How $29.9bn loan will curb inflation - DMO

02-11-2016 

The Director-Gener­al of the Debt Manage­ment Office (DMO), Dr. Abraham Nwankwo, has declared that the $29.9 billion loan sought by President Mu­hammadu Buhari will force a reversal of the current infla­tionary trend in the country.

Nwankwo, who spoke on Tuesday on Channels TV’s live programme, Sunrise Daily, a few hours before the Senate voted against the loan cover­ing a three-year period, added that it will help to address the biting infrastructure deficit in Nigeria.

According to him, once the infrastructure problem is ad­dressed, it will have a signifi­cant impact on the price level in the economy thereby forcing the cost of most goods and ser­vices to come down. 

He said: “When you are in this kind of economic situa­tion, you have to decide where you want to start addressing the problem. You then come to the conclusion that the most criti­cal point to start is to deal with infrastructure problem. If you deal with it, the cost of power will be lower, the cost of trans­portation will be lower, and the cost of other services will be lower.

“That impacts the econo­my by bringing down the gen­eral price level (they call it the consumer price index, which is a classical measure of the price level and the rate of inflation). When you do this, the Central Bank of Nigeria (CBN) will set the monetary policy rate low, because all over the world, the central bank knows it has to put the monetary policy rate high enough to catch up with in­flation rate, otherwise we will be talking of negative real rate of interest which destroys the economy.

“So, the way to go about it is that you have adequate infrastructure, power road, transportation ICT. All these make the cost of production in the economy much lower and when this happens, the cost of goods and services will be low­er and then inflation will start coming down. And if inflation comes down, the monetary pol­icy rate will be lower and this will translate to a lower lend­ing rate. That is the sequence,” Nwankwo explained.

According to him, one of the features of the proposed loan is the low concession­ary nature of the interest rate, which is fixed at 1.5 percent. This arrangement differs from previous loan arrangements (under previous administra­tions) with the Paris Club of Creditors, which came with floating interest rates as high as 18 percent.

He also explained that the facility will help revive infra­structure like railways which will smoothen the movement of heavy goods across the country.