Opinion: Crippling cost of borrowing; who cares? – By TAYO OKE
The chronically high cost of borrowing, otherwise known as interest rate, has represented a tightening noose around the necks of businesses for the last 30 years, at least. It shows no signs of abating, and certainly no visible end in sight. Interest rate is best understood as the cost of borrowing money from the bank, but it encompasses other aspects: mortgage, cars, hire purchase, and a host of back street moneylenders, also known as “loan shacks”. We live in an economy where borrowing from the bank routinely incurs interest repayment of between 15 and 35 per cent at the best of times. No economy anywhere in the world has ever developed at this level of rate. For good or ill, no advanced economy in the world imposes this type of burden on its citizens either. On the contrary, interest rate in developed economies rarely, if ever, hits double digits. In Western European economies, for instance, it is generally below five per cent and in the United States of America and the United Kingdom, it is hovering at around one per cent. It has remained decidedly low for almost 10 years in these countries. This column has highlighted this problem several times during the course of this year. The topic has also come up for discussion in different economic and business fora on and off the television screens. I am, therefore, not going to re-run any of the arguments here and now, except to offer one compelling reason for the huge disparity between the level of interest rate in advanced economies and a “developing” one such as ours.
When we quibble about economic numbers, it tends to fly over people’s heads because the so-called experts often couch the debate in esoteric terms inaccessible to the vast majority of us living in the real world. You will know the effect of a high level of interest rate if you have ever tried to build or buy a house, or car, which you have to finance from borrowing. On the other hand, high interest rate is also speaking to you on a different level; it is encouraging you to save because you can reap gratuitous rewards from sitting back and doing nothing. If, however, you de-personalise the issue, you will see how interest rate impacts the overall economy in terms of business and investment decisions. You look around you and see a deserted warehouse, or trade centre, it is very likely to be the result of a crippling interest rate, which then impedes the creation of jobs, and a steep growth in the teeming number of school leavers without a job ensues.
Furthermore, an investor would respond to a high interest rate by moving his money away from companies (who need the investment) into banks (who then lends to you at a high cost). Meanwhile, the stock market is where most big corporations go to raise cash in order to buy new plants, machinery, and employ people. It is the most closely watched financial market in every economy. It follows, therefore, that the higher the price of a company’s stock, the better it will be in a position to grow and expand its activity. If Nigerian banks, which often claim they want to partner the government in fostering economic growth continue to lure investors away from the financial market through a high interest rate strategy, what about the government itself? Governments around the world rely on first; “monetary policy”, meaning control over the rate of interest and inflation. This responsibility is often delegated to an “independent” central bank. Politicians, however, never fail to set the right targets for the head of their central bank. The question is what realistic target can the Nigerian government set for interest rate, when our government is the biggest customer for our banks? Large scale deposits are made to Nigerian banks by a variety of government departments, yielding healthy returns, which are then diverted to somebody’s personal benefit. Before it was streamlined to the “Treasury Single Account”, government Ministries, Departments, and Agencies routinely maintained dozens of accounts with Nigerian banks, from which interest accrued and disappeared into thin air. Admittedly, the TSA has put a check on that for now, but it is only a matter of time before we are back to business as usual. Now, if the banks can rake in deposits from government agencies and lend back to the same government at exorbitant rates of 15, 20, 30 per cent or more, why bother considering struggling manufacturers in our industrial wastelands for loan advance?
Government functions, also, through the instrumentality of its “fiscal policy”, that is, to say, setting the amount it takes in taxes and spending. A budget deficit is the excess of government expenditures over and above tax receipts in a financial year. Deficit is a normal and regular occurrence, except in a rare situation of stupendous wealth, such as it is in the Kingdom of Qatar, where the country often dispenses with income tax from citizens and residents because it has too much money from oil. Government deficit in Nigeria is offset by borrowing (apart from external sources) heavily from Nigerian banks. The same vested interest that owns and controls the banking industry is the same vested interest that holds the reins of power in government bureaucracy. They, in turn, set the regulatory parameters for the Legislature to consider in passing laws for the financial sector. Slashing the high rate of interest is like asking turkeys to vote for Christmas in that regard. The question for the curious mind, however, is that powerful vested interest also governs the American and the UK economies. How come they, nevertheless, respond to consumer demands in the way we do not see in our own economy? The answer, quite simply, is citizenship; a loaded concept we have yet to grapple with in our country and elsewhere in Africa.
As a way of fostering economic growth, developed economies rely on active participation of their citizens in productive activity. They extend credit to them across the income and demographic divides irrespective of class or ethnicity. The credit economy is so pervasive that the plasma television screen you watch with your family, the music centre in the corner of your living room, the chair you and your guests sit on, not to talk of the house you all crowd in are, more often than not, tied to credit of one sort or another. What this means is that questions of interest rates and inflation are no longer abstract concepts; they have become the concerns of everybody, not just a select few of horizontal economists and financial pundits talking above the heads of citizens as we have in this country. The necessary symbiotic relationship between government and the governed is missing in our economy, as elections have become a mere ritual without consequences.
Without prejudice to the current administration of President Muhammadu Buhari, imagine what would happen to a government that presided over a 20 per cent interest rate in a Western economy, then, has the brass neck to seek re-election to a second term? My friends, it is not enough to wring your hands in despair; get involved and have a say in who governs!. Punch