Interest Rate Management in Nigeria

Interest Rate Management in Nigeria

Interest Rate Management in Nigeria – Several authors have investigated various theories of inflation and interest rate deregulation in 1974 the central bank of Nigeria did a cross sectional analysis of the origin and development of inflationary pressures in some selected African countries namely, Nigeria, Ghana, Uganda, Gabon, morocco, ivory coast, Egypt, Sudan, Tunisia Zambia and Kenya. The explanatory variables used where changes in many supply, deficit financing and real gross domestic product.

In the case of Nigeria changes in many supply and domestic credit had no significant impact on inflation rate although real income had a correct sign. Sound management of exchange rate and money supply in addition to fiscal restraint are necessary to reduce inflation, inflation as measured by the change in the average all term consumer price index for the twelve month period ending December 2002, was 12.9 percent. It represent a deceleration compared with the 18.9 percent recorded in 2001. the food index which is a dominant compound with 28.0 percent in the preceding year.

 

Asogu 1991 made an extensive review of the literature on inflation in Nigeria inflation rate was expressed as a function of money supply and its lagged values, changes in domestic credits, real output export and net government expenditure. Imported inflation was expected to be picked up by changes in import price index and naira vs. dollar exchange rates. His result suggested that the real output especially industrial output, currently money supply, domestic food prices and exchange rate changes where the major determinate of inflation in Nigeria he conclude  that fiscal and monetary tools together with growth in productivity may curtail inflationary pressures.

Empirical studies on hyper- inflation particularly Latin America and European where of interest because of the lessons they provide outstanding policies adopted for such crisis.

INTEREST RATE MANAGEMENT IN NIGERIA

The primary role of interest rate is to help in the mobilization of financial resources and to ensure the efficient utilization of such resources in the production promotion of economic growth and development. Interest rate affect the level of consumption on the one hand and the level of investment on the other hand, which in turn affects growth in the real world, investment is never totally exogenous, not totally independent of income. It determinant can infact be separated into two. In one  group are interest rate and change in income, and in another business expectation.

We assume that there is only one tending rate at which investors can borrow in real world there is a structure if interest rates due to difference in risks, uncertainty and transaction cost. To decide whether or not to undertake an investment project, a businessman must compare the rate of interest to the expected rate of return. Whether an investment is financed by borrowing or from retained, earnings, the interest rates are of important consideration.

They are crucial in financial intermediation which involves transferring fund from surplus unit in an economy to deficit units. In general interest rate are useful in ganging financial market conditions and they ate major tools of monetary policies.

Usually, when the structure of interest rate is changed, the resulting relative rates of return will reduce in the asset portion of both the bank and non bank hence, the direction and magnitude of changes in market interest rate are of primary importance to economic agents and policies makers.

FACTORS INFLUENCING INTEREST RATE

A number of factors influence the behavior of interest rates as in the economy. Prominent among these are savings investment, inflatory, government spending, monetary spending policy and taxation. It is generally agreed that the price of any factor of production (land, labour, and capital) in a market  system is determined by the forces of supply and demand savings constitute a major source (Supply) of credit while investments represent the main demand for credit.

Consequently, the ground of savings by individuals, business and government partly determines the level of interest rate. For instance, a decrease in the accumulation  of loanable funds/savings is likely to exert and upward pressure on interest rate just as a reverse situation would tend to have a moderating effects. Inflation being another factor, which effects the level of interest rate. Nominal interest and inflationary expectation, is a function of the real interest rate. Expectation being about influence in interest rate movement even through demand and supply of capital remains constant.

Government activities influence interest on the both demand and supply sides of the credit market. When government actions result in the supply of credit it may increase the level of money stock, which is likely to influence a downward, movement in interest rates. The reverse is true when government demand credit. In addition, monetary policy through expansions and contractions in money stock can influence interest rates for insurance, if money supply is increased with the demand for money remaining unchanged. Short term interests rate may decline restrictive monetary policy may lead to rise in interest rate while on expansionary policy may result in lower interest rates for example, when borrowers are allowed to deduct interest payments in deriving taxable income, the after tax cost of founds would be lower than the prescribed rates. The affect is that the demand for credit is longer than would have been the case in the absence of tax provisions and thus could lead to increase in short term interest rate. On the other hand, since lenders are expected to include interest received as taxable income after tax, returns would be less than the contact rate, reducing as it were the supply of loan able funds, which would also lead to a rise on short term interest rates. In general the affect of taxes is to raise the market rate of interest.

