Prof Tella Renders Overview Of Nigeria’s Economy Following CBN Interest Rate

[00:00:05][music] >> Welcome back. Let's talk about the economy. In fact, as a matter of fact, the constitution is divided into chapters. Some of my favorite part has to do with chapter four that has to do with rights and then chapter two that has to do with objective of state policy where if you look at section 16, it panders to us a welfare state. But we run a new liberal capitalist economy, but that's not a big conversation. We're going to look at that. But let's talk about what played out at the monetary policy committee meeting yesterday where all parameters were retained including the interest rate.

[00:00:45]Sheriden Tella is an emeritus professor.

[00:00:48]Professor Sheriden Tella is emeritus professor of economics at the Olabisi Onabanjo University. He's a fellow Nigerian Economic Society and the fellow Chartered Institute of Bankers of Nigeria.

[00:00:59]Prof, good morning and welcome to the program.

[00:01:04]>> Uh good morning.

[00:01:06]Nice to be here.

[00:01:07]>> Yes, I think a general question would be were you surprised at the MPC decision retaining all of the parameters including the interest rate and how will this impact the economy in the short term?

[00:01:21]>> Um well, I was thinking that they would reduce the interest rate.

[00:01:26]Although traditionally they have held this interest rate for long.

[00:01:30]Um the interest rate actually that's the rate at which the Central Bank will lend to other banks. Which means that banks' interest rate will be higher than that interest rate that they have lent. And that means that the cost of borrowing is very very high or will be very high for private sector in particular that normally would do investment.

[00:01:52]So, it is important that uh we look forward to reducing the interest rate so that the cost of so affect the cost of cost of products that investors are producing. But the central bank decided to leave the everything believing that high interest rate will reduce money supply in the economy.

[00:02:20]Uh believing that interest rate and if interest money supply will also affect inflation. That is inflation will not be will not occur because of reduction in money supply.

[00:02:35]And that has always been the case. It's not true.

[00:02:38]Because inflation in Nigeria is more structural than monetary.

[00:02:42]The monetary aspect of inflation Nigeria has to do with the central bank itself.

[00:02:47]You see, we don't have a the lower denomination of a naira. So people spend more.

[00:02:52]They use more of a 1,000 and 500.

[00:02:57]I say you want to collect a a 200. You can't see it. Nowadays, you even may not get a 500. So people who are selling they also upscale their prices towards the use of 500 and 1,000. That's inflationary on its own.

[00:03:15]So that's is the monetary aspect. In the the inflation is actually caused by structural uh um issues. And that has to do with a low output in the economy. It has to do with a cost of production coming from power.

[00:03:31]That is a cost of power in the economy.

[00:03:35]With a the cost of a petrol or diesel or whatever they use in production. It also has to do with a this That That's why you see that the food inflation is very high.

[00:03:46]So the central bank think that monetary problem is a the cause of inflation.

[00:03:52]It's not is not transferred so.

[00:03:54]And that is why I think that they also have reduced the MPC to reduce cost of borrowing which of course will reduce uh the the interest lending to producers and which of course will also affect their own uh the prices.

[00:04:12]So, it's a We expect the interest rates to come down, but they didn't happen.

[00:04:20]>> Well, So, let let's let's let's talk about uh Prof. Just before my colleagues come in, so the cost of borrowing here goes beyond just, you know, uh the maybe the people in the private sector or the real sector. It also affects uh the government itself because look at the rates on our T-bills, you look at the rates on our bonds, and all the yields, and all of this. So, my my next question will have to do with how do you think the market is going to respond to this? Because on one hand, it feels like the fiscal authority in collaboration or indirectly in collaboration with the monetary authority is very aggressive with effects at creation to balance uh you know, uh what do you call it now? Effects in the effects market, and they've been quite successful at that even though it's high. But, how will this affect the real sector itself in the short term?

[00:05:20]>> Well, the the the interest rate high interest rate as I said affects cost of borrowing.

[00:05:26]And cost of borrowing has to do with the real sector, that is production.

[00:05:31]So, the production is constrained by one, inability of the private sector to borrow a lot of money because of the high cost itself.

[00:05:42]It also affects the production of goods itself because if they You have enough credits, of course, they will have that kind of problem.

[00:05:49]Uh the the fact that if they are not producing adequately, they are being constrained to uh output.

[00:05:58]And that simply means that uh they will not be able People will not be able to buy at the high cost. Because the larger the amount of goods that you produce, the lower the unit cost. So, if they don't have enough credit, that is producers don't have enough credit, they cannot expand their businesses. And when you don't have uh uh expand your business, unit cost will be very high. So, the selling cost will also be high.

