiele printed new currency, he systematically started pulling back old notes, which were in trillions. The objective was to striffle out all those who hoarded old notes and force them into the banks. This had a double benefits of lowering inflation and reduce vote buying.

Tinubu came and reversed the policy thereby overwhelmingly saturate the economy with excess cash. Those politicians who hoard Naira are now buying up existing $ at any rate.

Solution: though late, better late than never.
Stop the immediate use of old notes that is in trillions. If not, Naira will be devalued to the level of Zimbabwe dollar.

Namaster:
Kunle needs to stop writing nonsense from his house in Lagos.

His view on this issue is myopic and limited. After pointing out that Kingsley Moghalu, a Professor of economics, said they used the same strategy during his tenure; Kunle went on to paint a picture of economics as understood by a secondary school student.

Make no mistake, I firmly believe that Tinubu and Cardoso are a couple of plagues to Nigeria and Nigerians. But raising the interest rate is not a bad strategy.

Here's why:

First of all, Emefiele printed a boatload of NEW money last year. The plan was to take the old currencies out of circulation and have them replaced with the new.

Tinubu threw that plan into the dustbin.

What do we have?

A shitload of new money plus a shitload of old money. All of money are left swimming around somewhere in an economy where REAL production remains virtually the same.

The result is that we have a LOT more money than goods in the economy. That includes Forex, too. That's one of the reasons why inflation is running like a Lagosian chasing down a bus.

By increasing the MPR and CRR, the bank wants to take the excess volume of unproductive money out of circulation.

So instead of a "big man" to come buy your family land from under you and hold the land without doing anything with it, he'll put his money in tge bank and be collecting a nice chunk of monthly interests on it.

It's the soft life, baby!

So instead of selling your land to a "big man" for big money, you'll be FORCED to sell it to a regular struggling Joe for a "reasonable" amount.

Thus by raising the rates, they have forced you to sell the land at more reasonable price.

Now when this interaction is replicated multiple times across different Individuals, the price of land will become more reasonable. And inflation is reduced.

Same with other products.

Don't forget that reduction in inflation will have a positive effect on the exchange rate, too.

Plus, the argument about manufacturers and businesses not having access to funds is moot. Banks and governments have special programmes for them.

The economics on this is sound,!

You obviously didn't read to understand but rather to argue and state your poorly informed opinion. The real cause of inflation is the government's fiscal indiscipline as exposed by the illegal collection of 23 trillion Naira in Ways and Means advances by the buhari administration. The new money printed by Emefiele pales in significance to this.

That said, if Government is really serious about reducing the excess liquidity in circulation, the first thing they should have done is to make drastic budget cuts to reduce the deficit while also blocking loopholes that enable corruption in the system. Increasing interest rates to fight inflation is completely senseless in Nigeria because majority of Nigerians don't have access to consumer credit and your example of a big man buying land is totally irrelevant to the issue at stake.

DevilsEqual:



Do u guys ven follow the updates and Stats from MBS??
We've had less import in the last 9months and even gained more from Exports toward the last quater of 2023 yet u think this sudden 100000% increase in importation is the only way out

U talk as if Nigeria hasnt been import-dependent since ages yet $ never rose to this level


I think most of u who think "Textbook Jargon" wouldnt work here in Nigeria actually think theories are being passed with no proper tests, arguement, reality checks and counter arguments

U prolly failed Economics in your waec and Neco...Thank Goodness, U didnt need it to advance your University education

This argument, that Nigeria is exceptional and so standard or "textbook" economic theories don't work in Nigeria is an often trotted out claim that has only served to justify some of the most bone-headed policies you will ever see.

Nigeria is not exceptional when it comes to the understanding that if central bank interest rates are way below the rate of inflation, the rate of inflation cannot be curtailed. If these people disagree, please give us examples of where significant and protracted high inflation was resolved without raising rates.

Of course, businesses need low interest rates. But if consumers are suffering from inflation and the currency is losing value, businesses are not going to invest. Where were the business investments when rates were lower?

In this environment, if I run a business and you lend me money at low interest rates, the best returns I can make would be gained by finding a way to convert my money into dollars and waiting a few years for naira to lose value to the dollar and I can pay back the naira denominated loan.

