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Reducing interest rate will raise inflation – Sanusi

By on December 3, 2013

The Governor of the Central Bank of Nigeria, Mr. Lamido Sanusi, has explained why the Monetary Policy Committee has not reduced its interest rate for a long period.

The CBN governor  spoke at the fifth anniversary of Women in Successful Careers on Saturday in Lagos.

He said reducing the interest rate would lead to a corresponding increase in inflation rate.

He said, “I agree that the interest rate is high. The interest rate cannot be lower than this. This has been subjected to public argument. Reducing the interest rate is the easiest thing for any central bank to do. If the central bank prints enough money today, the interest rate will come down but what will the rate of inflation be? What will the exchange rate be?

“Where would we have been if the naira had become N190 to a dollar overnight? Now, if you are to exchange the dollar, you get it for N158 and N159 in the banking sector. The reason is because there is so much cash to sell to those who are not doing legitimate transaction.”

Sanusi explained that keeping the inflation at a low rate was for the growth of Small Scale Enterprises, adding that high inflation would have a negative impact on access to fund.

“The interest rate is not a problem to me. I told politicians and my boss; ‘you want interest rate reduced, but where do you want inflation? At 15 per cent, the exchange rate of naira should increase to 180 or 190’”

Sanusi noted that it was important to diversify the various sectors in the economy for even development. He, however, lamented the bad state of infrastructure in the country, saying it was a major reason for the inability of lenders to meet up with the interest rate.

The CBN boss said, “We just complain of interest rate; interest rate is not the biggest of our problems. If you look at the cost structure of our SMEs during production, it is huge. If you want to set up a textile company today, you must have your own power plant and a transport company with trucks.

“So, by the time you borrow from the bank, you are not borrowing to buy machines and cottons; you are borrowing to set up a power plant. Now, if security, electricity, good roads and well trained staff give you value for money; you will pay 26 per cent and  the business will still be profitable.”

Sanusi also said, “This is my retirement plan and everybody knows that now. I have a farm in Kano and I have a fantastic business model. I discovered that tomatoes cost more on the streets of Lagos than in London. I can just produce tomato and send it to Lagos. But the farm is two hours to Kano by road and it can be brought down to 35 minutes if I will have to build a 13km road myself.”

 

 

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