The Case Against High Interest Rates in Time of Contagion - Bola Tinubu

Proshare

Sunday, May 03, 2020  10:23 PM / by Asiwaju Bola Ahmed Tinubu/ Header Image Credit: PulseNG


 Proshare Nigeria Pvt. Ltd.


Economic Policy

The economic fallout from the coronavirus may present the best, most pressing case for revising the CBN's high interest rate policy. The undue rates penalise domestic investment and consumer borrowing.

 

This reduces both aggregate domestic supply and, to a lesser degree, aggregate domestic demand. The chronic gap between domestic supply and demand has been filled by bloated levels of imports & encouraged an overvalued exchange rate that the high interests have helped produce.

 

In normal times, the high interest rates also attract significant foreign financial speculation, the ever-ominous hot money. While in the short-term, the foreign speculation boosts financial inflows.

 

Over time, as compound interest payments become due on these foreign investments, the nation will lose an ever-increasing amount of money to satisfy foreign debt obligations. In the short run, high rates seem to attract foreign capital and spur 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 stifle domestic investment and incomes while pushing up inflation and exposing an ever-increasing share of our financial system to foreign manipulation and dependence.

 

Put another way, if you take a single picture early in the process, the high interest rate policy looks good at that moment in time. However, if you view the entire movie, you will see an ending that is both painful and unnecessary.

 

The Central Bank of Nigeria has demonstrated its financial agility by establishing a growing number of special financing programs for various industries and sectors of the economy.  While these programs look good at first glance, they also expose important contradictions.

 

The special schemes are an implicit admission that normal rates stifle investment borrowing and thus suppress the economy. The extraordinary schemes would not be required if the general interest rate was at a proper level.

 

By establishing the special programs, the CBN attempts the impossible. On one hand it defends the general rate as prudent. On the other, it proliferates special exceptions in order to spur investment borrowing that the general rate has heretofore stifled.

 

By establishing the special programs, the CBN attempts the impossible. On one hand it defends the general rate as prudent. On the other, it proliferates special exceptions in order to spur investment borrowing that the general rate has heretofore stifled.

 

This complex CBN rear-guard action does not serve the greater purpose. It merely prolongs the inevitable: We must retreat from high interest rates if we want investment borrowing to attain levels that actually increase private-sector growth and job creation.

 

The modern global economy is built on credit. Prosperous nations have built success based on the sustained ability to use credit to generate high levels of domestic investment as well as allow for significant consumer financing.


 Proshare Nigeria Pvt. Ltd.


The Story Thus Far 

The current form of our financial system is antithetical to growth. Broad and diffused growth was not the goal. Such growth contravened the underlying tenet of military rule - tight, centralised control of political power and economic resources.

 

There were no nodes of power truly independent from the centre. Nor did this situation foster creative and innovative economic thinking leading to sufficient business start-ups that might have grown and diversified the economy.

 

Thus, 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.

 

As such, we are in a situation where the banking system is not sufficiently governed by the rational dynamics of economic maximization. Without optimal financial sector support, the productive economy has failed to grow as it should.


 Proshare Nigeria Pvt. Ltd.


A Dangerous Old Fallacy    

Defenders of the high interest rate policy claim high interest rates quell inflation and maintain sound exchange rates. Many local economists who remain wedded to a brand of conservative monetarism support this position.

Bola Ahmed Tinubu

 

However, that school of thought has been discredited by the failures of Thatcherite policies of the UK in the 1980s, by monetary policies implemented to cure the 2008 financial crisis and by the financial policy moves being undertaken today to fight the coronavirus.

 

Proshare Nigeria Pvt. Ltd.


Long Term Positive Relationship Between High Rates And Inflation 

Over time, high rates cause more inflation than they prevent. In the initial phase, high rates might lower inflation. Feedback loops created by the initial high rates will eventually encourage inflation.

 

Proshare Nigeria Pvt. Ltd.


Exchange Rate And The Economy 

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.

 

Coronavirus And The Opportunity To Lower Interest Rates  

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 catalyst for economic growth at this moment.

 

Conclusion 

High interest rates are a fundamental drag on national economic growth. Only our unreliable power supply may loom as a bigger impediment to national prosperity.

 

Lower rates will spur domestic investment and production. This creates both jobs and wealth.  High rates serve only to suppress these vital factors. Lower rates will have some negative short-term impact on inflation and the exchange rate.

 

However, in a twist of irony, the economic dislocations caused by the coronavirus serve to mitigate those temporary negative consequences. If there is a time to reduce interest rates, that time is now.


 Proshare Nigeria Pvt. Ltd.


