SHORT-RUN MACROECONOMIC EFFECTS OF BANK LENDING RATES IN NIGERIA, 1987-91: A COMPUTABLE GENERAL EQUILIBRIUM ANALYSIS

D. Olu Ajakaiye

Working Papers from African Economic Research Consortium

Abstract: In this study, a computable general equilibrium (CGE) model was developed for Nigeria and applied in simulating the short-run macroeconomic effects of the rising bank lending rates experienced during the period of financial liberalization, i.e., 1987-1991, incorporating the confounding effects of the exchange rate depreciation that also occurred during this period. In order to assess the severity of the effects of the rising bank lending rates, the model was simulated while controlling for the exchange rate effects. Analysis of the results shows that the rising bank lending rate along with the exchange rate depreciation had deleterious effects on inflation, output, income, consumer demand and government fiscal posture. It was also found that while the rising bank lending rate without the confounding effects of exchange rate depreciation had deleterious effects on these macroeconomic aggregates, the effects were less severe. Thus, the exchange rate depreciation only aggravated the adverse effects of the bank lending rate during this period. These findings provide a reasonable basis for suggesting that the monetary authorities should fix the spread between the maximum lending rate and the interest rate on savings deposits at the 3.5% rate that prevailed at the beginning of the financial sector liberalization in 1987. The minimum rediscount rate (MRR) should also be reduced to its 1987 level of 12.8% in order to induce the banks to lower interest rates generally. Moreover, the role of banks in foreign exchange management should be limited to that of intermediation between the Central Bank of Nigeria (CBN) and the end-users. The end-users would then bid directly in the foreign exchange market, a situation that should enhance the potency of appropriate monetary and fiscal policies as instruments for stabilizing the exchange rate of the naira.

Date: 1995-03
Note: African Economic Research Consortium
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