•Beyond interest rate reduction
By Kelechi Mgboji
Assistant Business Editor
Six years after steady increase in lending rates, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday, November 24 reduced the benchmark interest rate – monetary policy rate (MPR) – from 13.0 per cent to 11.0 per cent.
Cash reserve ratio (CRR) was slashed from 25.0 per cent to 20.0 per cent, and symmetric corridor of 200 basis points around the MPR was changed to an asymmetric corridor of +200 basis points and -700 basis points.
The new corridor, together with the lower MPR, resets the rate on lending facility at 13 per cent from 15 per cent, and on deposit facility to 4 per cent from 11 per cent.
In simple language, banks will now borrow from the CBN at 13 per cent as against 15 per cent and deposit with it at 4 per cent against 11 per cent.
Why CBN reduced interest rate
The reduction in monetary rate is primarily targeted at stimulating economic growth and ease financial speculations induced by high arbitrage.
This is also motivated given the current economic realities as manifested in a weak and fragile domestic macroeconomic environment, fall in oil price, inflationary pressure, and declining private and public expenditures.
The rate reduction, which surprised many, also leverages on the global monetary policy stance which appears to be focused on reviving and sustaining growth and employment generation.
Which is why the CBN attaches condition on releasing to banks the cash arising from the reduction in CRR to 20 per cent: they must channel the liquidity flush to employment generators such as agriculture, infrastructure, and solid minerals.
Public sector crowding versus private sector credit growth
The CBN’s liquidity boost for productive growth notwithstanding, there are justifiable fears that public sector credit may crowd out private sector credit in 2016 as the government basically borrows a significant portion of the excess liquidity in the banking system.
Of Nigeria’s total debt, both domestic and foreign, federal and state debts outstrip those of private sector by a wide margin.
A sharp decline in government earnings following low oil price also predisposes it to borrow more and more to finance projects and pay salaries.
Analysts and industry players maintain that it is one thing to have a monetary policy drive that encourages credit growth to boost the real sector and another to actually get banks to advance credit to manufacturers because of the risk of default.
Manufacturers Association of Nigeria (MAN) Cosmetics and Toiletries Group Chairman, Ikpong Umoh, told TheNiche that banks, including those his company borrows from, are cautious about making comments on the development.
“That tells us that the expected lending rate of between 13 and 15 per cent may not really be obtainable. It may still probably be around 20 to 22 per cent except the CBN compels the lenders to key into the new pro-private sector lending policy.
“It is not that this rate, even at 13 or 15 per cent, is quite good.
“We think that it will be a step in the right direction, and possibly in the months or years to come that manufacturers will be able to borrow from commercial banks at a single digit interest that is obtainable in other economies,” Umoh said.
Quoting MPC data, analysts at Renaissance Capital (RenCap) led by its Sub-Saharan Africa Banking Analyst, Adesoji Solanke, said banks are not lending to corporates but to the government, citing factors that may further constrain banks’ ability to lend.
They explained: “Given the weak macro environment which continues to deteriorate, system capital constraints (17.5 per cent Capital Adequacy Ratio, CAR, as of half year 2015 against current 15 per cent minimum which rises to 16 per cent for Systemically Important Banks, SIBs, by July 1, 2016), scarce FX liquidity, weak credit demand and mounting credit risks, it appears unlikely that the banks will grow credits at the pace at which the MPC desires.”
No plans for forex liberalisation
Africa Research Chief Economist at Standard Chartered Bank, Razia Khan, also noted that further CBN easing seems likely following the confirmation of sub-3 per cent real Gross Domestic Product (GDP) growth in the third quarter (Q3) of 2015.
She expressed concern that a cut in MPR just ahead of any liberalisation of foreign exchange (forex) regime, with the risk of further weakness of the naira, would have been unusual.
“The inference from MPC’s policy choice is that there are no plans for imminent change to the fixed FX regime currently in place,” Khan said.
RenCap added that interest rate will remain low for longer, which implies Q4 2015 margin pressure continues into 2016.
“This, coupled with extant asset quality pressure and weak NIR, makes for a gloomy earnings outlook for 2016,” said the analysts.
They noted that some banks would have significantly more funding cost benefits than others while some are better shielded from asset yield pressure given their loan/asset penetration levels.
For leading Tier I banks like FBNH, Zenith, GTBank and UBA – which often operate with significant excess liquidity on their balance sheets – RenCap said they could face considerable margin pressure given the low yield environment.
Some banks such as Access and Stanbic could benefit more from lower funding costs compared with peers while dealing with systemic asset yield pressures, according to RenCap.
CBN’s condition for release of cash from CRR reduction
The CBN decided that the liquidity arising from the reduction in CRR to 20 per cent will only be released to the banks willing to channel liquidity flush to employment generating activities such as agriculture, infrastructure, and solid minerals.
The CBN leaves no one in doubt that it will walk the talk by the ruling party on reviving the economy and improving living conditions through production growth and every other legitimate means.
LCCI reacts
Lagos Chamber of Commerce and Industry (LCCI) President, Remi Bello, said the current monetary policy stance is needed to stimulate the economy through increased lending to productive sectors.
According to him, interest rate reduction leverages on global monetary policy stance which appears to be focused on reviving and sustaining growth and employment generation.
“To maximise the benefit presented by the MPC’s decision, issues such as access to foreign exchange for raw materials need to be addressed by the CBN,” Bello explained in an email note to TheNiche.
“Bank fees and charges on credit facility (management, drawdown, insurance fees) which accounts for about 5 per cent of credit costs need to be reviewed by the CBN as well.
“Finally, we urge the government to address the structural and institutional factors (security, energy, and infrastructure lapses) constraining economic activities and the ability of banks to lend to private businesses especially the SMEs.”
Bello echoed the views of Khan who noted that the success of liquidity easing measures will depend on how much other bottlenecks in the real sector can be overcome.
Will prices begin downward trend?
With the reduction in the cost of borrowing from banks it will be expected that prices of goods and services will trend lower in the coming months.
But this may not be possible so soon considering that there are fiscal issues the economy still has to contend with.
Umoh, managing director and chief executive officer of Stellarchem Industry, ruled out the possibility of prices coming down soon, saying there are fiscal factors which the government has to address before that happens.
His words: “Manufacturers still will have to spend about 40 per cent of their earnings generating electricity, and spend additional 40 per cent paying for security and access to passage on the roads.
“Corruption still takes its own toll. We still have most of our raw materials coming from abroad, and 24 hours clearing of goods is not possible yet. The corruption level in the ports is still very high.
“Previously, your documents would pass through about seven tables but now you have to pass through 126 signatures. Given the corruption level in the country, you know what each table entails.
“In the light of the foregoing, we will not see prices crashing except the government puts other things right. Corruption has to be tamed. Power generation and distribution has to be stabilised.
“The billing from power distribution companies does not have to be erratic and outrageous as it is right now.
“If all these fiscal policy issues are addressed by the government, prices of goods and services will go down progressively until they get to the right levels that can make local manufacturers competitive with their foreign counterparts.”
Former Diamond Bank Executive Director, Abdulrahman Yinusa, had previously explained that there are fiscal issues to tackle in the economy which are beyond the purview of the CBN.
“The CBN can only address the monetary aspect, but we still have fiscal issues to tackle,” he said.