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2017 Q2 GDP reignites debate on interest rates



2017 Q2 GDP reignites debate on interest rates

With the release of 2017 second quarter (Q2) Gross Domestic Product (GDP) data by the National Bureau of Statistics (NBS), last Tuesday, members of the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) will again face the key decision of whether to cut or retain interest rates when they meet in Abuja in a fortnight, writes TONY CHUKWUNYEM.


Despite the euphoria that greeted the announcement by the National Bureau of Statistics (NBS) last Tuesday that the Nigerian economy had officially exited recession with a marginal 0.55 per cent growth in the second quarter (Q2) of 2017 after recording negative growth for five consecutive quarters, the development did not really come as a surprise to most financial experts and industry watchers.

An exit foretold

As far back as last April, for instance, the Governor of the CBN, Mr. Godwin Emefiele, had predicted that the nation was likely to exit recession by the end of the second quarter of this year. Emefiele, who stated this after meeting with the leadership of the Senate, explained that his forecast was based on the fact that efforts by the Federal Government to revive the economy as well as the CBN’s foreign exchange measures had started yielding positive results.

“We are very much optimistic that by the end of the second quarter, or latest the third quarter, we should be out of recession that we are in right now,” he said at the time. The apex bank boss also repeated his prediction in May, stating that he was confident the country will be out of recession by September. He said: “My view is that with all the positive signs we see: inflation tending downwards, GDP improving to the extent that negative growth rate has decelerated quite significantly.

In fact, we have seen foreign exchange going to the real sector and industrial capacities are beginning to improve. We’ve seen positive signs in various economic sectors, I am very confident that at the end of the third quarter, we will be out of this and I still hold that position.” Indeed, so confident was the CBN Governor that the economy was coming out of recession that last July, he warned that the nation risked falling back into recession, if strong and bold monetary and fiscal policies were not immediately activated to sustain the fragile recovery that monetary authorities were beginning to see from key macroeconomic indicators.

Emefiele, who gave this warning while addressing journalists at the end of the MPC July meeting, stressed that to avoid the economy slipping back into recession, the expected fiscal stimulus as well as improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries, must be relentlessly pursued.

According to him, the MPC expects that timely implementation of the 2017 Budget, improved management of foreign exchange, as well as security gains across the country, especially, in the Niger Delta and North Eastern axis, should be effectively utilised to enhance confidence and sustainability of economic recovery.

Clamour for interest rates cut

Interestingly, the MPC ended that meeting by leaving rates unchanged thereby once again ignoring widespread calls for interest rate reduction. Such calls reached a crescendo in the wake of the country entering the recession, with critical stakeholders arguing that a rate cut is required to speed up economic growth.

For instance, in June, the Senate had convened a roundtable attended by the CBN, the Nigeria Deposit Insurance Corporation (NDIC), commercial lenders as well as stakeholders in the financial sector, at which it called for a reduction of interest rates, warning that efforts to revive the economy will fail if rates remain high.

The President of the Senate, Bukola Saraki, while declaring the forum open, stated that as much as Nigerians commended the government’s initiatives for economic growth: “They are also worried and have complained to us bitterly about the impossible interest rate regime our businesses face today to survive.”

He said : “It is inconceivable that businesses anywhere can survive on a 25 to 30 per cent interest rate regime. How can investors anywhere survive on these rates? How can they create jobs and make returns? But this is the situation our businesses currently live with.” However, according to a bank official who attended the session, which was held behind closed doors, Emefiele told the gathering that while the Banking watchdog agreed with the Senate’s views that interest rates should be reduced, he emphasised that there was also the need to consider the current economic climate in which lenders were operating.

He said the CBN was mindful of this, adding that this was why it set aside special intervention funds at nine per cent for key sectors of the economy. Similarly, at its quarterly press conference last June, the Nigerian Employers Consultative Association (NECA) added its voice to those calling on the CBN to review interest rate downwards.

The President of NECA, Mr. Larry Ettah, said that the current high interest regime in the country was part of several policy misalignment by the government, which was responsible for stagnancy in the economy. He said: “It is accepted practice in economic management in most jurisdictions that the correct posture in a recession is a reflationary fiscal policy and monetary easing, including reducing interest rates. Instead the CBN has maintained tight monetary policy and raised interest rates.

“We are of the view that this approach is sub-optimal and has failed. It is based on an erroneous assumption that tight monetary policy would constrain inflation and temper pressures on the naira. Instead, the actual experience confirms that Nigerian inflation is driven by cost elements usually currency devaluation and food and energy prices, while naira values are shaped by oil prices and the foreign exchange reserves rather than monetary conditions, especially as CBN has maintained administrative control of the currency value.”

As analysts point out, the Minister of Finance, Mrs. Kemi Adeosun, had called for a cut in interest rates in September last year, arguing that such a move would enable the government to borrow domestically in order to boost the economy without increasing its debt-servicing costs. She said: “We need lower interest rates, because when we are borrowing and interest rates go up, it increases our cost of debt service and it reduces the amount of money that is available to spend on capital projects.

The attempt was to manage inflation and the tradeoff for the economy right now is that what is a bigger problem: Is it growth or inflation? For me it is growth. I would rather seek growth. We can manage inflation. I think for us, at the moment in the Nigerian economy, growth is the most important thing.” Her arguments were rejected by the CBN and the MPC, which contended that it would be risky for rates to be cut in an inflationary environment such as Nigeria’s especially at a time when the country was trying to manage a huge demand for foreign exchange.

Furthermore, as Emefiele pointed out in a lecture in July, the high inflation rate and rising operating costs in the banking sector are some of the major reasons for the high interest rate in the country. He stated: “Interest rates reflect not just the cost of capital, but also the cost of doing business, and so, we need to also look at interest rates from the perspective of the lender. Given that most banks have to individually provide security, power and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high interest rates.” He said that fiscal policy should consider ways of stimulating household consumption and business investments.

Weak recovery

But with the NBS 2017 second quarter GDP data showing a marginal 0.55 per cent growth, some analysts including respected Economist and Chief Executive, Financial Derivatives Company Limited, (FDC), Mr. Bismarck Rewane, have again called on the CBN to change its stance and reduce interest rates in order to hasten economic recovery. Specifically, reviewing the 2017 second quarter GDP data, Rewane stated:

“Nigeria finally turned the economic corner into positive growth of 0.55per cent after 5 consecutive quarters of negative growth and a deep recession. “The challenge is that the growth is anaemic and pale compared to the population growth of 2.7per cent. The good news is that growth was driven by solid performance in oil, energy, financial services and trade. However, this output expansion is not enough to provide for the 14,000 new babies born everyday in Nigeria.

” Attributing the weak growth to high interest rates, Rewane argued that South Africa was able to exit recession with a 2.5 per cent GDP in the second quarter compared with Nigeria’s 0.55 per cent, because the former apartheid enclave reduced interest rates.

Last line

However, while analysts agree that there is a critical need to speed up economic growth, the consensus in industry circles is that the current inflationary environment will not allow the CBN to reduce interest rates.

In fact, as experts at FBN Quest stated, “the latest communique by the MPC noted that the committee is pleased with the downward trend in inflation. However, it remains concerned over loosening as this could exacerbate inflationary pressures. The committee is scheduled to meet next on the 25th and 26th September. We see an uptick in headline inflation to 16.3per cent y/y in August.”

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