•Manufacturers, brokers rejoice; stocks set to soar
Financial markets caught unexpected fire on Thursday May 5 when Godwin Emefiele unveiled a new template which sent manufacturers and stockbrokers into wild jubilation, even as banks caught cold.
Finance Minister, Ngozi Okonjo-Iweala (left), and Emefiele
The agenda of the Central Bank of Nigeria (CBN) governor ends high interest rate, outrageous charges on customer cash deposits by banks and highlights other issues that restore hope in the economy.
Emefiele abolished with immediate effect all charges on customer deposits, but retained charges at 3 per cent for individual withdrawals exceeding N500,000 and 5 per cent on corporate withdrawals exceeding N3 million.
He said the CBN will soon share with commercial banks the income arising from charges on withdrawals which currently goes entirely to commercial banks.
Although he did not disclose when lower interest rate and other positive policies will kick off, he announced at a press conference in Abuja that the objective is to reduce overall lending rate to make it cheaper to invest.
This is a remarkable shift from his predecessor, Sanusi Lamido’s policy of combating inflation at the expense of the economy, such that although the CBN achieved single digit inflation rate, benchmark interest rate remained high and crippled manufacturing.
Benchmark interest rate has been kept on hold at 12 per cent since late 2011, and several measures of tight monetary policy further emasculated the economy of liquidity, causing businesses to groan under a high lending rate of between 22 to 25 per cent.
“We shall pursue a gradual reduction in interest rates,” Emefiele promised. “A comparison of selected macro-economic aggregates from some emerging market countries, including South Africa, Brazil, India, China, Turkey and Malaysia indicate that Nigeria has one of the highest treasury bill rates.
“Such high rates create incentives for commercial banks to simply buy virtually risk-free government bonds rather than lend to real sector.”
To enhance financial access and reduce the cost of borrowing funds, he added, there is the need to pursue policies to make Nigeria’s treasury bill rate more comparative to those of other emerging markets.
While reduction in deposit rates will encourage investment attitude in savers, a reduction in lending rate will make the cost of borrowing funds cheaper for potential investors, he stressed.
“The bank will also begin to include unemployment rates as one of the key variables considered for its monetary policy decisions.
“In the interim, we will continue to maintain a monetary policy stance, reflecting the liquidity conditions in the economy as well as the potential fiscal expansion in the run up to the 2015 general elections.”
Emefiele said a key goal is to maintain exchange rate stability in view of the high import-dependent economy.
To him, a systematic depreciation of the naira will literally translate into considerable
inflationary pressure with a negative impact on macro-economic stability.
He explained, however, that reducing interest rate and maintaining exchange rate is a daunting twin goal.
“In this pursuit, the [CBN] will work with all stakeholders to device measures to ensure the goals are achieved.”
On Financial System Stability, he said the CBN will continue to sustain the effective management of potential threats and avoid systemic crisis.
Emefiele pledged that the CBN will be professional, apolitical, people focused and build a resilient financial system to serve the growth and development yearnings of Nigerians.
In his reaction, an analyst and a senior dealing member of the Nigerian Stock Exchange (NSE), David Adonri, of Lambeth Securities and Trust Limited, said reducing interest rate to a single digit and achieving single digit inflation will be a sterling achievement that will stimulate the economy.
Other analysts expressed concern that reducing interest rate too quickly may hurt the naira and stoke inflation, if not carefully managed.
But Adonri, who spoke the minds of his colleagues, expressed optimism for a quick and sustainable rebound in the stock market which has been too slow in recovery since after the 2008 crash.
According to him, a high interest rate tends to favour the money market and fixed income instruments as investors move funds to the money market. Conversely, when interest rate is low, funds move from the money market to equities.
He enthused that Emefiele’s plank will fire banks to concentrate on core banking activities to restore the lost glory of professionalism among financial institutions.
Nigeria’s benchmark 10-year bond yield traded flat on Emefiele’s pronouncement that he will cut interest rate. The three-year bond yield was down 16 basis points to 11.71 per cent and treasury bills fell 20 basis points across the board to an average of 11.3 per cent.
Lagos Chamber of Commerce (LCCI) Director General, Muda Yusuf, expressed optimism that Emefiele’s plan will open up investment opportunities and enhance access to finance for domestic investors.
He noted that Emefiele’s interest in the real sector like his predecessor underscores his readiness to carry on with most of the people oriented policies of the CBN.
Former Nigerian Economic Summit Group Chairman, Sam Ohuabunwa, called for a chain of steps that will ensure rest of mind on financial and economic matters.
Said Yusuf: “Inflation is down at about 8 per cent, so Emefiele needs to also adjust the Monetary Policy Rate (MPR) to bring down interest rate and may also ease the strain on reserves by allowing the naira to float a little bit.
“Secondly, Emefiele needs to see how he can support revenue recovery and growth for the federation. He must bring some influence in helping to seal any revenue leaks in oil proceeds.”
However, as Chief Executive of Financial Derivatives Company Chief Executive, Bismarck Rewane, put it, Emefiele’s appointment is perhaps the only big change before the ballot in February 2015.
The new helmsman will be under pressure to hit the ground running. Those close to him said he has been doing his home work to meet this expectation.