Related News

1.      Why It Is Worth Listening to Bola Ahmed Tinubu On Sovereign Economics - Apr 10, 2019 

2.     Bola Tinubu Colloquium and Productive National Discourse - | The  Guardian - Mar 29, 2019

3.     The Bola Tinubu - Bukola Saraki Exchange for The Records - Aug 20, 2018

4.     Seven Drivers of Urgent Need to Fix The Economy - Bola Tinubu Sept 25, 2017

5.     A New Nigeria Or A Better One: The Fitting Tools of a Great Repair - TheNews - Sept 24, 2017

6.     Kachikwu: Competence based performance; not magic is required - Bola Tinubu - Mar 27, 2016

7.     The Story of a Visionless Caper: How Political Shenanigans Led to a Bond Default - Apr 04, 2019 

 

Proshare Nigeria Pvt. Ltd.

Related Video

Power, Key to Driving Nigeria's Economy-Bola Tinubu - Oct 03, 2016

Proshare Nigeria Pvt. Ltd.

RELEVANT LINKS on Exchange Rate Policy and Economic Management in Nigeria

1.     Foreign Direct Investment and the Central Bank of Nigeria's Monetary Policy - Feb 16, 2018; Bismarck Rewane, FDC

2.     The Nigerian Economy: A Macro-econometric and Input-output Model - Sept 07, 2016; by Dr. Temitope W Oshikoya

3.     Why portfolio investors are not flocking to Naira-based assets - Businessday - CrescentPillars, Aug 15, 2016

4.     Nigerian Economy: Beyond a Flexible Exchange Rate Policy

5.     Why portfolio investors are not flocking to Naira-based assets - Aug 11, 2016

6.     Resolving the Exchange Rate Regime Conundrum

7.     The Economist's Evidence on Devaluations

8.     MPC: Behind the Curve, Playing Catch Up

9.     Managing Exchange Rate, Interest Rate, Capital Flows and Reserves  - Book Abstract, May 13, 2016

10. Pathways to Shared Prosperity in Nigeria: Making Market and Government Work in a Global Context May 08, 2016; by Dr. Temitope W Oshikoya

11. The Art of Central Banking in Nigeria: Managing Exchange Rate, Interest Rate, Capital Flows and Reserves - Amazon, April 27, 2016; by Dr. Temitope W Oshikoya 

12. Nigeria: Of Ministers, Clowns, Hazards, and Lazard - Apr 08, 2016

13. Current State Analysis of the Economy - Temitope Oshikoya

14. It's the Productivity, Stupid.

15. Currency Woes and Capital Flows in Emerging Markets - Feb 04, 2016

16. Who Command and Control the Economy? - May 11, 2016

17. Current State Analysis of the Economy - Oct 16, 2015

18. JP Morgan Index and Collective Self-Delusion - Sept 16, 2015

19. It's Productivity of the Economy that Defends the Naira - Jul 8, 2015

20. Emefiele's CBN: one year after - June 10, 2015

21. Exchange Rate Policy and Economic Management in Nigeria - Is there a need for Paradigm Shift?  - Proceedings of Seminar by CBN, April 2015

22. The Quadrilemma of Buharinomics

23. Microeconomics of Banking and High Lending Rates

24. Nextonomics puts cost of Buhari's Economic Blueprint at N60 Trillion 


Proshare Nigeria Pvt. Ltd.


Related News - Opinions & Analysis

1.     Nigeria's Post COVID-19 Economic Outlook - Ayo TERIBA

2.     The Coming Greater Depression of the 2020s

3.     Of Swans and Free Markets Capitalism - Lessons for Nigeria

4.     Can the Nigerian Economy Survive the Virus?

5.     Nigeria's Economy After Oil: How Should We Prepare? - Bode AGUSTO

6.     Roadmap to Rebooting Nigeria's Economy from COVID-19 - Soji APAMPA

7.     Can Africa Afford COVID-19 Lockdowns? - Chukwuma SOLUDO

8.     Of Q1'20 Economic Output and GDP Forecasts - Lessons from China

9.     It's Time to Build - OpEd

10. The World After COVID-19: Mark CARNEY on How the Economy Must Yield to Human Values

11. What Would the World Look Like after Coronavirus: Economically, Politically and Socially? - MAK


 Proshare Nigeria Pvt. Ltd.