[00:06:21]So, the interest rate coming down, and therefore giving ability of uh the banks the banks to be able to give credit to uh private sector will expand their businesses. It will also lead to employment, you know? But, that is not what we are having.

[00:06:41]And that is why the the constraint to output in the real sector affect the price on its own.

[00:06:48]And that's why I said that uh the relief could have come from the monetary sector by reducing the interest rate.

[00:06:55]Because the structural problems are there, and they cannot wish them away.

[00:06:59]Even the ex- the foreign exchange reserve is very high.

[00:07:02]And because it's very high, it creates a serious problem for it creates a serious problem for the economy itself. Because when the government actually devalued the currency massively, the prices went up.

[00:07:17]And that is why the cost of part of part of the cost of production that affected production itself.

[00:07:24]The government ought to have been able to reduce or to appreciate the the the uh the the exchange rate itself, but they have not been able to do that. That massive devaluation actually affected production.

[00:07:36]Many businesses had to close down. But, government was interested in getting revenue, and that is what the problem that we are having.

[00:07:43]>> Prof, at the 13th annual Central Banking Awards held in London, the the Central Bank of Nigeria, that's the country's apex bank, received the award of the Central Bank of the Year in 2026. And our CBN governor, Olayemi Cardoso, was there to receive that award.

[00:08:06]So, it looks like the global the the the the global community think, you know what? We're doing well. The CBN is doing well. So, um I want you to perhaps highlight some of those some of those things you perhaps would think the CBN is doing well. And then, why does it not translate to the average Nigerian acknowledging these efforts?

[00:08:31]You know, we've said, oh, the macroeconomics things look really good and sweet, but the micro is where it seems to be biting and biting really hard on the average Nigerian household.

[00:08:45]>> Uh yes, you see, the since they came in, they have been able to mobilize in conjunction with fiscal side, mobilize funds, be able to stabilize the You can say we stabilize the exchange rate, but that's what we thought. That's That's a different thing entirely. Uh they also have been able to clear the issue of uh Central Bank financing of uh of a government uh uh budget, which was very bad. It part was part of what created So, they have been able to do a lot of positive things. What we are talking about really is uh now looking at domestic economy in terms of production.

[00:09:18]And that is where we have a we have problem. We have high interest rate, which was part of what is causing inflation. So, it's not as if they have they have really done well in terms of stabilizing the uh the economy in conjunction with the fiscal policy side, that's the Ministry of Finance and all and other ministries.

[00:09:35]So, to that extent, of course, they can be given the credit.

[00:09:38]The Of course we know that there is also politics in all these things.

[00:09:43]Uh the World Bank want them to harmonize the exchange rate. They have been able to do that >> [clears throat] >> as of course of course to the economy but it is good that they have been able to do that because they have been able to reduce some inefficiencies in the in the foreign exchange system as it were. So, it's not as if they have not done positive things. It's not as if they have not been able to achieve some good things.

[00:10:02]The only thing that we are talking about is about maintaining that high interest also has effect on the in of the private sector as well as the economy itself being able to move from a consumption to pro- So, the Central Bank role in that sense has to do with this maintaining this rigid rates of 20 28% because it means that the banks will lend over and above that particular rate.

[00:10:33]Which profits which a business that would do to have a profit over and above that 30% interest rate? And that's that's that's the important thing that we are talking about. It's not allowing money to flow.

[00:10:45]It's not allowing a businesses to have more credits to be able to expand their businesses. That's what we are saying. So, it's not as if they have not done well over you know when we are talking of the macro level.

[00:10:58]The macro level we are talking about is how do these things affect Yeah. And that is very important. That's why we say we cannot be talking of GDP. We have to talk of uh employment. We have to talk of increasing reduction in inflation itself because those are the things that affect the the household.

[00:11:19]So, generally if of course we were aware that uh uh the the governor was awarded the >> Yeah. And so some would say Yeah. so some would say uh you know perhaps another yardstick for measuring the performance of the CBN would be the impact of its work of regulating the banking system in the country on the real sector which you know should be thriving but can it thrive beneath the weight of the 26.5% interest rate. But you also touched on the fiscal side which is what I want to explore and have you talk about the revenue challenge that we may be having in terms of fiscal responsibility. And I want to highlight a number of reports.

[00:12:13]First of all the World Bank has this year drawn attention to um complexities in budget structures and delays that weaken financial reporting and transparency specifically pointing out discrepancy in um Nigeria's 2026 budget identifying 8.8 trillion naira in government expenditure that are extra budgetary. The IMF has doubled down on this.

[00:12:49]Uh I'll just cite maybe two two more.

