The Nigeria economy is in dire need of reforms to free markets for labour, capital, and entrepreneurial ideas. Increasingly, reforms to our criminal justice system are at the top of our shopping list.
There was always something wide off the mark with the idea of restricting the interest rates banks pay on savings account deposits. The Central Bank of Nigeria (CBN) currently has this cap at about a third of its Monetary Policy Rate (MPR). As with all attempts at price control, one outcome of this policy is the proliferation of perverse responses. Predictably, one suggestion is that only a few banks in the country pay interest rates on savings deposits at more than 5 per cent per annum — way below the CBN’s “recommended retail price” for savings accounts. This is interesting in several respects because given an MPR rate of 27.5 per cent, the yield on savings accounts (indicated by the cap) should be at least 9 per cent plus — on the CBN’s say-so, and arguably more if the domestic retail money market were more efficient. Still, even this latter yield raises adequacy concerns. From the standpoint of where domestic inflation is at, today, it is clearly not sufficient an argument for anyone to keep their loose change with the banks. Back-of-the-envelope arithmetic suffices to illustrate this point. A depositor who keeps N100 with a bank for a year on today’s numbers will lose 27.5 kobo of this to inflation, even as the bank pays an interest of nine kobo.
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In other words, at the end of a year in the banks’ vault, all that remains of a savings account depositor’s N100 is N81.50. Is there an opportunity cost to the N18.50 that current monetary policy invites would-be savings account holders to lose? Put differently, what else could a prospective depositor do better with this? My sense is that, unwilling to lose money through the banks to inflation, but alive to the fact that inflation would erode their savings, anyway, domestic economic entities front-load spending. In essence, they buy, today and now, stuff that they would ordinarily have bought at some later date. Could this front-loading cause temporary increases in demand for domestic goods and services? Without any doubt.
Worse, over the last ten years, monetary conditions have discouraged savings in the central bank’s misguided belief that lower interest rates are a better prompt for domestic growth than the accumulation of savings. Unsurprisingly, having kept rates low for long enough without boosting domestic investment, the central bank felt compelled, over the same period, to create money out of the ether for government to spend.
Is there a possibility that such spending messes with domestic price levels? However marginal, yes, it does. And adversely, too. So, why hold rates down this way? One could assume that a misalignment of demand and supply in the retail money market space could push retail deposit rates beyond what banks’ balance sheets could bear, or the economy’s welfare could take, and thus make a case for temporarily tinkering with the functioning of the price mechanism in this space. It could be argued, too, that a far better response to such a predicament would involve the isolation and fixing of the main driver of the imbalance.
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Financial repression is another possibility. In which case, the CBN would force banks’ cost of funds down in order that they can invest large proportions of these in government debt, issued at coupons below market clearing rates. The only difficulty with this case for financial repression is that more savvy bank customers have seen the yield on their funds rise with increases in the central bank’s benchmark interest rate. Yet, this argument underscores another important fact. For by far the biggest need of the Nigerian economy in pursuit of its growth and development aspirations are the funds with which to finance infrastructure upgrades, new builds, and to fund the reforms critical to driving big and sustainable increases in domestic productivity levels. National savings are a critical part of this process. Accordingly, policies that constrain domestic savings are suboptimal to our desired outcomes as an economy.
Worse, over the last ten years, monetary conditions have discouraged savings in the central bank’s misguided belief that lower interest rates are a better prompt for domestic growth than the accumulation of savings. Unsurprisingly, having kept rates low for long enough without boosting domestic investment, the central bank felt compelled, over the same period, to create money out of the ether for government to spend. Today’s inflation is one unintended consequence of this harebrained policy response.
The truth, however, is that while the continuing uncertainties in our environment remain a huge let to doing business, banks find that the collateral with which they seek to hedge their lending bets are almost impossible to realise when they come up against a determined recalcitrant debtor. The ability of certain counterparties to bank lending to gum up the legal process is a big reason for bank lending in the country remaining subdued for long.
How then do we finance the growth initiatives that our economy needs? It would have been reassuring to believe that our banks are not lending because they do not have the deposit base to do so, which would be a legitimate conclusion from savings deposits being remunerated below costs — potential depositors skirt banks’ vaults, keeping their monies in circulation instead. The truth, however, is that while the continuing uncertainties in our environment remain a huge let to doing business, banks find that the collateral with which they seek to hedge their lending bets are almost impossible to realise when they come up against a determined recalcitrant debtor. The ability of certain counterparties to bank lending to gum up the legal process is a big reason for bank lending in the country remaining subdued for long.
The Nigeria economy is in dire need of reforms to free markets for labour, capital, and entrepreneurial ideas. Increasingly, reforms to our criminal justice system are at the top of our shopping list.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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