Related News - Monetary Policy

1.      Ahead of 040520 WebTV Discussions on COVID-19: Assessing Fiscal and Monetary Policy Responses with Laoye Jaiyeola, CEO NESG

2.     Looking at Home for Policies and Solutions

3.     MPC Members Looking Beyond the Virus

  1. CBN Intervention: Playing to the Gallery or Serious Business?
  2. Turning COVID-19 Tragedy into Opportunity for a New Nigeria
  3. Personal Statements By The MPC Members At The 129 MPC Meeting of Mar 23-24, 2020
  4. MPC - Think Twice or You Sink! FDC Aligns with TheAnalyst Opinion that the CBN is Trapped
  5. CBN Issues Guidelines for the Implementation of the N50bn Targeted Credit Facility
  6. CBN Communique No. 129 of the MPC Meeting - Mar 23-24, 2020
  7. The Limits of Heteredox Economics Revealed, MPC Trapped and Has to Hold
  8. Monetary Policy Preview - Caught Between the Devil and the Deep Blue Sea
  9. Fiscal or Monetary, Both, Neither?
  10. COVID-19: CBN, Bankers' Committee to Support Pharmaceutical Companies
  11. Bankers Committee Reviews Impact of COVID-19 On Economy, Announces Support Packages
  12. Coronanomics: Figuring Out CBN's Recent Policy Intervention
  13. CBN Policy Measures in Response to COVID-19 Outbreak and Spillovers
  14. Bank of England Measures to Respond to The Economic Shock from COVID-19

Proshare Nigeria Pvt. Ltd.

Related News - Nigeria Economy

1.      The Lockdown - Food Scarcity and Social Unrest Looming

2.     April 2020 Headline Inflation Will Cross 13.0% - FDC

3.     Nigerian Economic Update: A Throw of the Dice

4.     Guidelines and Recommendations: Reopening the Nigerian Economy

5.     GDP By Income and Expenditure Approach Q4 2019 - Household Final Consumption Declined by -2.40%

6.     Of Swans and Free Markets Capitalism - Lessons for Nigeria

7.     Hiccup in Trade Activities Ahead

8.     Can the Nigerian Economy Survive the Virus?

9.     A Surprising Boost to the FAAC Payout; April Payment Amount to N781bn

10.  Impact of Privatization on Nigeria's Economy

11.   Can Africa Afford COVID-19 Lockdowns? - Chukwuma Soludo

12.  COVID-19; Nigeria Needs to Relax Foreign Exchange Management to Boost Industrialization - Dr. Yusuf

13.  Nigeria's Economy After Oil: How Should We Prepare? - Bode Agusto

14.  The Disruptive Impact of COVID-19

15.  Nigeria's Impending Recession

16.  Coronation Weekly: Interest Rate Conundrum

17.  Headline Inflation Increases By 12.26% YoY In March 2020; 0.06% Higher Than February 2020 Rate

18.  COVID-19 and the Construction Sector

19.  Consolation in Isolation: COVID-19 - Why You Are Unlikely to Die - LBS EBS - April 2020

20. Great Lockdown Necessitates Further Downgrade to GDP

21.  COVID-19 and the Focus on Sub-Nationals in Nigeria

22. Reset Nigeria - A New Paradigm for Africa's Most Populous Country

23. Decline in the FGN's External Debt Service

24. Ahead of Tomorrow on WebTV: COVID-19 Impact on Supply Chain and Disruptions on Operating Model

25. Nigeria Weekly Update: Oil Prices, the New Normal



Proshare Nigeria Pvt. Ltd.


Related News - Reviews & Outlook

  1. Nigeria's Post COVID-19 Economic Outlook - Ayo Teriba
  2. Fitch Revises 2 Nigerian Banks' National Ratings
  3. Banking System Outlook Update - Nigeria Outlook Changes to Negative Due to Oil Price Collapse
  4. Is Africa Open for Business?
  5. Coronavirus Crisis Impact on Jobs Could Outweigh GDP Impact
  6. Moody's Affirms Nigeria's B2 Ratings, Maintains Negative Outlook
  7. Fitch Revises Outlook on Kaduna State to Negative on Sovereign Rating Action; Affirms at 'B'
  8. Fitch Downgrades Lagos State to 'B' on Sovereign Rating Action; Outlook Negative
  9. Further Multi-Notch Sovereign Downgrades Are Probable in 2020
  10. Various Rating Actions On Nigerian Banks By S and P Following Sovereign Downgrade; Outlooks Stable
  11. Three Ratings Agencies, Now One Message
  12. Fitch Downgrades Nigeria to 'B'; Outlook Negative
  13. Nigerian Banks at Severe Risk from Oil Price Slump, Coronavirus
  14. Moody's Assigns Ratings to Dangote Cement Plc's DMTN Program and Proposed Series 1 Notes
  15. Macroeconomic Review Q1 2020: Steering a Fragile Economy in the Face of Uncertainties
  16. Fitch Downgrades 3 Nigerian Banks to 'B', Places All 10 Banks on Negative Watch
  17. Nigeria Long-Term Rating Lowered To ''B-'' On Weakening External Position
  18. Coronavirus to Weaken Sovereign Fiscal Positions; Track Record Matters
  19. Fiscal Space Limited for Many Sovereigns
  20. Rating Actions Taken on Several Corporate Issuers with Exposure To Nigeria

Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

READ MORE:
Related News
SCROLL TO TOP