Economic Growth: CBN Urged to Deploy 25% of CRR to Critical Sectors at Lower Rates

Nume Ekeghe

Experts in the financial service sector have called on the Central Bank of Nigeria (CBN) to deploy 25 per cent of Cash Reserve Ratio (CRR) fund to critical sectors of the economy at a capped interest rate of 20 per cent, stressing that this would be a pivotal strategy to addressing Nigeria’s economic challenges.

This was contained in the latest report by CFG Advisory, which noted that if the strategy is implemented, it could significantly reduce average lending rates, boost productivity, and drive GDP growth.

The report written by the Chairman of Fidelity Bank, Mustafa Chike Obi and the Chief Executive Officer CFG advisory, Adetilewa Adebajo, observed that reducing lending rates would also close the gap between Nigeria’s actual and potential economic output, narrowing the output gap that has hindered the country’s progress.

The report reiterated that this measure would not only stabilise the economy but also ensure that financial resources are channeled to sectors that yield the highest impact on GDP growth.

The report, titled, “Adverse Effects of High Interest Rate Spreads on the Nigerian Economy,” stated, “The high interest rate to deposit spread in Nigeria has significant consequences for GDP growth rates. A wide spread is a consequence of high lending rates, relative to low deposit rates, making it more expensive for individuals and businesses to borrow money. This can reduce investment, consumption, and economic growth. 

“Furthermore, a high-interest rate spread can also lead to a decrease in deposit rates, making saving less attractive. This can reduce the amount of money available for banks to lend, further exacerbating the problem. In Nigeria, the high-interest rate spread has been shown to have a negative impact on the output gap, which is the difference between the actual and potential output of the economy. A high-interest rate spread can also lead to a decrease in manufacturing output, as high lending rates make it more expensive for manufacturers to borrow money.”

It added, “Overall, the high interest rate to deposit spread in Nigeria from our research, shows an inverse correlation with GDP growth making it essential for policymakers to address this issue. Key consequences are reduced investment as high lending rates make it more expensive for individuals and businesses to borrow money, reducing investment, consumption and decrease in deposit rates, making saving less attractive. The negative impact on output gap in Nigeria, has decreased manufacturing output as is it more expensive for manufacturers to borrow money, which in turn affects productivity and reduced GDP growth rates.”

On specific recommendations, the report stated: “Release of 20-25 per cent CRR funds to be directed to lending to critical real sectors of the economy at an interest rate of not more than 20 per cent. This will reduce average lending rates, stimulate productivity, and increase GDP growth.

“Rationalise the statutory costs to banks AMCON, NDIC, EMTL, Cybersecurity tax, Windfall tax, and other taxes and levies that reflect on the interest rate spread. These costs are passed unto the customers by a lowering of deposit and increase in lending rates and effective coordination of fiscal, monetary, trade, industry and industrial policies.”

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