University of Nigeria Rates...It was revised upwards to 8.0 per cent in 1382 and further to 10.0 per...
Transcript of University of Nigeria Rates...It was revised upwards to 8.0 per cent in 1382 and further to 10.0 per...
University of Nigeria Virtual Library
Serial No Author 1 AGU, Cletus Chike Author 2 Author 3
Title Interest Rates Policy in Nigeria and its Attendant Distortions
Keywords
Description Interest Rates Policy in Nigeria and its Attendant Distortions
Category
Social Sciences
Publisher
Publication Date
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IXTERES'T FIATES POLICY - IN - - N I G E R I A LVD ITS ATZNDANT
DISTORTIONS. - I, INTRODUCTION. 'By C. C. Agu,. Department of
Economics, Universi ty o f Nigeria , Nsuk~a.
'Our knowledpe of macroeconomics i s n o t so secure t h a t ?-. .. . , . . . . 4 . . I
p-e;udgernerit can'& attempted l i g h t l y . . Economics i s net theology,
where the a r t i ~ i e ~ of f a i t h must b e supported t o the end of t imet
( W i n t r a u b 'I 977). C:onsequen-kly, the re fo re , macroeconomic theory is . . 1:
. . pervaded with a number bf u n s e t t l e d is i ixs. . k gjod exanple i s - the cont inuing controversy, over t h e years , abont t h e detnrrninants
.. .:-. of the ''1eye.i gf i n t e r e s t r a t e , ..: . . v . , . ,. . .
.,;$$$,erest rate- ' de terminat ion c ~ q be.: analykk8~' I n e i t h e r 'stock - . . . - , . . ....,.
or figu-dbnensich&. ?h6 s tock dimension considers* the'dernand f o r
and supply of t h e s tock of .'money as an a s s e t an2 t h i r b f o r e 'argues . . : , -.;, - 7 . . . . .- y r r - .- - -. . . 2 .
t ha t interest r a t e i a determined by t h e demand f o r and supply of .. :. f '
money;' On f n e &her hend, ' the flow dimension t h e c l a s s i c a l '
loanable fund& theory cons iders t h e r e n t i n g ~f money o r t h e demand
- for and. supply of f i n a n c i a l claims o<er a period of time and I . - contends th'at the l ewel 'o f i n t e r e s t r a t e i s determined by t h e
. . , ' r
demand f o r and supply of c r e d i t generated by renting:money, o r '
t h e demand f o r and supply of f i n a n c i a l claims on t h e prirniry an& . , B
secondary parket's i n a p a r t i c u l a r per iod of time.
Hicks (1939); ' took a middle course o r . cornpromise s tand and . .
. . ,
contends t h a t Ln te res t . r a t e , . i + . . a . . p r i c e which, l i k e o the r p r i c e s
i s determined wl th them as mutually interdependent system.
With i n f l a t i o n a r y pressure , many f i n a n c i a l nbscrvers ,
r e i e a r n i n g t h e lesson t augh t by Irving Fisher at. t h e beginning
o f t h e century gradual ly accepted that while t h e l i q u i d i t y
preference and loanable funds t h e o r i e s both genera te t h e same
equi l ibr ium i n t e r e s t rate, they bath f a i l e d to consider a f a c t o r
that has becohe inc reas ing ly important i n r e c e n t yea r s - t h e 8
. p r i c e e x p e c t a t i o n s . . ~ I n other words , . there has been a growing
awareness tha* spending and saving dec i s ions are important ly
a f fec ted by r e a l i n t c r m t ratrs,
?more , i n the . 1970 Amendment, the CBN was authorized t o
re i n t e r e s t r a t e s f o r various c lasses of l iccnsed banks . ... . ' - : -.. - I . . ' . 5
\tu~~t.rdrnent Decree 1970, sect ion 40).
