Democracy and need for monetary stability

Again, Sanusi Lamido Sanusi, governor, Central Bank of Nigeria (CBN), did not hid his feelings last week when he said the crave for lower interest rates to energise the economy by manufacturers and other entrepreneurs may not be feasible going by the penchant for spending associated with election period.

Sanusi believes that election period would naturally witness much spending that tends to have negative impact on the economy, as government increased spending will lead to possibility of higher interest rates and also risk of increasing the cash reserve ratio, a development that will leave lower cash at the disposal of banks for lending to the real sector.

President Goodluck Jonathan gave the scorecard for his two years stewardship last Wednesday, saying that his government had done well, and requested Nigerians to come up with their marking schemes to mark his administration’s performance.

However, Akin Oyebode, trustee, Awo Centre for Ideology, Development and Good Government, said the rating of the administration was slightly above average, as a lot needed to be done to improve the lives of the citizenry.

Indeed, Sanusi had last week foreclosed the possibility of reduced interest rate in the economy with the possibility of increased government spending in the political era.

Consequently, he said the period was usually very difficult for monetary policy measures as politicians would want to spend more to justify their re-election.

Also, there is the possibility of increasing the cash reserve ratio to handle the situation, he said, saying “there is higher risk of increasing the CRR than reducing it at this point in time. The central bank will have to respond in events of elevated spending.”

The governor stated this while delivering an address at the National Risk Management conference in Lagos, recently.

“Everywhere in the world, if you have an election, that is when government spends more because at that time, you will have political office holders wanting to deliver dividends, they will want to show reasons why they should be re-elected.

“So, central bank governors all over the world know that election cycles are very difficult for monetary policy. The point I am making is that if there is increased spending, what is likely going to happen will be higher interest rate. So, people should not look forward to low interest rate at a time of increased government spending,” Sanusi said.

Speaking further, he said, “despite the best intentions of the finance minister, I don’t see her stopping politicians from spending money in 2014. She’s got all the intentions and all the commitments, but at the end of the day, she doesn’t approve the budget. So, there is no way in an election year, when you are not going to have increased spending.”

The governor also allayed fears of too much liquidity from the activities of the Asset Management Corporation of Nigeria (AMCON), saying that refinancing of the bonds would not have adverse effects on the economy.

“Today, AMCON is holding about N800 billion in treasury bills. So, we are not creating any new money. At the point it pays off over N800 billion bonds, it will simply hand over these treasury bills to the banks, take these bonds and cancel them all. All that is happening is that the balance sheet of AMCON is shrinking and that reduces its liabilities and assets holdings.

“We are not pumping cash into the system; we are not creating new securities and we are not going to have more liquidity. What may happen, which is not likely, is the possibility of tightened liquidity. But because liquidity ratio is about 70 percent and most of those AMCON bonds are not being used for repos, even though that can be used.

“So, really in terms of money supply, we don’t think there is going to be any major impact in terms of liquidity in the system. There might be an impact in the total money supply because of the reduction in credit to the private sector, but we are looking at all the implications and when it is time to pay, the central bank will decide how much of it should be in form of securities, should we issue some special securities to mop up the money and if we are going to sterilise the money for a year or six months. This will all fit into our monetary policy stance,” he said

On the future of AMCON, he said, “AMCON winds down as it pays down its debts. Clearly, from where we are, we have a maximum of 10 years from 2014. We think it will be able to pay down before then. But on the conservative side, we have about 10 years.”