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Making sense of Tinubu’s 19-page sermon on interest rates: 25 key takeaways

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The national leader of the ruling All Progressive Congress (APC) Sunday afternoon issued a statement in which he made a case for the imperative of lowering the prevailing interest rates in the country by the central bank in order to strengthen the economy against the COVID-19 pandemic.

Here are twenty-five key takeaways from his statement:

1. The CBN’s high interest rate policy penalises domestic investment and consumer borrowing. This reduces both aggregate domestic supply and, to a lesser degree, aggregate domestic demand. The wide gap between domestic supply and demand has been filled by bloated levels of imports and encouraged an overvalued exchange rate that the high interests have helped produce.

2. In the short-term, the foreign speculation, which high interest rate attracts, boosts financial inflows. However, as compound interest payments become due on these foreign investments over time, the nation will lose an ever-increasing amount of money to satisfy foreign debt obligations.

3. In the short run, high rates seem to attract foreign capital and boost the economy while giving it discipline against inflation. In the longer-term, all of this is untrue. High rates give us the worst of both worlds. They hinder domestic investment and incomes while pushing up inflation and exposing an ever-increasing share of our financial system to foreign manipulation and dependence.

4. The CBN has demonstrated its financial agility by establishing a number of special financing programs for various industries and sectors of the economy. These programs expose important contradictions in the CBN’s position. The special schemes are an implicit admission that normal rates stifle investment borrowing and thus suppress the economy. They would not be required if the general interest rate was at a proper level.

5. We must retreat from high interest rates if we want investment borrowing to attain levels that actually increase private-sector growth and job creation.

6. If the financial sector functioned properly, servicing the needs of the economy in general, there would be no need to constantly resort to specialised sectoral plans for concessionary lending below regularly available rates of interest. Such schemes are evidence that the overall financial system is fragmented in a manner that artificially reduces investment and the positive consequences increased investment has on growth, production and employment.

7. The current interest rate in Nigeria prohibits most normal business investment. Thus, the productive sector stagnates as innovation and creative endeavour are discouraged. Employment and aggregate demand are dragged down. The economy becomes a slave to a negative, impoverishing dynamic.

8. The current form of our financial system is antithetical to growth. Our financial system was originally structured to serve the colonialists who wanted a highly centralised system that provided little chance of prosperity for indigenous business beyond that which the colonial master would allow. The basic structure of that old financial system remains intact until today. The system has not kept pace with the needs and challenges of our evolving nation.

9. After national independence, the system was but slightly modified to fit the requirements of highly centralised military rule. Only those allied to the power core were enabled to access credit and favoured to prosper in business. One had to seek the alliance and friendship of the government of the day to overcome the strong impediments that high rates caused. This rendered business an appendage of government, dependent on government favour to survive.

10. Consequently, the banking system became one intended to bar most businesses and people from access to sufficient commercial and consumer credit, a system constructed to suppress large-scale independent economic activity unless expressly sanctioned and approved by arbitrary power. Thus, it suppresses wealth and job creation. It keeps the economy on crutches so it cannot run too fast as to get beyond the grasp of whosoever wields that arbitrary power.

11. The economic model of overreliance on oil led to an overvalued currency, which has caused Nigeria long-term harm. It undermined the global competitiveness of local producers. It also made imports cheaper. We became an import-reliant nation with a dwindling productive capacity. Over the long haul, such a position is high risk. Underlying economic fundamentals have become more adverse over time. Oil revenues, in real terms, have not and cannot keep apace population growth.

12. We remain too import reliant even though our supply of funds to buy imports dwindle. We seek to maintain a strong currency because of this import reliance and because of national pride. However, this reliance drains funds to support the exchange rate that could be better invested in strengthening our productive capacity.

13. We need business and industry to take up the slack generated by the weakening of the oil sector at this moment. However, the productive economy is barred from this needed increase in activity because the high interest rates, along with an unreliable power supply, combine to form a steep obstacle to sufficient real-sector investment, growth and productivity.

14. The high interest rate financial model runs contrary to the ideals of a progressive democracy to which Nigeria aspires. A nation cannot become a genuine democracy while access to credit remains under a semblance of authoritarian lock-and-key.

15. High rates cause more inflation than they prevent over time. The suppressed levels of private sector activity will result in higher levels of government borrowing than otherwise would be the case had private sector incomes and productivity been unhindered by the high rates. This means that government must spend an increasing sum merely on interest charges. This places more naira in circulation without a corresponding increase in goods and services.

16. Domestic firms must charge high prices in order to achieve profit levels sufficient to repay their high interest loans where high interest rates are applicable. This too is inflationary.

17. We have become too reliant on foreign borrowing. In our case, we have created a highly imbalanced and imperfect economy. On one hand, high rates are used to scare domestic investment borrowing thus undermining income, production and consumption. On the other hand, high interest rates are used to attract foreign creditors who must be repaid with an increasing percentage of our intake of dollars.

18. If we went to a freely floating exchange rate, the naira would devalue. This means our currency is overvalued in terms of our trade with the outside world. This overvalued exchange rate is buoyed by high interest rates.

19. In a well-functioning economy, import levels should shape the exchange rate. In our economy, the exchange rate determines import levels. Our demand for unnecessary imports is much too high. This unhealthy appetite drains or limited supply of foreign currency.

20. To maintain the exchange rate, we must sacrifice both naira and dollars that could have been invested in strengthening our productive capacity and job creation. Instead of bolstering the economy, we give these financial resources to international finance arbitragers who care little for our well-being, who invest little in our productive economy and who gain too much influence over our national economy as insensitive creditors.

21. To stimulate their economies, the central banks of all major economies have driven their prime interest rates below 1 per cent and nearer to zero per cent. These central banks are lending vast amounts at low rates just to support to their industries and firms.

22. If the COVID-19 crisis is to have any positive economic aspect, let it be that we used this moment to drive down interest rates. To apply the rate reduction only to future loans would be prejudicial to current bank debtors. Thus, the financial authorities should consider formulating regulations that banks must reduce the high interest rates on existing business loans to the new lower general rate.

23. This can be achieved through regulations requiring banks to automatically roll-over existing loans at the lower rate or regulations stating this must be done if the borrower so requests. Any such change will alter the profit structure of most banks. To help moderate the change, government should provide generous tax relief to the banks. Additionally, government should institute a special bond-purchasing program where banks can purchase interest-bearing government bonds at a significant discount or even on credit for a period of years.

24. Another consideration we must weigh regarding interest rates is how lowering rates along with other innovations may unlock the potential for real estate to be a catalyst for economic growth at this moment. The global economy will not rebound for several months if not longer. We must seek ways to inject liquidity into the economy and foster activity.

25. Reform of government mortgage agencies and policies will further allow us to deepen both the primary and secondary mortgage markets in ways that increase liquidity and spur economic activity independent of what may be happening in the outside world.

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