The CEN h a s ~ c m s t a n t l y use'd the power r e s t e d on it by
prescr ib ing .year ly in te ' res t r a t e s on various types . , @f f inanc ia l . $
a s s e t s and loal? instruments o f . d i f f e r e n t banking insditut iofis bh . -- e,.- I
t h e country, I t is , therefore , co r r ec t t o say t h a t i n t e r e s t
r a t e s . . s t ruc tu re i n Nigeria i s i n s t i t u t i o n a l l y determined and
administered or . managed. This implies that..ther s t ruc ture of *,
i n t e r e s t r a t e s i n the economy does not have any bearing t o the . . .*
theore t i , ca l i n t e r e s t r a t e s s t ruc ture a s generated by the loanable + ' . .
funds snd. theiJ iquidi ty preference theories. Consequently i n t e r e s t '
r a t e s s t ruc tu re i n Nigeria i s not a good indicator of the scarc i iv
or a v a i l a b i l i t y of c a p i t a l i n the economy. 1
Table 1 shows a spectrum of selected i n t e r e s t r a t e s cover
Y J p b ~ V I A - L I A U I A L . A ~ J . a . 3 . 3 ~ ~13 alAu .
m o f f i c L ~ 1 rediscount ra te t o
v a ~ f o ~ s . +naa n+ ~ ' i ~ ~ ~ ~ - 1 -1 loan instruments. These I."
range frl: various deposi t r a t e s , '4 I
borrowing and lending r a t e s .for the beriod 1970-1'~85. An . . _,...
eiamination ,&f the t a b l e shows a general ly very low and s t a t i c
i n t e r e s t r a t e s t ruc ture . For example i n t e r e s t r a t e s paidgon
over 12 inonths deposi ts remained l o w and s t e t i c n t 4 per cent
from I971 t o 1975 and was as low' as 2 per cent i n 1.977. For the
three years 1979-1981 'it remained a t a l o w l e v e l of 6.5. per
cent . I t was revised upwards t o 8.0 per cent i n 1382 and fu r the r
t o 10.0 per cent i n 1985. Savings deposi ts r a t e s a l so remained
a t a low and stable r a t e of 3.0 per cent f o r f i ' v e years 1970-1974,
I t rose marginally t o 4.0 per cent i n 1975 and remained the same I '
u n t i l 1978, By 1982 it went up t o 7.25 per cent and.was 9.5 per cent
by 1984 and 1985. The same i s t r u e of t h e various .*Me deposi ts ..
r a t e s and other Lending and borrowing rates.
This reason accounts f o r thd generally low ra tes bn gavernment
s e c n ~ i t i e s , ' No wonder then that the opponents o f tbe f i xa t ion + .
a of the r a t e s of i n t e r e s t ' o n government stocks argue " tha t it
perper tuates .an u n r e a l i s t i c i n t e r e s t r a t e s s t ruc ture i n the
"gilt-edged market1!. -The argumect ' i s t r u e if it i s real ised nommal
nrnent 3td&ks would. make7.future s e c u r i t i e s market w i a t t ~ a c t i v e . .
t o Xnvestors. '
. . :. The 'sicond reason t h a t has been' a@-rlucecito justify the
po1ic.y of b ~ w and stable Snteras t rates s t ruc tu i - e regardless '
of' economic 'circumntances $ L . ,$s $ . . tine Keynesian postula te t h a t a '
low i n t e r e s t r a t e iniplies' '$ 'high r a t e of intkstrnent. T ~ U S
tfiat:-Melped determine. &he pace of economic ac t iv i t y . Thus
Keyn@&in bos tu la te has served as a donvonient ro t ibna le f o r '
many -develdping countr ies , 'Nigeria being a goad case, wishing
t o a t t r a c t a l w g e por t ion o f -the scarce aavings ctwarcSs the t
.I I .
publ io ' aec tor a t & low cost; Thb justification of the
. . Keynesian postula te i s based. on the unc r i t i ca l acceptance' and
mis interpre ta t ion of the Ke-ynesian investment theory, kkkch''!~.ri . I . . -. r- I
n o t -necessari ly appl icable under f u l l employment. with'inflation; . .
how eve^:. 'the controvers ia l ~ k y n e s i a n model, eve3 Lf ~ p p r d p m t e
fdr a mature indt&trisli;ed econorhy with sa tu ra t ion of invest- b
menC 'opportuni t i e s i s not applicable t o Nigeria. Nigeria
l i k ' e h m t ' developing countr ies , ib characterized not by o w e a s
.'savtngs and lack of investment opp6h.ani t ies but, on the
contrary, by numerous producti& oppor tuni t ies that cannot
be taken advantage of becausk of insuff ic ien& o f savings.
* There a r e o ther l e s s p laus ib le j u s t i f i c a t i o n f o r the policy
beoauae low interdst 'rates on their i i a b i l i t i & h&lp t o '
I ' ,
8 .
p ro tec t t h e i r earnings, This j u s t i f i c ~ t l o n tends '20 fdcus
xable 2, ESTIMATED REAL RATES OF INTEREST -- ON.OVER I 2 ' MONTHS TiME .-- DE%SZS AKD SNIKCS DEPOSIT
I N NIGERIA 1970 - 1985.. .. . . . ..
