Recession: Reducing Interest Rates Would Do Nothing To The Economy – CBN

Moses_TuleThe Central Bank of Nigeria (CBN) on Wednesday said reducing interest rates “will do virtually nothing” in taking Nigeria’s economy out of a recession.

The apex bank also maintained that there is no quick fix out of the recession Nigeria is currently in.

The Minister of Finance, Mrs Kemi Adeosun, had expressed hope that the Monetary Policy Committee (MPC) would lower key interest rates.

“We would love to see the MPC reduce interest rates because we think in terms of business activity that would deliver greater results to Nigeria”, she told Channels Television in an exclusive interview.

However, speaking on Sunrise Daily, the Director, Monetary Policy Department of CBN, Mr Moses Tule said the MPC had to look at the fundamentals before taking the decision to maintain the rates at 14 per cent.

Mr Tule said a country like Japan has been in recession for more than ten years despite having an interest rate of less than 2 per cent, adding that the Bank of England has also reduced its interest rate from 0.5 per cent to 0.25 per cent and “still nothing is happening, so the solution does not lie in the reduction of interest rates”, he said.

He also noted that despite the interest rate reduction in the past, the CBN has not seen “that response, in terms of growth in credit”.

He further noted that “we are not just in recession but we are in a stagflation, where growth has reduced precipitously to the negative and you have prices rising, so it is insufficient for the Monetary Policy Committee to just meet and say we are reducing interest rates to address a complex economic situation like stagflation”.

To get out of the economic quagmire Nigeria is in, Mr Tule said the “monetary policy, fiscal policy, trade policy, budget policy need to sit together in a retreat to fashion out comprehensively what the policy response is going to be.

“All the key policy parameters must be brought to the table to fashion out what the way forward is for the country”, he said, insisting that “you can’t clap with one hand”.

Mr Tule added that with the inflation rate at 18 per cent, a reduction in interest rate will lead to an increase in money supply which in turn means higher inflation, wondering “if the government has the resources to increase salaries when there is higher inflation.

“The current inflationary trend are not strictly monetary policy induced factors. Some are legacy factors that rose as a result of reforms, like in electricity tariff, petroleum pricing model and foreign exchange market”, he maintained.

Key Constraints To The Economy

Mr Tule, who maintained that the CBN is not averse to lower interest rates, however stressed the need for the government to correct the structural deficiencies inherent in Nigeria.

He added that an economy does not deliver low interest rates if it has key structural deficiencies like infrastructure, insisting that “these are key constraints to the economy.

“You cannot compare the infrastructural level to the structural deficiency in this economy with what you have in the UK, Japan or in the United States. If the UK went through a recession, which they are still going through and not completely out, Japan over the last ten years is being struggling with a recession, the European Union since 2007/2008 global financial crisis still going through a financial crisis and are not yet through despite putting all the policy arsenals, then for an economy like Nigeria, where there are key structural deficiencies, there is an urgent need to harmonize the policy reaction that would address this stagflation”, he maintained.

Mr Tule maintained that the issues are “deeper and comprehensive than the current solution kit that is on the table”, hinting that we are “misdiagnosing what the issues – stagnation or recession – are”.

The CBN had at the last MPC meeting in July raised the benchmark Monetary Policy Rate from 12 percent to 14 percent, while the Cash Reserve Ratio and Liquidity Ratio were both retained at 22.50 per cent and 30 per cent each.

Recapitalisation: CBN Clears 128 BDCs

BDCsData released by the Central Bank of Nigeria show that 2,964 bureau de change operators have scaled through the recapitalization process mandated by the regulator.

According to a circular posted on the CBN website, 128 BDCs recapitalised in the last one week.

The apex bank is expected to refund nearly 100 billion naira to all the BDCs that paid the mandatory 35 million naira caution deposit which was scrapped last week.

In the meantime, the President, Association of Bureau De Change Operators of Nigeria, Mr Aminu Gwadabe described the cash refund as a welcome development, as it will go a long way in boosting the capacity of operators to stay in business.

 

CBN Insists No More Sale Of Forex To BDCs

CBNThe Central Bank of Nigeria (CBN) will not back down on its decision to stop the sale of foreign exchange to Bureau De Change (BDC) operators.

The CBN’s Director of Monetary Policy, Mr Moses Tule, made the statement on Thursday while speaking on Channels Television’s Sunrise Daily.

He said that the BDC operators have abandoned their primary functions, stressing the need to protect the Naira and conserve the depleted foreign reserves.

“We have Bureau De Change that are making huge volume transactions in foreign exchange, contrary to the terms of their licence,” he said.

The CBN official also noted that the BDC operators have taken a life of their own, saying they took actions that threatened the decision of the CBN.

“The Association of Bureau De Change Operators, which is supposed to serve as a self-regulating association, has taken on an entire life of its own and they act as a trade union, making demand that the Central Bank reverses its policy,” he said.

But the acting President of the BDC operators, Aminu Gwadabe, has expressed displeasure with Mr Tule’s claims.

He insisted that the operators are professionals who were being unfairly treated by the CBN.

“The Central Bank licensed Bureau De Change operators only contribute five per cent in the market (that is their market share). The other 95 per cent is being shared among the banks, the Central Bank and the street hawkers (these are the players in the market),” he said.

Mr Gwadabe wondered how a sector that only play five per cent would control the activities of the market.

“Our concern is not to fight the CBN policy, our concern is not to constitute ourselves as a trade union, (but) we are a professional organisation,” he said, maintaining that the group is a professional organisation.