LCCI, interest rates and the economy

WHEN the President of The Lagos Chamber of Commerce and Industry, Remi Bello, the other day, implicitly stated that the economy had yet to derive the benefits inherent in effective financial inter-mediation, he appropriately observed that banking institutions were taking advantage of the double digit interest rates being paid on treasury securities to channel a lot of funds into their purchase.

And this is being done while the productive sectors were not receiving enough bank credit to help in creating jobs. He, therefore, called on the monetary and fiscal authorities to review the yield on treasury securities to single digit in order to stem the crowding out effect of government borrowing in the financial market.

The LCCI has highlighted the core economic issue, which is worth examining in some detail notwithstanding apparent efforts by the CBN to suppress up-to-date information on the matter.

In 2012, the deposit base of deposit money banks (DMBs) was N15.2 trillion. Given then cash reserve ratio (CRR) of 12 per cent and liquidity ratio of 30 per cent, the lending capacity or potential of DMBs was N88 trillion.

Public sector deposits (PSD) of N3 trillion contributed N17 trillion to the lending capacity. The balance of N71 trillion was attributable to private depositors’ funds amounting to N12.2 trillion.

However, utilised lending capacity or bank credit to the private sector (CPS), which represented roughly bank credit to the economy because the apex bank includes some government borrowings in this category, was N15 trillion.

That amount was just 21 per cent of DMBs’ potential lending capacity based on private depositors’ funds alone. Also the amount as a proportion of the final rebased 2012 GDP (CPS/GDP) of N71.7 trillion is 21 per cent, a ratio that compares diminutively with the 2013 ratio of 132 per cent for Malaysia, Nigeria’s economic peer in the 1970s.

Therefore, it was indeed, an understatement when the LCCI asserted that the banking institutions were not doing enough for the productive sectors.

There is a telling lesson in the above data for the monetary and fiscal authorities. Suppose Nigeria’s 2012 CPS/GDP was 132 per cent. An additional N80 trillion generated domestically would have been invested in the various sectors of the economy with perhaps not less than proportionate increase in both employment and corporate tax revenue flowing into the public kitty not to mention the impact on economic growth.

In that scenario, would the Federal and State governments experience any difficulties financing their recurrent and capital budgets today? But what aborted the glimpsed scenario? Firstly, the N88 trillion DMB lending potential included N17 trillion attributable to N3 trillion PSD in DMBs. Also, the utilised lending capacity of 21 per cent meant that 79 per cent of the N71 trillion lending potential derivable from private depositors was idle.

Thus, with the PSD in the banking system superfluous to requirements for financing desirable economic activities, financial system soundness demands that PSD should attract CRR of 100 per cent. In other words, public funds should be strictly kept in government treasury.

Sadly, the CBN has since 2012 raised the CRR on PSD from 12 per cent to 75 per cent. The PSD and excess liquidity (which arises from faulty fiscal practices) have led the apex bank to turn its back on the real sector of the economy while it focuses on helping DMBs and colluding government top shots to profiteer.

The PSD facilitate risk-free transactions that fetch hefty unearned incomes. For instance, PSD fund purchases of treasury securities to pile up the non-investable national domestic debt, blue-chip equities, importation by DMBs of foreign exchange and acquisition of official forex from CBN for purposes of currency speculation.

The public funds also oil treasury looting and provide the haven for negotiated kickbacks for the corrupt enrichment of colluding senior government functionaries and high-level bank personnel.

The Presidency (acting through the Federal Ministry of Finance) and the CBN should therefore stop these anti-economic activities by imposing CRR of 100 per cent on PSD in DMBs and fixing adequately high CRR and liquidity ratio to control any excess liquidity that genuinely occurs in the system.

Secondly, age-long faulty fiscal practices cause the persistent excess liquidity. The end products include high inflation that has brought in its train high monetary policy rate, restrictive monetary policy stance aimed at contracting economic activities while the country pines for the converse, very high lending rates that give positive (real term) returns.

And habituated by the apex bank to hefty unearned incomes, DMBs which have become risk averse, proceed to set prohibitively high interest rates to discourage prospective borrowers. Thirdly, the inflation level is economically out of sync with government-acknowledged figures.

From year to year, the Budget Office in the Federal Ministry of Finance (FMF) puts the actual fiscal deficit incurred at less than 3.0 per cent of GDP. CBN figures are not markedly different.

Economics teaches that the above fiscal deficit regimen should put inflation rates expectation in the 0-3.0 per cent bracket. Given that outcome, the apex bank minimum rediscount rate should be close to the recorded inflation level thereby paving the way for lending rates (that are positive in real terms) to settle in a mid-single digit cluster to the joy of LCCI and enhanced productivity of the productive sectors and diversification of the economy at accelerated pace.

Unfortunately, the high inflation and persistent excess liquidity originate from the adamantine refusal by the fiscal and monetary authorities to ensure that allocations of Federation Account (FA) oil receipts are converted through DMBs to non-inflationary naira revenue for budgetary spending.

Consequently, the withholding by the CBN of FA dollar allocations and their simultaneous replacement with freshly printed naira funds amount to illegally CBN-financed deficits, which are additional to the officially recognised fiscal deficit figures.

The resultant excessive fiscal deficits, as economics cautions, give rise to excess liquidity and high inflation. In order to eliminate the illegal deficit financing and reduce inflation and enthrone low interest rates, FA beneficiaries should collect dollar allocations for conversion to non-inflationary naira revenue by means of the managed float system.

But it is likely that some FA beneficiaries would abuse disbursed raw forex. To forestall any hanky-panky and guarantee documentation of forex transactions, the dollar allocations should remain physically in the vaults of the CBN while the forex should be credited nationally to the domiciliary dollar accounts of the tiers of government.

The domiciliary account balance statement is sufficient certification to entitle the account holder to sell when desired part of or total forex amounts thereon through the DMB-operated single forex market.

The resulting stable realistically valued domestic currency, low inflation and internationally competitive interest rates will end retardation of the economy to the benefit of the Nigerian people, who do not owe any apology to the corrupt elements in the financial sector and top echelons of government for losing in the process the avenue to endlessly milk the system.