2015 budget: FG urged to utilise capital market

The Federal Government has been urged to execute the 2015
budget through effective and efficient utilisation of capital
market facilities just as it has been asked to review policies
that under-develop the market.
At a joint press conference Monday in Lagos, the alliance of
capital market community represented by the President of
Chartered Institute of Stockbrokers (CIS), Mr. Albert
Okumagba and the Chairman of Association of Stockbroking
Houses of Nigeria (ASHON), Mr. Emeka Madubuike, as well as
the Chairman of Association of Issuing Houses of Nigeria
(AIHN), Mr. Victor Ogiemwonyi, lamented that capital market
was grossly being under-utilised in the country unlike in other
economies where it is used as a platform for government to
access medium to long term funds for execution of
development projects.
They argued that the time has come for total review of some
of government’s policies that are at variance with the
development of the capital market to promote enhanced use
of the market to finance huge infrastructural deficit, which has
become the bane of the nation’s growth.
They stated: “In Nigeria, the capital market is grossly
underutilised relative to its absorptive capacity. Government,
companies and individuals are not using the capital market to
meet long term funding requirements while the back-seat
approach of the capital market operators has not helped
matters. We believe that the effective and efficient utilisation
of the capital market facilities would enable the Federal
Government to finance the 2015 budget despite its frightening
infrastructural deficit.”
They identified high interest rate as another albatross
hindering market development, arguing that the Monetary
Policy Rate (MPR) is also a disincentive to investment.
“A high interest rate discourages long term investment and
lowers demand generally, whereas a low interest rate regime
stimulates demand and helps with capital formation for long
term investment. An example of the importance of the interest
rate as a tool can be seen in its deployment by United States
Federal Reserve Bank (FED) and United Kingdom’s Bank of
England (BoE) to stimulate demand for commodities and the
capital market and the economy as a whole. The two
countries brought interest rate close to zero to encourage
borrowing for consumption and investment purposes. The
result of the exercise is a strong growth in the US and the UK.
“From the foregoing, it is clear that the current nominal
anchor for interest rate in Nigeria, the MPR, currently at 13 per
cent is not only discouraging demand but is also a
disincentive to investment in this environment, especially when
inflation rate, currently 8.0 per cent has been successfully kept
at below 10 per cent in the last two years.
“While it is arguable that the reduction in interest rate may
lead to an uptick in inflation, it is noteworthy that inflation in
Nigeria has been found to be more structural than monetary,
hence the high interest rate, which discourages long term
investment in infrastructure, may actually lead to more
inflation than curb it over time. Therefore, having successfully
kept inflation in check, now may be a good time to start
considering a reduction in interest rate.
“Another worrisome effect of the high interest rate is the lack
of flow of credit in the financial system. Perhaps since the
banks can invest in Treasury Bills (TBs) and FGN Bonds with
yields ranging from 10 per cent to 15 per cent, they can easily
make profits without risking their money. This is more so as
the Standing Deposit Rate (SDR) at which banks place funds
with the Central Bank of Nigeria (CBN) stands at an all-time
high of 10 per cent despite the fact that banks pay only 3.9
per cent as interest rate on savings deposit. An opportunity to
make a risk-less return of more than 6 per cent would not
encourage lending by banks to the detriment of real sector
companies and the capital market.”
“We therefore implore the Federal Government through the
CBN to commence the reduction of interest rate by a
downward review of the MPR, especially now that we have
achieved a moderation in inflation to single digit in the last
two years. We appreciate the implications of a sudden change
in interest rate; hence we urge the government to embark on
gradual adjustment of the rate to boost investment in the
bond sector of the capital market which at present is badly
affected by the high interest rate regime.”