02.27.08
Will CBN increase interest rate?
The current confusion over the dollarisation or not of oil savings to be shared between the federal and state governments seemed to have been laid to rest. If President Yar’Adua’s spokesman, Olusegun Adeniyi, was truly speaking for his boss when he was quoted in a newspaper report as saying: “The consensus was that the position of the law is against dollar payment and it was so ruled by the president,” then the payments would be in naira.
The Central Bank of Nigeria had earlier revealed that the payments would be made in US dollar, to be spread over five months in three installments. The reasoning for CBN’s decision had been the inflationary implications of too much liquidity in the system, if the payments are made in naira. With government’s insistence on naira payments, analysts believe there are three immediate course of action open to the apex bank.
The first is to alter the five-month payment timetable and extend it. This might not work, as the state governments are likely to kick against it. They will interpret such a move as a ploy by CBN to deny them of their entitlement. The money will also come handy in their development drives. The second path for CBN is to increase the interest rate, to curtail bank lending. Another option is for the bank to increase its dollar sales to control liquidity. There are speculations already that in its next meeting in April the bank will increase interest rate.
An increased interest rate has its implications for the capital market. The most obvious is that margin investing will fall, which will dampen market activities. Margin facility is said to be responsible for the “greatest inflow of capital into the stock market.”
Yet again, one wonders at the quality of planning and communication within this government. For such a profound decision, we expected it would have been properly thought through and well thrashed out by government and its agency, in this case the CBN, before the final agreement is made public. This new problem cuts a picture of a CBN that acts impulsively and without consultations. True it is an autonomous body, but it must realise it is a sensitive organ of government and its actions or inactions have far-reaching effects on the economy. It should have considered the implications, including the legal one, of payments in dollar and presented a compelling case for it before going public. This sort of confusion happened with the naira redenomination, it has happened with this, and it will happen again.