Tuesday, January 8, 2013

The Impact of High Bank Interest Rate on Nigeria’s Economy

For many years now, Nigeria’s Central Bank of Nigeria Monetary Policy Rate (MPR), otherwise known as the benchmark interest rate has been at double digit. In 2012 it was largely at 12 per cent. By the time deposit money banks charge their own lending rates to prospective customers wanting to loan money, it’s usually between 15 – 20 per cent and more. This has made nonsense of government’s effort at stimulating the real sector of the economy. Even the aviation, textile and entertainment intervention funds set aside by government to revitalize these ailing sectors have been difficult to access by the target beneficiaries. Banks, apart from charging high interest rates on loans, also add all manner of administrative or miscellaneous charges which make the burden of borrowing unbearable. What obtain in many other developing countries are low interest rates of between 5-8 per cent with a moratorium. What cheap loans do for entrepreneurs are that it makes take off and expansion of business relatively easy for the investors. With that, the cost of doing business is reduced and they in turn will be able to provide cheaper services and goods. Invariably the consumers get a better deal from the producer.
However, with the high interest rate, the mortality of small and medium enterprises (SMEs) becomes high as lack of cheap loans to grow their business interests will lead to high cost of production, low capacity utilization, staff rationalization (right-sizing and down-sizing), low sales as consumers may not be able to afford the goods and services, default in loan repayment, and ultimately, business collapse.
It is most unfortunate that while many entrepreneurs borrowed at cut-throat interest rates from banks and other financial institutions, many government contractors are not paid for the contracts they have successfully executed for government many years after completion of such projects. Statistics from the Debt Management Office of the Federal Government show that the country’s domestic debt profile stands at about $38.37bn (N5.97tn) as at March 2012. In the 2013 budget only a paltry N100bn is earmarked for the payment of domestic debts. The nonpayment of contractors who in most cases borrowed at high interest rates from financial institutions to do contracts for federal, states and local governments  is to say the least very unfortunate and discouraging. Any wonder there are so many abandoned projects dotting Nigeria’s landscape.    
Apart from high interest rate on loans and nonpayment for contracts duly executed on behalf of different tiers of government and their agencies, the World Bank in its Investment Climate Assessment Report for the 2011 fiscal period chronicled other constraints that entrepreneurs face in doing business in Nigeria. The report titled ‘Nigeria, an Assessment of the Investment Climate in 26 States’ was released on August 9, 2012.  The account observed among many other things that Nigerian business environment, in spite of the series of reforms being carried out by the current administration to attract Foreign Direct Investment into the country, remained hostile. The 202-page report said that investors were losing 10 per cent of their revenue to the hostile investment climate in the country. It stated that the areas that account for the 10 per cent loss include poor quality infrastructure, crime, insecurity, and corruption. The assessment reviewed the experiences of over 3,000 surveyed business owners in 26 states of Nigeria about the aspects of the business climate that affected their businesses.
The aforementioned constraints are not only responsible for low investment drive in Nigeria but also high level of divestment and business mortality. Today, many once flourishing businesses have either collapsed like a pack of cards or their founders have relocated to saner climes where the cost of doing business is not as astronomic like ours. A case in point are our tyre manufacturing companies like Dunlop and Micheline; pharmaceutical companies; vehicle assembly plants like Steyr, Leyland, Volkswagen and even textile mills to mention but a few. Many warehouses of once productive businesses have been acquired by churches and turned to worship or event  centres.
In 2013, serious attention must be paid to incidences of insecurity in all its ramifications, poor social infrastructures such as electricity, water, good roads, hospitals and even recreational facilities. The policy of government must also be investment friendly. Such policies include the tax regime and moratorium; customs duties and goods clearing process, industrial dispute adjudication procedures; labour laws and many others. The entire lending process and procedures set by financial institutions need to be simplified and made investor friendly. We must also combat corruption not by paying lip service but by effectively prosecuting corrupt elements in our society.