Nigeria’s Interest Rates/Forex Quagmire Part 1
Posted: 27/Dec/2016

A quagmire is “an area of soft, wet ground that you sink into if you try to work on it” (Cambridge dictionary). It is “a soft boggy area of land that gives way underfoot” (Oxford dictionary). It is “…a predicament from which a skilful or graceful escape is impossible” (Vocabulary.com). For our purposes, the latter definition sums up the previous two rather well.  Several years of observing and analysing public policy in Nigeria as it concerns the issues of interest rates and foreign exchange (ever shifting) policies have led me to conclude, as I suspect, many people have also concluded, that the Nigerian economy is in a quagmire of lacerating interest rates and a sliding currency that sheds its value by the day if not by the hour.

Nowhere is this state of affairs more readily manifested than in the absurd attempt at targeting Nigerian students in various universities across the globe. One day, they could access maintenance funds, the next day, they could not. One day, maintenance funds were reinstated, the next day, they were drastically cut to more than half their previous value. One day, some banks freeze access to maintenance funds, the next day, they put a moratorium on them. One day, some banks cancel access to these funds; the next day, others announce allowance of a rather paltry sum. It is almost approaching a Shakespearian tragedy: “To allow or not to allow…”

The maintenance funds shambles had, at its core, the hallmarks of policymaking on the hoof. It was a spur-of-the-moment kind of idea emanating from the Presidency. It was meant to tap into the public perception of schooling abroad as elite privilege; hard to defend at a time of recession, but as it turned out, it was an absurdity. For a start, Nigeria does not have enough university places to satisfy demand. By way of a quick comparison, London alone, with a population of less than 10 million, has more universities inside it than the whole Nigeria with a population of over 170 million! What someone palpably failed to mention to President Muhammadu Buhari when he was championing this policy was that students are a capital resource, and those studying abroad (like I did), do eventually come back home to put in their quota to national development. Those hardworking students, a lot of whose families are in fact on modest incomes, need to be encouraged and not be maligned for seeking to upgrade their skills wherever they choose.   That said, when one is in a quagmire, one does pretty desperate things.
 
The above intertwines with the cost of borrowing (interest rates) policy in Nigeria. Let us focus on the interest rates on bank credits to the private sector. In Nigeria, this is mediated through the Nigerian inter-bank offered rate (otherwise called NIBOR).  It is the rates at which the Central Bank of Nigeria lends to commercial banks, also known in common parlance as “the official rate”.  It follows, therefore, that once you designate something as “official”, any other source of similar transaction becomes “the black market”. Very often, when we enquire about any merchandise in this country, we are immediately given two different quotes; one price for the “original”, and the other for the “Aba” or “Taiwan” equivalent. This is done even for medical products. Thus, it was the state; the Nigerian state, which created the black market in its currency, which it has sought, for a long time, to re-christen “the parallel market” as a way of removing the stigma attached to it. Many people have long recognised the blindingly obvious: the “parallel market” rate is indeed the official rate in disguise. How then does the government get the convergence it desperately needs between these two? The CBN is “working on the elimination of arbitrage”, the Minister of Finance, Kemi  Adeosun, said a few days ago. Interswitch Limited, which processes payments for banks, is the latest of a long line of corporations reluctant to list on the Nigerian Stock Exchange as a result of the fluctuation in the value of the naira and the restrictions on foreign exchange.

One thing the CBN could do is to instruct the commercial banks to lend to its customers at a rate not higher than, say, three per cent of NIBOR. That will provide the minister of finance with the magic wand she needs if that were remotely possible. Commercial banks are in the market to make profits; they are not civil service departments that can be bossed around by ministers, nor should they. Lending rates in this country has been a lacerating (the word is carefully chosen) experience for business in this country for over 40 years. The average level of (official) interest rate in Nigeria between 1970 and 2014 is 15.18 per cent according to the World Bank reports. Of course, in the real world, it is much worse. Rates can be as high as 35 per cent and even more. Our nearest competitors fair a lot better: Egypt 12 per cent, India 10 per cent, South Africa nine per cent, Libya six per cent. When cost of borrowing is so high as it is in Nigeria, the manufacturing sector cannot survive, so too the capital market, which will be starved of funds because it is a riskier investment option.  By contrast, in order to get out of a prolonged recession, interest rates went down as low as one per cent in the UK and the USA for a considerable period of time, until now, in fact. Neither of these two large economies is anxious to hike the rates anytime soon. Under normal circumstances, it takes years for them to move it up by a single digit sometimes. So, why are we seemingly stuck in the miasma of high interest rates, high inflation, low growth and high unemployment in this country?

To be continued

Dr. Oke, a lawyer and an expert in financial and economic law, wrote in from Abuja via drtayooke@gmail.com