The lack of coordination between the nation’s fiscal and monetary authorities has become manifest as the Central Bank of Nigeria, CBN, yesterday, refused to cut interest rate, as suggested by the Minister of Finance, Mrs. Kemi Adeosun.
The Finance Minister had on Monday, called on the CBN to lower interest rate, so the government could borrow domestically to boost the economy without increasing debt servicing costs. But Governor of the CBN, Mr.Godwin Emefiele, who briefed the press at the end of the Monetary Policy Committee, MPC, meeting in Abuja, said rate cuts in the past did not result in banks giving credits to the real sectors of agriculture and manufacturing as instructed.
He said a cut in the rate at a time inflation was rising could worsen the nation’s economic situation. Emefiele said: “Whereas the Minister of Finance has called for a reduced interest rate at this time, the MPC decides otherwise.
“Basically, like I said, both the monetary and fiscal authorities have the intention to achieve growth, but the direction through which we want to achieve it may differ as long as you still achieve the growth.
“The issues here, just as we have read in the communique, is that when you say reduce the interest rate, there are two possibilities here.
“You are saying because you want that to push credit to the private sector at lower rate, or two which I have had the fiscal authorities talk about, is to be able to borrow at lower rates and spend.
“Our view at the MPC, which was exhaustively discussed, was that in the past, there was a time when MPC decided, not only to reduce the policy rate, but, indeed, also increased the Cash Reserve. Past rate cuts channeled to traders.
“These were intended to lower rates and encourage spending, particularly to the private sector. After we did that, because we did not see the impact of credit to the private sector, we needed to further redo the CRR. During that first section, we reduced the CRR from 30.5 to 25%.
“It provided an opportunity for about N1trillion to be injected by the CBN into the economy or made available to the banks. “But rather than loan this mony to the banks or loan them to the consumers, or agriculture and manufacturers, like we said in the communique, we found that those credit went to traders, who used them to demand for foreign exchange, which ended up putting pressure on the foreign exchange market. That was what happened.
“Subsequent to that, we said since this money wasn’t deployed directly, we would also be reducing the CRR, then from 25% to where it is right now, which is 22.5%. That was going to provide between N350 billon and N500 billion through that avenue.