Economy, Africa

Nigeria: Experts fear affects of interest rate cut

Experts warn that the central bank's reduction of interest rates on Tuesday could cause capital flight, inflation

26.11.2015 - Update : 27.11.2015
Nigeria: Experts fear affects of interest rate cut

By Rafiu Ajakaye

LAGOS

The reduction in interest rates on Tuesday by the Central Bank of Nigeria (CBN) could lead to an increase in inflation and capital flight, experts told Anadolu Agency on Thursday.

The bank cut key interest rates to 11 percent from 13 percent. It was the first interest rate cut by the bank in six years.

 The bank cited "weakening fundamentals of the economy," as the reason for the rate cut in its statement on Tuesday.  Rising unemployment and low output growth were among the economic fundamentals the bank warned of in its statement. The central bank also cut the Cash Reserve Ratio (CRR) -- the amount banks must keep in reserve from deposits -- for commercial banks to 20 percent from 25 percent. 

Speaking  at the end of the bi-monthly Monetary Policy Committee meeting in Abuja on Tuesday, Central Bank of Nigeria Governor Godwin Emefiele said the committee had “evaluated various options for ensuring increased credit delivery to the key growth sectors of the economy, capable of generating employment opportunities and improving productivity and growth.” Banks will, in theory, have more funds at their disposal to lend.

But experts said that the measures might have an overall negative effect on the Nigerian economy.

"The relaxed monetary stance of the MPC after its last meeting for the year, though positive for stimulating short-term economic growth, may not come without negative implications for the economy in the medium term," Ola Belgore, a financial analyst and managing director at AfrInvest, told Anadolu Agency.

"With the reduction in interest rates, Nigeria is likely to face increased capital flight in the medium- to long-term, more so if the Fed raises its benchmark interest rate at its next meeting in December," Belgore said.

"The spike in liquidity resulting from the reduction of the CRR to 20.0 percent as well as the expansionary 2016 fiscal year are expected to trigger inflationary pressures. While the decisions by the MPC ensued from a need to grow the real sector through increased lending by banks, banks' decisions on lending will continue to be governed by risk considerations with banks more conservative in taking risk given the macroeconomic headwinds," Belgore said.

Atiku Samuel, financial expert and lead analyst at BudgIT, a public spending watchdog group, said that, while the MPC decisions could promote investment in infrastructure and facilitate credit for the real sector, consumers and importers could suffer from higher inflation and a weaker naira.

"Inflation may spike while the exchange rate may come under intense pressure. This is bad news for consumers, since inflation means higher price of goods and services.  The value of the naira may fall and this is bad news for importers.

"The CBN decisions mean different thing to different sectors of the economy. Overall,  it means the CBN is shifting its focus from price stability to overall growth of the economy," Samuel told Anadolu Agency.

According to Samuel, the drop in the CRR also means banks would now have more cash to lend out especially to the real sector, but the decision rests with banks.

"Indeed under this arrangement,  the CBN is releasing about NGN 776 billion ($3.8 billion) into the economy,  particularly to the banks. But the CBN has said that the banks must show evidence of using the funds to lend to the real sector - that is, for example, to agribusiness, or to solid mineral and infrastructural development. In theory, it means the lending rate to the real sector should fall, but of course banks will still determine at what rate they are giving out their loans," the analyst said.

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