Government borrowing, spending push interest rate upwards

By Stanley Oronsaye May 5, 2011 02:16PM

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The Central Bank of Nigeria (CBN) has said that as long as the federal government continues to patronize the bond market, it would be difficult to achieve low interest rates. CBN deputy governor, economic policy, Sarah Alade, said while the central bank is striving to achieve an inclusive economy that would capture more Nigerians, that effort was being made difficult by the huge borrowing and expenditure of government.

According to her, government needs to begin to control its level of spending in order for the real economy to have access to cheap funds.

"In terms of interest rate being high, when government borrows money, offering banks higher rates than the private sector can offer, banks naturally lend to government. So as long as the Debt Management Office keeps selling bonds, this expansionary fiscal policy, and interest rate will remain high."

She said when control is placed on government spending, then ordinary Nigerians can enjoy low interest rate.

Speaking at the presentation of the regional outlook for sub-Saharan Africa by the International Monetary Fund in Lagos on Tuesday, Mrs Alade said the central bank was working at improving access to finance for Nigerians by reforms of the payment system.

"We are thinking about agency banking where you use the post office, so that more people will be able to save and receive money. For access to finance, we are doing a lot of things," she said.

Permanent secretary in the ministry of finance, Danladi Kifase who represented the finance minister, Olusegun Aganga, said government has already embarked on measures that would cut down on its expensive and improve the quality of its expenditure.

"Government is determined to bring the budget back to balance. We are working to diversify our revenue base away from oil and gas by strengthening the tax base. The use of performance-based budgeting will help toward delivering efficiency in spending," the minister said.

He said the establishment of the sovereign wealth fund was geared towards ensuring discipline in government spending and to ensure that excess revenue are saved for judiciously applied.

According to Mr Kifase, government needs to continue to spend money in order to keep the economy running. "We cannot keep money in the bank when people need roads. The problem is the quality of spending."

He said government would improve on its expenditure to achieve growth in the economy.