MONETARY POLICY COMMITTEE RETAINS MONETARY POLICY RATE AT 14 PERCENT - WHAT DOES THIS PORTEND TO INVESTORS AND YOU?

MONETARY POLICY COMMITTEE RETAINS MONETARY POLICY RATE AT 14 PERCENT - WHAT DOES THIS PORTEND TO INVESTORS AND YOU?

BY BARR. ANTHONY EZEAMAMA

The Monetary Policy Committee (MPC) is a Committee of the Central Bank of Nigeria (CBN) established pursuant to section 12 of the CBN Act, 2007 to facilitate the attainment of price stability in the economy amongst others. The MPC essentially augments the efforts of the Federal Government by providing the monetary and credit policy direction for the economy (e.g fixing of interest rate) while the Federal Government on their part provides the fiscal policy direction (e.g government taxation policy, provision of electricity and good roads etc). The MPC rising from their meeting on Tuesday, the 21st of March, 2017 voted to retain the Monetary Policy Rate (MPR) at 14 percent while the Cash Reserve Ratio (CRR) was also retained at 22.2 percent as was the case in the previous period amongst others. It need be mentioned that the MPR is simply an indicative or benchmark interest rate which is used to determine other interest rates in the economy while the CRR is the amount of customers’ deposits that licensed banks are required by law (section 15 of the Banks and Other Financial Institutions Act) to maintain with CBN in cash at a material time. The CRR determines how much of customers’ deposits banks can lend to the public at a material time. Consequently, the higher the CRR, the lower will the banks be able to lend to the public and vice versa. Both the MPR and the CRR are potent monetary policy tools at the disposal of the CBN to fight inflation.

Therefore, the pegging of MPR at 14 percent will naturally have different kinds of effects (whether good or bad) on different classes of persons and transactions some of which I will consider below.

IMPORT OF 14 PERCENT MPR ON DIFFERENT PERSONS AND TRANSACTIONS

(1) Tax Authorities/Tax Payers: By several provisions of the Nigerian tax legislations (see for instance sections 54 of the Petroleum Profit Tax Act, 74(1) of Personal Income Tax Act as amended, 34 of the Value Added Tax Act as amended and 32(1)(b) of the FIRS (Establishment) Act to mention but a few), defaults in tax compliance carry with it payment of penalties and interest at the prevailing commercial rate or MPR and in extreme cases (e.g in the case of blatant tax evasion), fines and imprisonment upon conviction by a court. Consequently, tax defaulters at this time are liable to pay at least 14 percent interest on the principal sum/tax owed by them to the tax authorities.

(2) Investment Account Holders: The MPR being an indicative rate determines how much of interest banks will be willing to offer and pay to their investment account holders (e.g fixed deposit account holders). For instance, banks usually quote savings rate at MPR minus 8 or 7 percent per annum. This therefore translates into between 6 – 7 percent interest per annum on such investment accounts at this time (also depending on the amount fixed and the negotiating powers of the parties). Little wonder, over 2 million Nigerian investors opted to patronise the popular Ponzi scheme, MMM last year.

(3) Pricing of Loans Facilities by Financial Institutions: Most Naira denominated loans are generally priced using either MPR or the Nigerian Inter-Bank Offered Rate (NIBOR) or the Nigeria Treasury Bills Rate (NTB) as the benchmark interest rate. However most institutional lenders will in other to hedge their risk against fluctuations of these rates set a floor rate of interest. For instance, such loan can be priced at 5 percent over MPR with a floor rate of 21 percent. This in a simple term means that no matter the percentage of the MPR at any time, the interest rate payable on the loan cannot be below 21 percent.

(4) CBN/Financial Institutions Transactions: The rate of interest at which the CBN will borrow from banks or lend to them is tied to MPR. It used to be plus or minus 2 percent. This simply means that if that was to be at this time that CBN will lend to the banks at 16 percent and borrow from them at 12 percent.

Other categories of financial activities and persons affected by this MPC decision are the base lending rates of banks, inter-bank lending rate, the rate of interest/coupon payable by the government on issued bonds and treasury bills and ultimately cost of living generally.

TAKEAWAY

In conclusion, it can be sensed that the reason behind this MPC decision is to keep inflation which is already double digits in check. One however expects a robust fiscal policy response from the Federal Government so as to complement the efforts of the MPC/CBN in reviving the ailing economy and push it out from this present economic recession in no distant time. Until then, it would appear that this MPC decision may translate into little or nothing to an ordinary man on the street if not the imposition of more misery and hunger on him.

Anthony Ezeamama is a corporate commercial lawyer and tax specialist