CBN sees fiscal consolidation as key to lower interest rates

The Central Bank of Nigeria (CBN) believes that fiscal consolidation would have a greater impact on lowering interest rates and unlocking credit than easing monetary policy in the medium term would.

The CBN led by its governor, Sanusi Lamido Sanusi, kept its benchmark monetary policy rates (MPR) at an elevated level of 12 percent throughout 2012, after hiking rates by 5.75 percent in 2011.

“CBN Governor Sanusi Lamido Sanusi does not think lowering the MPR alone will spur lending. He believes that absent structural reforms, the increase in bank lending will be limited”, Yvonne Mhango, Renaissance Capital’s sub-Saharan Africa economist, said in a note released on Wednesday.

“The government’s plan to lower domestic borrowing through the redemption of some bonds and to keep foreign borrowing at 2 – 3 percent of GDP will help moderate interest rates.”

Some measures of fiscal consolidation are already beginning to take place.

The 2013 budget deficit may come in smaller than the 2.2 percent of GDP target, at 1.8 percent, according to Finance Minister, Ngozi Okonjo-Iweala.

While domestic debt accounted for 86 percent of public debt at year end 2012, the policy target is 60 percent, Okonjo-Iweala said.

Mhango notes that the building up of fiscal surpluses, as Okonjo-Iweala did in the 2004 – 2006 period, partly explains the drop in the 91-day Treasury bill yields from 15 percent to 7 percent then.

“This alongside an increase in reserves would allow for a substantial fall in interest rates now.”

Credit growth last accelerated in Nigeria in 2007 and early 2008, when it approached 60 – 100 percent growth year-on-year and driven largely by margin lending.

In the six years prior to this period, year-on-year credit growth averaged 28 percent.

Credit growth only increased by 7.8 percent year-on-year in 2012, according to CBN data.