Year.:. Changc i n Real i n t e r e s t r a te 1 - Real i n t e r e s t on over 32 months r a t e on savings
deposits . i i
. . ,. i
in moblizing savings e i ther dn.the nationel account sense or . . , ! ' . . , . .
. . a , inith'e f inancia l , . . form. (see Wilii.amson 1968; .Gupta 1970 for
> . . . . . .,. i !
.::. inconcpasivc ana confl ic t ing rebul t s ) . :ib. examination of 0 -, .. . . , . . v
, 1
Table 2;above depicts the same inconclusive.result . For. . :. , ,
instande, i n t e r e s t r a t e on savings deposits was constant . '
a t ; i per, cent fo r the peri6&' 1970-74 but savings .index , . . ... . . . . . ; , . .
. > , . '
showed ..an increasing trend f o r the period. 'Q,e same, can -- .,.I. .! 0 ' . : ' " I ,; "
, . be !said of the period 1975 - 78 when the i n t e r e s t r a t e was . . . r . .
stable a t 4.0 per cent. On the other hand, the increasing
,;$rend in savings index was very-much higher i n the period ... :., I
.1980,.,,~5 when interest re turn on savihgs deposits was adjusted ! . ,
upwards. every two years. These inconclusive resul ts . notwith- . , . . . . .
s t and i r .~ , what is however not i n doubF i s t h a t i n t e r e s t r a t e s
gnjficant in determining where savings
.s in determining . . . how .much will. be saved.
len established. for -.b~:th developed and , . '
-, .L,l,A .., v,-... -es that when interest rate differentials
occur, exi~ting savings are transferred from.10~ to high
yielding , I nccounts (Hifiris and Wiseman 1981 ). It is very
well known that n l a t of savings are waeted ei ther i n form
of hodrding o r o i n wproduotive.ventures in Nigeria because
of the Low relative retwns'offered by the3.banks, and
convenient financial in~.trmen&k ylelding.'positive retqr.s. I . I, .- .
Various studies have sh&n th'at the effect ~f reguiatidn . . .- . , - .
, . . . . I
o f interest rates has, been to foster monopolistic' pro.?ll-' ' "
I . . ' .<. . .. making and that many of the alleged shortcomings ofo the
f f nsncial system stemming. from competition. are: actualiy the
result of d l stortlons introduced by regulations (R'aazzi 1 981 )
(b).R@allacation of Resources:
In the administration of interest rates in Nigeria
monetary authorities ,conduct discriminatory interest. rate
policy for different sectors of the economy. Ihe specific .+ - .
interest 'rate policy like $he one prevailing inl .our , , , . . I a .
agricultwal sector have been Justified on a num3er of b
grounds. The notion 5 s widespread that Investments in
agriculture do not produce a high yield, requiring cheap' . . . . ,.- " ,credit to encourage producti.on , . . and innovation. 1% is
4 -
els6.8elfeved that poor farmers ownot afford high , .
L ' . . - . , . _ I .
interest rates. These stereotypes and asSumptZons are '.' . . .
supposed to apply partiGularly: ,tp sm& farms' and srnal!.
farmers, many of whom are assumed to be eiploitgd 'by money . .
lenders. Without interest subsidy, Lt Js claimed, such . .
activities (farm activi-~ies) would not-. take, place, ., . .
' . Q
p ~ ~ b a b i y because such projects are not .sufficiently profit- , @ . , ,, .,-t? :.: . .
g b l e . But the argument remainsbthat if an, acti+ity is . . . . .
sufficiently profitable $0 be worthwhile, its returns will
adequately cover the c o s t 01 resources enp.Loyea. A n r ; r i l s case
subsidy is tinnecessary t o pxoniote the a c t i v i t y and it becomes
merely an a r b i t r a r y gifD..Sor indome d i s t r i b u t i o n (Gonzalez-Vega
1982.);:. f-f however-the activity subsidized by' 'ow i n t e r e s t r a t e
i s n o t ',sufficiently. pro f i t ab l e , the subsidy o,bscurcs t h i s fact.