 

The time of maturity of financial assets also affected interest rate, long term funds because of future uncertainties, other factors that affect rate deregulations include speculation, expected changes in exchange rates and differentials between domestic and international interest rates more, recently  the influence of the oilgo- poistic structure of the banking system. The influence operation of the depressed banks and administrative inter venture by government have attractive intervention by government have affected interest rate development in Nigeria.

MANAGEMENT PRIOR 2002/ MONETARY

With the general framework of deregulatory the economy in 2002 is to enhance competition and efficient allocation of resources, the Central Banks of Nigeria introduced a market base interest rate policy. The policy decision was without any controversy.

The growth in monetary aggregates was in excess of the programmes targets for 2002. But represented a considerable moderation, compared with the preceding year. Broad money (M2) grew by 21.5 percent, compared with the target is 15.3 percent for the year and 27.0 percent recorded in 2001. similarly narrow money(m) rose by 15.0 percent, compared with the target of 12.4 percent and 28.1 percent achieved in the preceding year. The excessive growth in money supply was induced by the expansionary fiscal operation of the three tiers of government. In particular, the rapid draw open of the federal government deposit with the CBN, the monetization of u3 $ 1.5 billion external reserves in the last quarter of the year, and the substantial increase in bank credit to the domestic economy were expansionary of many supply. Aggregate bank credit to the economy increased by  56.6 percent, compared with the 57.9 percent targeted for the year and 79.9 percent increase observed in the preceding year. The federal government accounted for the bulk of credit growth, which the deposit money bank provided through their increased holdings of treasuring bills. Bank credit to the private sector was much lower than that for 2001 and he target for the yea .reflecting the weak growth performance of the economy.

There was a general decline in interest rates in 2002.the trend was influenced by he surfeit if liquidity in the banking system, the downward review of CBN’s minimum rediscount rate (MRR) and the moral section employed by the CBN for banks to reduce spending rate in order to stimulate investment growth the average savings deposit rate fell to 3.7 from 18.2 percent in 2001 to13.5 percent in 2002.

The economy recorded a mixed performance in 2002. the real gross domestic (GDP)  increased by 3.3 percent relative to  4.2 percent in the preceding year. Inflation declined from 18.9 percent I  2002 to 12.9 percent at the end of the year. Similarly, bank deposit and lending rates trended downwards. However, the fiscal operations of the federal government resulted in an over all deficit of  N30.1 billion or 5.1 percent of GDP. The declines of external reserve was bad on the economy because it would support 6.4 month of imports of goods and services, compare with 23 months in the preceding year.

CASE OF INTEREST RATE CEILING

(1)             It has been argued that the interest rate existing prior to the formation of the 21 percent ceiling by the CBN discouraged investment and therefore growth and unemployment. At rates in excess of 35% few investments can really generate positive.

(2)             Linked directly to above interest rate tends to feed inflationary pressures in the economy in two ways by lending to contraction in output and there by limiting supply of goods and services by price increase arising from attempt to producers who now face very cost and pass on such cost to consumes in an economy like ours where magnetization is rather limited and only a relative small portion of money in circulation passed through the banking system, unregulated interest rates, artificial and not truly market determined, rather such a regime tends to reinforce the structural deformities in the system. The regulating hands of CBN is therefore required to maintain stability in the economy or money market. A regime of unregulated rates tend to speculate with its attendant implication for inflation. It has been appointed out historically that no economy is known to have made   such progress under the kind of interest rate regime existed prior to the introduction of the 2.1 percent ceiling by the CBN. Deregulation that is not totally in its embrace can only have unwelcome consequences………………………………………………………..

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  This article was extracted from a Project Research Work Topic

THE EFFECT OF INFLATION AND INTEREST RATE ON ECONOMIC GROWTH OF NIGERIA”

  Do you want the full project work? CLICK HERE TO ORDER

Interest Rate Management in Nigeria

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