On Politicians and Interest Rates

The usual culprits in the Nigerian political ecosystem, having been emboldened by Buhari’s economic stupidity and have decided to mount their own soapboxes and out-stupid the guy. Their pet campaign now? Interest rates.

Some politicians have been making noises about forcing banks to charge interest rates as low as 6% in order to help businesses as well as “teh poors”. They accuse banks and private lenders of trying to scam the people and position themselves as the authoritarian saviors of the masses. Which is exactly how we got here.

I haven’t heard even ONE of them ask WHY the end users of credit in Nigeria borrow at 20+%. I haven’t heard any one of them talk about our savings rate, exchange rate policy or monetary policy. I haven’t heard them ask why our own sovereign credit is priced at around 12.5%. In other words, they don’t have a clue. Yet they want to arbitrarily mandate interest rates of 6% or so. 

So the question is, let’s say they do that. What happens to the country? Well first off, no one is lending money at a lower rate than they themselves obtained it so unless the Federal Govt’s borrowing rate falls to 5% no bank lends money to private businesses, period. Businesses would have to either raise money from outsiders, or from donor/international agencies. Hardly a way to power an economy. So businesses will grind to a halt, across the board. 

And if they decide, well we’ll just force the FG rate down, then most of the capital in the federal bond market is just going to grow wings and fly away. Nigeria is a high credit risk country, from our across the board credit ratings. If you’re going to pay me 5% to lend money to Nigeria given all the political, macro and all other risks, I won’t do it. Not many would do it. There are much better places in the world to earn a 5% return and also sleep well at night. So if they forced that, the resulting capital flight will be like a kid sucking out Capri-Sun from that little packet on a hot afternoon. 

So with banks not lending and FG unable to borrow? How long do you maintain low interest rates on capital you don’t have? Exactly.

If they want to help the poor, tackle political risk. Tackle bad policy. Tackle ease of doing business issues. Copy what worked for other countries so that we can become an attractive destination for capital. Encourage savings across the country. Sign financing and trade agreements that will encourage FDI. Tackle balance of trade issues. Tackle monetary policy. In other words, solve the problem or at least try.

Don’t just order it away. It doesn’t work like that. At the end of the day, interest rate is a price. It’s the price at which credit is obtained. And what we’ve learned about prices in all our economic learning is that if a price is too high, the best way to lower it is to either increase supply or reduce demand. It’s always better to discover prices through a free market than to administer it from on high. Yet it appears no matter how many times this controlling instinct fails us, Nigerian politicians never learn.

Let’s hope this time they listen. 

Peace.

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