Reflationary imperatives for monetary policy

It is quite safe to conclude that there is now a prevailing consensus in the land that the Nigerian economy is in dire need of reflation if as a country we will continue to keep fidelity to the promise of improved quality of life for our citizenry, which is the essence of governance. We do not need any reminder that, unfortunately, one growth sector in the economy today is the unemployment market. I do not believe that there is any household in this country which has not been visited by this dehumanizing scourge and, therefore, the first order of business for the current administration is to deliberately create and grow job opportunities even if we have to trade off rising inflationary spiral.

I should never get tired of giving the President Barack Obama example. When he came into governance in 2008, Obama inherited the worst economic situation – unemployment, for which there were reliable figures, was trending upwards and it was religiously tracked every month, and there were massive closures on mortgages as the bubble burst on the housing sector and companies were going bankrupt. What did Obama do? He did not resort to allowing the retrenchment on the economy even against unprecedented budget deficit situation. He decided, even in the face of the unprecedented downturn, to reflate the economy. It will be recalled that General Motors and Chrysler were amongst the companies which benefitted from the 2009 auto bailouts. He even gave tax breaks to individuals, increased pensions and recorded the worst deficit in recent memory. And it would be recalled that at some point in time, because of squabbling with the legislators over the bloated size of the deficit, the American economy was literally on temporary shutdown but President Obama called the bluff of the legislators and refused to budge. The rest, as they say, is history as Barack Obama won effortlessly his re-election and he is basking in the glow of this wonderful feat. When he visited Africa and had gone from Kenya to Ethiopia where he addressed the African Union and was cautioning against sit-tight syndrome by African leaders, he pointedly observed that if he sought another term of office, he was sure he would get it. But he would not attempt that as the American Constitution will never allow that as he advised African governments to transcend beyond individuals and build powerful institutions. I suppose that there are lessons in this anecdote for the Buhari administration!

It is trite to observe here that this success could not have been recorded if the Federal Reserve did not align itself to adopt a posture that aided the reflation of the economy. It must be recalled here that, maybe besides the possibility of undertaking Open Market Operations as was recently done when the Fed embarked on the sale of bonds to inject money into the economy which was romantically dubbed ‘Quantitative Easing’, it only has Monetary Policy Rate to play with, quite unlike here where the monetary authorities have all kinds of reserves to play with. And, therefore, if the recently concluded MPC meeting was held in America, it could have been concluded that a hold decision was taken despite the conditions precedent which should have advised otherwise. The Fed followed the example of the Fiscal Authorities by sustaining its accommodative stance which commenced in 2003, by first reducing the MPR from 5.25 percent to 4.75 percent, and at some point in time the literature reported that the rates were at 0 percent by the end of 2008 as the depression intensified. I must confess that I am still at a loss how that was possible and its implications. But let us survey the consequences: the stock market received a shot in the arm as investors, discouraged by non-remunerative returns on money market instruments, had nowhere to go but the stock market and, therefore, the market did not have any alternative but to be bullish. Business got transfusion as it were, with reduced cost of borrowing to grow productivity and jobs, and there was evident rebound of the housing sector and, as a matter of fact, a wholesale rebound of the American economy.

Now let us contrast the scenario above with the decisions taken by the MPC at their meeting which was held on Monday/Tuesday, September 21 and 22, 2015. Maybe before we go into the details of the outcome of this meeting, it will be salutary to gauge the expectations which I personally held as likely outcome of the meeting during the discussions I had with Harriet of Channels Business Morning fame on the Friday preceding the Monday of the meeting. I recalled that when Harriet asked my expectations of the outcome of the meeting, I promptly retorted that on this occasion a hold decision was certainly out of the question. I gave my reasons for this conclusion based on the recently enforced Treasury Single Account (TSA) which was widely reported to have drained an estimated N1.2 trillion from the banks; the delisting by JP Morgan of Nigerian bonds from its Emerging Market Government Bond Index that immediately resulted on bearish sentiments ruling the stock market; the declining GDP rates; rising inflationary spiral and, above all, the emerging consensus to reflate the economy.

I then predicted that the reserve ratios will be changed and that, in fact, there was no longer need for the reserves on public sector deposits if public sector funds were being moved to the Central Bank under the TSA platform and that I expected that the reserves on the private sector deposits which were harmonized at 31 percent would be reverted to status quo ante of about 23 percent. In the same vein, I predicted that the liquidity ratio would be reduced to positively impact the cost of funds for the banks and that the MPR which has remained at the same rate for almost four years would be reduced, albeit notionally, to signal the desired direction of policy in this regard.

But what was the outcome of this meeting? There was surprisingly a hold decision except that I am sure the CBN governor must have prevailed to achieve a reduction in the cash reserve ratio from 31 percent to 25 percent. And I say so because in the governor’s agenda which he presented upon assumption of office, he clearly indicated his readiness to see a Central Bank that would adopt a developmental posture; that would be concerned about the unemployment levels and overall wellbeing of a generality of the citizens of the country. In fact, I should well recall here that he pointedly made the point that the data on unemployment would be a regular input to the decision of the MPC under his watch. One suspects that for the fact that the president lent his voice against devaluation, that could have been in contention as members pander to sentiments that, as far as I am concerned, are more sympathetic to external sector.

Bismarck Rewane tells us that those of us who are against the devaluation of the naira are not “market intelligent economists”. And these sentiments were well advertised by Channels Television. As far as dye-in-the-wool economists are concerned, inflation is trending upwards and, therefore, if anything, you can only be tightening up by increasing interest rate, which probably explains why the MPR has remained static for almost four years now. You ask the question: beyond what the textbook teaches, who has bothered to do a regression analysis to show to what extent a reduction on MPR of, say, 500 basis points, would jack up the demand for credit? My gut take on that is that it will be almost inconsequential! Rewane thinks that all we need is a devaluation of 10 percent and we will arrive at Eldorado! But I say that under this administration at the Central Bank, in spite of the advertised known aversion of the governor to devaluation, naira has been devalued by about 23 percent in under one year!

But I have news for Rewane. If we followed his recommendation and devalued by another 10 percent, we would still be facing the same challenges except there is a sudden rebound at the oil market. What devaluation does in our environment is that it imports inflation, exports badly-needed jobs and has not be shown to be an effective allocator of resources, and most certainly undermines local production. This is why, inasmuch as we do not say you cannot throw in devaluation as a mix of policy, I have been on record to argue that devaluation cannot be the panacea it is being claimed to be.

It was recently reported that the Federal Government wants the Central Bank and the Pension Commission to provide funds at single-digit interest rates for the financing of project in the power sector. I hope that this has been correctly reported as PenCom is most certainly not in the business of extending credit and playing financial intermediation role. It is not cut out for that and even its enabling Act is quite rigid regarding the sort of asset structure it is allowed to hold consistent with the need for prudence to hedge against risk of massive loss which would jeopardize the interest of pensioners. But the need to reflate this economy now is no longer negotiable, and the sooner the MPC takes a cue from the experience of the Fed and aligns its decisions accordingly, the better for all concerned.

Boniface Chizea