CBN, interest rates and the economy

A CLEAR pattern has emerged in the interest rates structure of deposit money banks since the Central Bank of Nigeria (CBN) undertook to guarantee interbank transactions last year and introduced the monetary policy rate within an asymmetric corridor. At its meeting last month, the apex bank’s monetary policy committee (MPC) noted that average interbank call rate declined from 2.89 per cent as at end-December 2009 to 1.50 per cent in March 2010. Over the same period, the securitised open-buy-back rate fell from 2.64 per cent to 1.31 per cent.

But the new measures appear to have had little effect on the average savings rate which stood at 3.38 per cent in February 2010 because the weighted annual average savings rate has fluctuated between 3.20 and 3.83 per cent since 2005. However, the consolidated deposit rate dropped from 6.13 per cent last December to 5.53 per cent in February 2010. (Media reports early in April indicated that deposit money banks have further slashed the rate to 4.0 per cent). Despite the falling deposit rates, last February the average prime lending rate and the average maximum lending rate were 18.28 per cent and 23.32 per cent respectively.

The MPC and some other quarters have expressed concerns over the ensuing widening spread between the average consolidated deposit rate and the average maximum lending rate which last February rose to 17.79 per cent. But when viewed in perspective, the gulf noticed in February if sustained throughout the year would only make 2010 to rank a distant sixth behind 1997, 2003, 1993, 1999 and 2002 in ascending order of the widest average annual spread since 1990. Over the period, only five years (the last being 1996) recorded upper half single digit percental spread. In the rest of the years the spread ranged from 14.82 in 2007 to 26.04 percentage points in 2002. High interest rates and wide gulfs between deposit and lending rates are signs of inefficient monetary policy management.

The MPC attributed the current low and falling deposit rates to the availability in the banking system of surplus funds emanating from fiscal operations. The committee also ascribed the high lending rates “to inefficiency in cost management and unrealistic profit expectations and targets” of deposit money banks as well as to their risk aversion. Amid persisting tight credit conditions, net bank credit to government rose in February while bank credit to the private sector declined. This result, interestingly, served as justification for convening the special meeting of the monetary policy committee in April, during which steps were taken to hasten the injection of additional N500 billion to finance real sector projects.

We hold that the CBN plan would only compound the existing glut of funds in the system and worsen the federal fiscal deficit. Rather than descend low to assume the role of, and compete against, deposit money banks in providing funds to investors, the CBN should concentrate on core central banking policy options in order to address the reluctance of banks to lend to the private sector. For instance, it is curious that the MPC failed to mention talk less explain why the risk-free treasury bills and associated restructured bonds used to help contain excess liquidity were and are still being offered at very high interest rates. Treasury bills attracted 26.50 per cent interest in 1993 but the current rate is lower.

The high rates paid on these instruments serve as a means of unearned income for banks and act as a depressant against lending to the private sector. Worse still, foreign direct investors in the existing universal banks through their subscription to treasury bills and the federal bonds (which are not invested but sterilised as their sole purpose is for liquidity surfeit control) garner and drain from the country’s foreign reserves over US$300 million monthly. It is an unsustainable and unacceptable waste that must stop.

While the MPC was rightly categorical about not fixing lending and deposit rates by fiat, the CBN cannot shirk the responsibility for setting interest rates for financial instruments used for monetary policy management. Clearly, when interest rates paid on such treasury bills and restructured (treasury) federal bonds appropriately drop substantially below the minimum deposit rate that is available in the banking system, those financial instruments will cease to be a source of unearned income generation. At that point, in order to survive, deposit money banks will, like banks in focused economies, actively scout for viable small-scale, medium-scale and large-scale real sector projects including various types of infrastructure to finance at competitive lending rates.

Inducing competitive lending rates ties in with another CBN statutory responsibility of caging inflation. The MPC fears of “real threat of inflationary pressure in the near-to-medium term” and CBN Governor Lamido Sanusi’s assertion that inflation would stay in the lower double digit for some time are groundless and only betray both parties’ apparently feigned lack of understanding of the true cause of high inflation in the country.