[00:12:53]The former vice president and candidate of the ADC has exposed 12.8 trillion naira allocation allegedly hidden under the this government's budget claiming that they're concealed under the service wide vote. We could also talk about how a fake agency found its way into the 2026 budget and was able to secure a line item. I'd like you to speak to all of this under one administration in the same government where there are concerns of budget overlap and contractors not getting, you know, their allocation for jobs that they have duly performed, we could go on and on. How does this impact on what should be the local economy if, you know, this extra budgetary spendings have found their way really to a priorities that they should go to.

[00:13:53]So, what are we missing out What is the local economy missing out as a result of these items, these concerns raised on the budget?

[00:14:07]Mr. Sheriffudeen.

[00:14:08]>> Yes, the last 3 4 years have not been actually having a appropriate impact on on the citizens because one, large proportion of that budget is spent servicing and paying and repaying debts, very huge debt that we have, all sorts of loans that we have actually uh committed to.

[00:14:26]Um secondly, the government itself has not been um looking at the budget or even using the budget at all. That's why you have all these overlap.

[00:14:37]Uh the budget for 2024 was not implemented for a long time. It was not even approved in time. So, it was then delayed for implementation. The 2025 almost towards the end of the of the year, that's when we started talking about 2025 budget. So, the government is not is maybe having budget for having a sick is not running the budget as as it were.

[00:14:57]All those eating things that you are you are talking about, they are there.

[00:15:00]Actually, um but the fact remains that that budget those budgets are not even implemented.

[00:15:08]The government just run the economy on on his own whims and caprices. That's why you can run a whole year without implementing the budget itself.

[00:15:19]And they when they are even running the budget, the capital aspect of the budget are not are usually not run. You know, the capital has to do with uh that's what have impact on the economy itself. Because the recurrent expenditure is like paying salary and all those things, which are normal day-to-day things. But the capital is where you have new projects that will also generate employment even from the private public sector. So, the the we have not there's no budget discipline in this government in the last three or four years. That's why you have this uh We don't even know where this uh 2026 budget whether it's being run now.

[00:15:53]Whether it's going to be to start running in December.

[00:15:56]So, nobody seem to care in the government circle about running the budget as it should be.

[00:16:04]What is important that uh let us pay salaries, let us pay emolument, let us make sure the politicians are happy and all that. Because I cannot imagine with all the money that is coming from the revenue that uh they cannot pay contractors. All those things affect the economy itself because you know how many people are tied to contractors.

[00:16:21]So, if you don't have money, how do they spend?

[00:16:24]People don't know that the government seem not to know that there's need for money to flow in the economy. Because when money does not flow, it also affect uh production.

[00:16:34]And when production is affected, definitely it's going to affect employment.

[00:16:39]So, government has to there should be some discipline in budgeting. Now, we are approaching we are half of the year.

[00:16:46]We are we don't know whether the budget for 2026 is being implemented now.

[00:16:51]And that has also always been the trend.

[00:16:53]So, even when we talk of this budget, we have the large gap in the in the in the budget deficit.

[00:17:01]That is created in order to be able to accommodate the issue of a debt. Oh, the the gap the deficit is uh huge.

[00:17:08]Therefore, we must have debt. And so, we go for loan, go for loan. Those loans, some of those loans have to have been repaying themselves by right So, you can't be talking of money that we generate from uh oil and other non-oil this thing. Use that to pay to pay all the debts. All right, prof. So, paying debts is a significant problem. And so, that is why the economy is not moving forward, and that's why employment is not output is not moving forward. Employment is also not generated. Because the government is not talking of of budget.

[00:17:37]They are not talking of output. They are not talking of employment.

[00:17:40]>> Yeah, prof. Uh I think what is required the most uh from what you've said is transparency. Because I know there was a re- repeal and re-enactment. Uh the lawmakers were complaining that the capital component of the 2025 budget is still being implemented. It's They had to shift it to September, and that's just 30% that they are trying to They are still trying to implement. The Minister of Finance, the new gentleman, Otunba Wale Edun, was talking about the need to borrow because even if they exceeded target in terms of their projection, there are still gaps to fill. So, there's a lot to explain, and the issue about unaccounted for So, I'm sure they will I'm sure someday we'll get them to, you know, explain these things for some people who are still confused about how it works. But we must thank you so much, prof. Sheriffdeen Tella, a Professor Sheriffdeen Tella is an Emeritus Professor of Economics at Olabisi Onabanjo University, Fellow of the Nigerian Economic Society, and Fellow Chartered Institute of Bankers of Nigeria. Thank you, sir. We appreciate >> Thank you very much. Nice being here.

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