"Clearly at present, most income-earners in Nigeria are not making enough money to spend. So, if CBN likes, they should increase interest rate to 1000%, savings will not improve significantly. So, who are the economists in CBN that made the decision? Either they are oblivious of economic reality or they are ignorant of the power of IR, or both."
"CBN raises interest rate from 12 to 14%" -The Punch, (27/07/2016)
It is almost a decade now that I took few courses in Macroeconomics in Great Ife. But I want to try to see if my knowledge of how interest rate drives economy is not rusty. Interest rate is a powerful monetary tool that Central Banks use to control demand and supply of money, in other words, inflation and deflation.
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In this discourse, it is essential to understand the meanings of "investment", "saving" and "lending" or loan. For wider readership, I would like to make it as short post as possible, therefore definition of terms may not be conventional.
"Savings": When people make excess income than they spend, the rational thing to do is to either "save" or "invest" the excess. What will prompt the decision of a rational income earner is INTEREST RATE (IR). In simple term, if IR is high, the income earner saves. If IR is lower, he/she invests.
"Investment": Entrepreneurs and/or investors usually need more money or capital than they have. They take loans from savers or banks. Their decision on how much to borrow is similarly controlled by IR. If it is high, they borrow less and vice-versa. Investment also controls economy. Lower investment could result in job loss/unemployment, high prices (inflation), and increased importation (low GNP, BoP & Balance of Trade deficit ).
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"Lending" or loan: This is done by financial houses such as banks. Banks survive partly on money made from loans. Supply of loanable funds is controlled by IR and saving (which depends on IR). Banks loves high IR but investor will take less loan when IR is high. Therefore, there is need to maintain a balance.
ROLE OF CENTRAL BANKS: is to implement a monetary policy to balance the decisions and actions of these three actors based on economic reality of the country at any point in time.
CBN, NIGERIA ECONOMIC REALITIES AND THE IR INCREASE
Clearly at present, most income-earners in Nigeria are not making enough money to spend. So, if CBN likes, they should increase interest rate to 1000%, savings will not improve significantly. So, who are the economists in CBN that made the decision? Either they are oblivious of economic reality or they are ignorant of the power of IR, or both.
Furthermore, many people are at the brinks of losing their jobs, unemployment rate is "Kilimanjaroic", prices have snowballed, and we need to lower our importation to improve our balance of trade. In this case, is higher IR the solution? Hell NO. Then, who trained these economists at CBN?
Lastly, it is true that banks may not have enough loanable funds. However, IR is not the main reason. The reasons are lower purchasing power of incomes due price hikes, and irregular salary payment.
In my opinion, I think what CBN should do is to lower IR. This will encourage investments, thereby create jobs/income for people and provide enough goods and services locally that could eventually bring prices down. As time goes on, people will earn enough money and think of saving. Economy and governance are NOT rocket science. Listen to people, feel their pains, and consider the reality in your policies. This is the way-forward.
Tajudeen Oyehan writes from Dhahran
08:12 GMT,
27 July, '16
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