Ifeanyi Uddin
In favour of “low” interest rates, there is basically only one argument. The interest rates regime (adjusted for associated risks, including, inflation) in any economy, indicate to potential investors how much they may earn on their investments. Ideally, in a properly functioning economy, few arbitrage opportunities should exist, and so the marginal returns on invested funds should be just about equal to the incremental cost of any such investment. Lower rates thus have the benefit of driving economic activity through its effects in stimulating additional investments. Businesses acquire more capital goods, and employ extra hands. And the latter’s new spending drives the production of new goods and services. Over the medium- to long-term, therefore, the economy is the better for lower interest rates.
For a while, the federal government has led the call for a lowering of domestic bank rates for this reason, supported for the most part, by the organised private sector. By lending the considerable weight of his office to this call the new governor of the Central Bank of Nigeria, has returned debate around this issue to the fore. Although, truth to tell, for myriad reasons, possibly including high lending rates, bank lending accounts for a miserly part of our domestic economic activities. It is thus not certain that the lowering of lending rates in the sector will feed through into new productive borrowing.
Nonetheless, much of the arguments around the desirable level of interest rates in the country, thus far, have ignored the fact that each economy has a natural rate of interest. So, when it is argued that bank lending rates to the retail and the prime business segments (currently as high as 28% and 17% – all in- respectively) are too high, what is indicated is that these rates are higher than the Nigerian economy’s natural rate. Essentially, this argument assumes what ought to be proved as part of its proof.
In the absence of detailed study of what this “natural” rate is, any talk about “low”, “appropriate”, or “high” interest rates would be just so much hot air. To the extent that interest rates, like all prices, are the result of the interplay of demand and supply around several economic activities, including saving and investment rates, the danger with pushing interest rates lower than they are currently, is that the real borrowing cost is lowered.
Essentially, this is what the CBN has been doing with its special intervention programmes. Stripped of the fancy talk, the CBN’s quasi-fiscal interventions involve the offer of subsidies to private economic actors. We have seen with government’s petroleum subsidy programme how a well-meant policy could result in unintended consequences. The distortions to the allocation of resources arising from such policies are by far the bigger worry today.
But, there is the further and more real concern over qualification. If we must offer subsidies designed to stimulate economic growth, as opposed to ones put together as part of a poverty alleviation programme, who chooses (is this a fiscal responsibility or a monetary policy one), and how are benefitting sectors chosen? Put differently, do we have instances of governments successfully rooting for industries, which subsequently turned out to be successful national champions?
Despite the fact that the answer to this question might be in the negative, we have seen increasingly, a federal government focussed on the dispensing of such distortionary freebies as part of its economic policy, including through its most recent automotive policy. This particular problem has a latex balloon quality to it. Squeeze the air in a latex balloon as tight as you can in one area, and all you would have done is move the air (problem) elsewhere. The air does not go away.
A more useful expedient to the problem of the adverse effects of relatively “high” lending rates on domestic investment and the combined effect on our phlegmatic growth is to drive domestic costs down across the economy. Within this context, the task confronting governments at all levels is how to design, and put in place market-based incentives that promote both savings and investment. This is equally about absent infrastructure ― banks for example cite the cost of generating their electricity as part of the high costs they need to cover through high revenues, in order for instance to keep the national ATM infrastructure ticking, banks have invested much in generators and inverters. It is equally about putting governance structures in place that ensure the different markets favour efficient price discovery ― how much more efficient could the market for financial services be were the monetary policy process to separate price stability considerations from financial stability issues?
All told, there is a clear case for addressing our current low interest rate concerns from a market efficiency vantage, rather than an administrative one.