Accommodating monetary policy stance

The Monetary Policy Committee (MPC), following its meeting which took place on November 23/24, 2015, took decisions to relax the hitherto suffocating monetary policy stance, a move that had been long anticipated by most informed and patriotic economists and knowledgeable public commentators. It is on record that I had predicted on a Channels TV Business Morning programme interview while discussing the likely outcome of the MPC meeting held in September 2015, that the benchmark interest rate would be reduced coincidentally by 200 basis points, just as it has now happened. I had then argued that the fiscal authorities have not made any secret of their intention to reflate the economy to grow badly-needed jobs for the teeming unemployed youths of the country and also bring idle capacities back to work to generally increase the level of employment, reduce the misery index in the land and the increasing tendency to anti-social behaviour, grow tax income and augment the general welfare of the generality of our populace. That interview took place just after the president took the unprecedented step of publicly serving notice of his aversion to further devaluation of the naira in agreement with the CBN stance. I had argued that the MPC had better take a cue and begin to take steps to drop the MPR, albeit notionally, otherwise just as the president had given his support for the anti-devaluation stance of the CBN, it would not be farfetched if one extrapolated to expect that he would similarly speak up in condemnation of the MPC if it continued to fail to align with the expectation of most compatriots in this connection. I say most compatriots are in agreement with the thrust to diversify the economy advisedly because, as should be expected, there are those not in agreement as we would soon make clear as we track reactions trailing the announcement of this redirection in policy stance by the CBN.

But it should be surprising and indeed beggars belief that the benchmark interest rates remained unchanged for a long period of six years! It is impossible for this experience to be repeated in advanced economies of the world. In most countries, the monetary policy authorities only have interest rates to play with and the signal an adjustment in interest rates sends is often potent and immediate. A reduction in interest rate by, say, 50 basis points, in England, for instance, has immediate impact on the servicing of the mortgage which automatically puts more money in the pocket of the citizens thereby enhancing purchasing power. We were able to keep benchmark interest rates at same level for such a long time because the focus was more on the external sector and therefore the rate of foreign exchange. And most of the discordant voices we have heard so far following the recent CBN measures to conserve depleting external reserves and refocus on growing the economy to create badly needed jobs has come from those who pander unnecessarily to the external sector almost to the unfortunate neglect of the fortunes of the domestic economy.

Let us remind ourselves of the complement of the decision taken by the MPC following the meeting under review. In addition to the reduction in benchmark interest rate by 200 basis points from 13 to 11 percent, the Cash Reserve Ratio was reduced from 25 to 20 percent while the corridor around the MPR was adjusted from the hitherto symmetric position of 200 basis points to an asymmetric rate of +2/-7 points, which implies that the CBN will lend to Deposit Money Banks at the rate of 13 percent while deposits made with it will attract only 4 percent, signalling the preferred thrust of policy in this regard as it is consistent with the prevalent posture of more credit delivery to the real sectors of the economy. The CBN decried the banks’ posture when recently similar accommodation was made following its last meeting when the CRR was reduced from 30 to 25 percent when the banks preferred to invest in fixed income securities rather than lend to the real sectors of infrastructure, agriculture, mining and industry. The bank has served notice that fund releases would only be made to those financial institutions that express their preparedness to lend to the real sector as identified by it. We await further details in this connection as it should be expected that it would take uncommon ingenuity to be able to evolve a safe proof strategy to do so since money as we all know is fungible!

What have been the reactions so far? As should be expected, the reactions have come thick and fast and have also been varied. It is probably in order to, as an opener, recount the reaction of the president himself as conveyed during the swearing-in of the newly appointed ministers: “The Central Bank assisted 30 states in the federation with concessionary loans to offset salary arrears for their workers. On the monetary side, the CBN has implemented country-specific and innovative policies that have helped stabilize the exchange rate and conserve our reserves.” I have also heard views expressed to the effect that what the CBN has now done is unorthodox as it is attempting to inject liquidity into the financial sector while retaining capital controls at the foreign exchange market! The fact is further bemoaned that this development would also spike inflationary spiral which will discourage foreign investments, particularly of the portfolio variant. Some have commented by pointing to the rumoured intention of the US Federal Reserve to increase interest rates in America toward the end of the year, arguing that it could lead to a reversal of investment flows to the US. But such reactions have not factored in the celebrations from the galaxy of our Micro, Small and Medium Scale Enterprises in anticipation of the potential consequences of this development as it impacts on the cost of capital in the positive direction, which demonstrates this overly excessive focus on the likely consequences of policy measures on the external sector to the neglect of development in the domestic economy. Those who have opposed this development would rather prefer that the MPC continues with its tightening policy stance at the expense of continued closure of companies and rising unemployment which account for the rising tide in anti-social behaviours.

It is salutary at this time to speculate on the likely impact of the recent shift in posture by the MPC. It has been estimated that the relaxation just announced is likely to inject an estimated liquidity into the financial system in excess of N700 billion. The MPC prefaced the relaxation stance by citing an indicative reduction on the rate of inflation between the last two quarters as supportive of this measure. But my take is that while conceding that the core mandate of the CBN is to maintain price and macro-economic stability, the challenges confronting the country today call for a slight shift in focus on this policy to reflate the economy, bring back idle capacity to work, grow jobs and purchasing power while ameliorating the misery index in the land. We should therefore be prepared to trade off a slight increase in the rate of inflation even if it goes outside the preferred target range of single digit. The banks are reeling from a liquidity crunch, particularly following the recent introduction of the Treasury Single Account which drained massive amount from the banking sector estimated in multiples of billions of naira. Therefore, this move should amount to extending a lifeline to the banks which should be most welcome as it enables the banks to continue to sustain a going concern.

Interest rate charged by banks is aimed to recover the cost of deposits which they mobilize, provide for the direct cost of offering service, that is, overheads including deposits sterilized in reserves, the payment of insurance premium, and provide for the estimated risk inherent in extending the credit and make a return on investment. The benchmark interest rate is simply indicative as it only comes into account when a bank borrows from the CBN, which most banks will not do in hurry as it directly raises a red flag to the regulator.

Having made this observation, it remains a fact that interest rates in the Nigerian economy have been prohibitive, particularly to the SMEs, the engine that should drive the economy. Therefore, if this measure achieves a reduction in the cost of funds across board, it should give a boost to activities in the economy. What will be most impactful is if the authorities are able to get the banks to extend credit to the real sectors of agriculture, mining, industry and infrastructure arising from this liquidity infusion. It is also in order to note that fiscal authorities are expected to embrace supply-side economics so that there is complementarity of policies for the achievement of maximum results in the desired direction to achieve quick and rapid reflation of the economy.

Boniface Chizea