Nigeria's Central Bank on lower interest rate

The Central Bank of Nigeria (CBN) announced at the beginning of the first quarter 2010 to keep and maintain 6 percent benchmark interest rate. The unchanged interest rate reassured and reaffirmed the commitment for pro-growth and credit availability policy pursued by governor of Central Bank, Sanusi Lamido Sanusi. While the monetary policy rate was left at 6 percent, the borrowing rate was lowered at 2 percent from previously 4 percent but the key interest was reserved at 8 percent. The business and financial community received it as good news to strengthen them in this period of credit uncertainty and banking instability.

Nigerian economy, in spite of high unemployment rate and weak performing stock market, is relatively healthy. Although the economy was affected by the global recession, the impact is mild because Nigerian economy is not wholly exposed to the global economy. In addition the revenue from oil is encouraging which has seen the rise in Nigerian foreign reserve to $44.04 Billion. The Nigerian foreign reserve was hovering above $50 Billion two years ago before the recession and prior to the failures of five major banks in Nigeria which resulted in credit shortage. The Central Bank of Nigeria funneled almost $4 Billion to the banking sector to rescue the troubled banks.

Inflationary trends were subdued and properly controlled with a monetary policy grounded in reality and probity. Higher inflation is not gaining momentum and CBN is doing the right thing to make sure that rising inflation will not have a new life. According to Nigerian Bureau of Statistic, inflation rate rose from 11.6 percent in October to 12.4 percent in November 2009. And Sanusi’s CBN anticipated that inflation rate will dip below 9 percent by the end of 2009. This can be possible with the end of the credit shortage and the banking crisis.

It is essential to maintain a moderately low interest to bring about the long needed liquidity into the capital market. The credit crunch will not be allowed to take the upper hands and in turn frustrate economic growth and wealth creation. The marketers and market need the flow of credit and with lower interest the banks will not hesitate to lend out money to traders and business community.

Dipping the interest rate to four percent might be better in order to comprehensively cure the credit crunch. But reasonable minds can understand that the quick flow of credit might trigger inflationary trends and that may not be leverage to safeguard the capital market at the long term. Therefore the 6 percent benchmark interest rate looks reasonable to get the job done without undermining the capital market and diminish the attraction of capital into the market.

Sanusi’s CBN must look outside the guarded financial and banking house to make some decisions. In as much, that politics must not be determinant benchmark for making decision but the principles of political economy must not be deemphasized. Nigeria standing in the global geo-politics is affecting our economy particularly the world perception about Nigeria and the problem of the image of Nigeria.

The flow of foreign capital into Nigerian economy might be restricted due reservations unrealistically harbored by foreign investors. Therefore CBN have to be ready to liquefy the economy and grease the economy with credit liquidity to deter another impending credit crunch. At the long run, lower interest at four percent even three percent might act as a shield to makeup for the paucity of foreign capital in the economy.

The lower interest rate at 6 percent is still good enough to ensure and consolidate any gain made in the economy and prepare the economy for long term growth. The lending of loans by the financial institutions to traders and business community may be dampened by the psychology of the troubled banks. The lower interest notwithstanding, there must be a level of trust in the banking sector; so that confidence will return and normalize the banking sector. Governor Sanusi Lamido Sanusi and CBN are laying foundation, a prospective for long term growth and capital market appreciation.