The reality is that low interest rates makes it very profitable to swap naira for dollars. If you are a saver in naira, your savings lose value and is not offset by the interest rates you get on your savings. You cannot stimulate your economy out of an inflation crisis.

I also agree that increasing rates is not enough as you need to curtail government spending growth which I think is a key driver of inflation in Nigeria. The thinking, as with low interest rates, that you can stimulate growth through government spending which we have seen implemented since 2015 has always been flawed. The late economist, Rudi Dornbusch, touched on this in relation to Latin America:

Again and again, Latin America has seen the populist scenario played to an unfortunate end. Upon gaining power, populist governments attempt to revive the economy through massive spending. After an initial recovery, inflation reemerges and the government responds with wage an price controls. Shortages, overvaluation, burgeoning deficits, and capital flight soon precipitate economic crisis, with a subsequent collapse of the populist regime.

https://www.nber.org/books-and-chapters/macroeconomics-populism-latin-america

Don't claim that Nigeria is exceptional.

4Play:


This argument, that Nigeria is exceptional and so standard or "textbook" economic theories don't work in Nigeria is an often trotted out claim that has only served to justify some of the most bone-headed policies you will ever see.

Nigeria is not exceptional when it comes to the understanding that if central bank interest rates are way below the rate of inflation, the rate of inflation cannot be curtailed. If these people disagree, please give us examples of where significant and protracted high inflation was resolved without raising rates.

Of course, businesses need low interest rates. But if consumers are suffering from inflation and the currency is losing value, businesses are not going to invest. Where were the business investments when rates were lower?

In this environment, if I run a business and you lend me money at low interest rates, the best returns I can make would be gained by finding a way to convert my money into dollars and waiting a few years for naira to lose value to the dollar and I can pay back the naira denominated loan.

The reality is that low interest rates makes it very profitable to swap naira for dollars. If you are a saver in naira, your savings lose value and is not offset by the interest rates you get on your savings. You cannot stimulate your economy out of an inflation crisis.

I also agree that increasing rates is not enough as you need to curtail government spending growth which I think is a key driver of inflation in Nigeria. The thinking, as with low interest rates, that you can stimulate growth through government spending which we have seen implemented since 2015 has always been flawed. The late economist, Rudi Dornbusch, touched on this in relation to Latin America:



https://www.nber.org/books-and-chapters/macroeconomics-populism-latin-america

Don't claim that Nigeria is exceptional.

Have you worked in banking sector or interacted with those who have concerning the borrowing pattern? You are merely exploring textbook probabilities further with more assumptions. Most loans are by civil servants. Few businesses use loans and we don't have the privilege of low interest consumer credit loans. When people flood their accounts with saving because of better returns, who will the banks loan those funds to? Is it the worker who can barely feed? Or businesses that are about to close down due to slow patronage?

RepoMan007:
Have you worked in banking sector or interacted with those who have concerning the borrowing pattern? You are merely exploring textbook probabilities further with more assumptions. Most loans are by civil servants. Few businesses use loans and we don't have the privilege of low interest consumer credit loans. When people flood their accounts with saving because of better returns, who will the banks loan those funds to? Is it the worker who can barely feed? Or businesses that are about to close down due to slow patronage?

This is a recourse where bank has to find its footing, why should bank be making easy money? Nigerian bank make easy gains by not doing anything at all. The investment banking is a fail sector in Nigeria banking system because of the lack of awareness of the populace in what bank represent.


Let bank themselves start investing the fixed deposit that they will receive in their system due to MPR increase and start utilizing it by taking real time risk with the money and henceforth tightening their grip on reality on ground instead of those bosses sitting around and declaring billions of naira gain every quarters without adding any tangible thing to the economy.

Nigeria bank is useless and an avenue for easy money channeling why would a productive organization that offer real service like MTN be declaring forex loss while our banking system with lack of solid investment practice declaring massive gains in the same economy.


The simple summary of my opinion is that bank should start earning their keep simple, that's what capitalism is meant for not amassing easy money out of the system(backdoor forex trading).

Real fact