university of nigeria rates...it was revised upwards to 8.0 per cent in 1382 and further to 10.0 per...
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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
Signature
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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,
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?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.
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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
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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
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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 $0 be worthwhile, its returns will
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adequately cover the c o s t 01 resources enp.Loyea. A n r ; r i l s case
subsidy is tinnecessary t o pxoniote the a c t i v i t y and it becomes
merely an a r b i t r a r y gifD..Sor indome d i s t r i b u t i o n (Gonzalez-Vega
1982.);:. f-f however-the activity subsidized by' 'ow i n t e r e s t r a t e
i s n o t ',sufficiently. pro f i t ab l e , the subsidy o,bscurcs t h i s fact.
Tha:.subsi'dy does h o t . remove the cause of sthe b n p r o f i t a b i l i t y
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.tin&' informal markets d dams and Nehzian 1977). While the
i nke re s t r a t e i s lower a t the banks, the .other costs of 0
.obtain&ng a loan and the r i s k of n o t ge t t ing the loan a t a l l " I , . ' .- <
x e so ' high t h a t barrawebs are aften served b e t t e r and more
. - 7
L- '"'&er'&cw.t;h of unorganised mmey markets should thererore, . . . - '
be c:or-is&itcid f r o n an ec ~nornic p o i n t of view ss a healthy
reac t ion against unfortunate i n t e r e s t Fates regulations and
i t s attendant d i s t o r t i o n s t ha t prevent f inancial equilibrium.
To t ha t extent t h ~ c r e d i t extended i n the unorganised money
-markets is of g r ea t eeononLc importance. Although the lenders
i n t h e rnark~ts a re alleged t o make monopoly p r o f i t s and use the
debt re la t ionsh ip t o exp lo i t t h e i r c l i e n t s , there i s stunning
lac^ of empirical evidence t o support the t h e s i s , However,
i n s p i t e of i n t e r e s t rates regula t ions i n the formal financial -
markets, the i n f o r m 3 money markets are less efficient ;thaa
. t he f i nanc i a l intermediaries and therefore - ,are .. not ,533421 ,sub= _.__._.-. - I
s t i t u t e s f o r arganised financial m'arkets. i$ 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
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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
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. . ! . !..- ?
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,
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