The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) rose from its 24 July, 2012, meeting with a decision to leave the Monetary Policy Rate (MPR) at 12 per cent, but increased the Cash Reserve Ratio (CRR) from 8 per cent to 12 per cent. The decision of the MPC was anchored on the need to hold inflationary pressure under check. Most analysts have predicted before the outcome of the meeting that the MPR would be left unchanged by the MPC. However, the increase in the CRR still shows that the CBN is pursuing a contractionary monetary policy designed to fight inflation and protect the naira exchange rate.
The outcome of the recent meetings of the MPC have shown very clearly that the CBN is more concerned about containing inflationary pressure in the economy rather that its other objectives of promoting economic growth and tackling the high unemployment rate, especially among the youths in the country. We believe, all these objectives are all very important, given the economic and high social costs of the rising rates of unemployment and poverty in the land.

The decision reached by the MPC will no doubt constrain the quantum of lending by the commercial banks to the public, and at the same time lead to a hike in both the prime and maximum lending rates. Recent study by the staff of the IMF shows that only 47 per cent of Nigerians use financial products compared to 56 per cent in Ghana. In the formal sector the respective values are 23 per cent for Nigeria and 41 per cent for Ghana. While 67 per cent of Nigerians currently save in one form or the other compared to 64 per cent among Ghanaians, the data further shows that only 7 per cent of Nigerians borrowed in the past 12 months before the survey as against 19 per cent for Ghana, 45 per cent for Ugandans, 33 per cent for South Africa and 66 per cent for Lesotho. Hence, Nigerian monetary authorities need to encourage more Nigerians to borrow and not discourage them through high interest rates. Recent Fritsch Report has also shows that Nigerian banks are not yet totally out of the woods in terms of capital adequacy and other indicators of bank soundness.

Hence, the decision of the MPC will only compound the economic crises in the country. In the first place, the resultant high lending rates by the banks would further increase the gap between lending and deposit rates in the country, suggesting that there is a macroeconomic imbalance in the economy and higher inefficiency of the financial system.

Second, many productive investments would not be able to attract credit because of the high lending rates. Only few sectors, especially the trading subsector and very large borrowers will be able to afford the high lending rates. Thus, small and medium scale businesses that are really the backbone for employment generation in any economy are going to find it difficult to sustain a lending rate that is above 25 per cent.

Third, there is also the risk of adverse selection as only very high risk projects will approach the banks for funding at the very high interest rates. This will increase the exposure of the banks as the mix of their loan portfolio will be dominated by very risky projects.

Thus the cumulative impact of the MPC decision in our opinion is that the Nigerian business environment would remain dour. The inflation rate, though above a single digit level is still very mild. Also, the use of monetary policy as the major tool for fighting inflation and protecting the naira is also very limited. Fiscal policy should be used to complement monetary policy. Fiscal policy that will improve macroeconomic performance and efficiency of government spending in infrastructure sectors like power, transportation, and roads will reduce costs of doing businesses in the country and drive down costs of production.

The CBN Governor, Sanusi Lamido Sanusi, acknowledged after the July 24 meeting of the MPC that there are serious risks to growth in Nigeria due to weaker global growth, lower oil output and the government’s failure to push through reforms and projects. These are the root causes of economic problems that should be tackled directly through credible government policies, faithful implementation of the capital projects in the budget, rather than imposing higher interest rates and inflicting punishments on the private sector of the economy.

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