Tha:.subsi'dy does h o t . remove the cause of sthe b n p r o f i t a b i l i t y
.tin&' informal markets d dams and Nehzian 1977). While the
i nke re s t r a t e i s lower a t the banks, the .other costs of 0
.obtain&ng a loan and the r i s k of n o t ge t t ing the loan a t a l l " I , . ' .- <
x e so ' high t h a t barrawebs are aften served b e t t e r and more
. - 7
L- '"'&er'&cw.t;h of unorganised mmey markets should thererore, . . . - '
be c:or-is&itcid f r o n an ec ~nornic p o i n t of view ss a healthy
reac t ion against unfortunate i n t e r e s t Fates regulations and
i t s attendant d i s t o r t i o n s t ha t prevent f inancial equilibrium.
To t ha t extent t h ~ c r e d i t extended i n the unorganised money
-markets is of g r ea t eeononLc importance. Although the lenders
i n t h e rnark~ts a re alleged t o make monopoly p r o f i t s and use the
debt re la t ionsh ip t o exp lo i t t h e i r c l i e n t s , there i s stunning
lac^ of empirical evidence t o support the t h e s i s , However,
i n s p i t e of i n t e r e s t rates regula t ions i n the formal financial -
markets, the i n f o r m 3 money markets are less efficient ;thaa
. t he f i nanc i a l intermediaries and therefore - ,are .. not ,533421 ,sub= _.__._.-. - I
s t i t u t e s f o r arganised financial m'arkets. i$ will &a& mwh . time and ingenuity t o develop v i ab l e alternatives t o o ~ g a n i ~ ~ d
fLnancial markets ( ~ a l b i s 1982). Furthermore, noninstitutiono~ . #
c r e d i t i s l h a r h l y adequate f o r l a rge investrnei5t plans and ' b -
informal. money markets cannot' e a s i l y provide - and l o n g ~ t e r m loans . for such. plans.
IV. POLICY OPTZGN
- The first bes t policy option that w i l l remove distortions
in the savings, investment, reeouroe allocation and money mark& operations in Nigeria, created by i n a t 2 t u t l o n a ~ l y determ$~ed
low nominal and negative rea l interest r a t e s i s Lo l iberal ize
i n t e r e s t r a t e s . Unfortunately, ava i lab le s tud ies indicate t h a t . .
interest ra tes l i b e r a l i z a t i o n does n o t work when nconditione l o r . ! .
the existence 0 f . a competitive . rnarke* . a r e no t present and cannot . . be readily established because of i n s t i t u t i ona l , , legal and other
impediments (Ga2bIs 1981, 1982), . . , .. . . . I . t
structure inspite of the indigenization of the financial~system.
I prevailing* condbtions, , therefore, one cannot .
poU.cy,of interest rates liberalization will
t conducive to achieving a s t a t e of interest rate-
The reason is that, under a more or less severe
. . ! . !..- ?
in i n t e r e s t r a t e - i i $ required ('as i s the case i n ~ i g e r i a )
.-, * ... ..., c, ........ ' 2 - . . . . 5 ., . ., - . ... . ., . reas&ably .h@h$ositxve ren, - i k " r e ~ t rat3"strudture,
" . . . . . . . .:..,... . discret&Gy f l ex ib le ' i n t e res t rate p'olicy can b e more ' ~
' 5 app~o$riates'i?han immediate interest r a t 6 lidcralizatiori.
- - . . As Galbit 1 2 1 a 'rgkd: . idis~retionary nction oculd,
..,. . - . < . . . . . . . . . . . , I . . For ikktance discret ionary action could "educe the sear'ch'-
. . . ..., . .< . L . . ., . . L . i ,.!
costs of themarkets groping toward equilibri~m and redu6e : .r.
the risK 'of formation of unstable expectations i n ' t h e short- [ ' ? . , . !' ; ,.,
run, the Xkelihoo2 of which &ght be directly 'related t o
the magnitude of the i n i t i a l di~equilibrium '. ' p as ti^, t h e ' I
:,, des i re f o r aiigopa~:i-ist financial ine t l tu t ions t o r a i se loan
rates substantially above the deposi t rates, t o qaxirnize their . . I ..
spread, might beb'cbunter' balanced by a sharp d e & ' , l m in the
denand for loans as a resblt of hi&h posi t ive r d h interest - . ' .
r a t e charges. I
A.discretionary f l e x i b l e i n t e r e s t r a t e s policy needed L .
to r a i s e the l e v e l and s t ructure of i n t e r e s t r a t e s fihould be,