I was at the annual conference of the Nigeria Economic Society recently and the governor of the Central Bank came to be inducted into the college of fellows. Afterwards, he gave a speech which focused on what he described as unconventional monetary policy. The challenges in Nigeria require out of the box thinking he said, and we in the press should stop criticising his polices but understand and support them. Fair enough, but how unconventional are these policies?
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The idea of unconventional monetary policy in the global context is not new.
Monetary policy typically deals with the interactions between interest rates and money supply on one hand, and unemployment and economic activity on the other, with the broad goal being to maintain the best conditions for sustainable economic growth. Those conditions broadly described as price stability.
So, when inflation is getting high authorities go to tightening cycles by raising interest rates and when inflation is low then the opportunity exists to ease policy, or lower rates to support economic activity in a sustainable way.
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However, once in a while some countries fall into peculiar situations. Situations where inflation or interest rates are too low or close to zero. This creates problems for conventional monetary policy and so authorities move into “unconventional” monetary policy. For instance, when interest rates are already at zero and there is no further room to cut then monetary expansion by other means such as quantitative easing become an option. Or when inflation is too low and unconventional methods of monetary expansion to raise the price level and expected inflation are needed such as in Japan for the last decade or two.
The important point is that “unconventional” monetary policy in those contexts is driven by such challenges when key monetary policy variables get close to zero and traditional tools stop being effective. In most cases, the unconventional monetary policy is seen as temporary with the goal being to get back to fundamentals that are more in tune to conventional policy.
Which brings us to Nigeria and our definition of “unconventional” policy. It goes without saying that none of our key monetary policy variables are close to zero. But in order to stimulate economic activity, we have banned certain sectors from access to foreign exchange. We have done this with the hope that it will stimulate the local production of goods in the restricted sectors. We have termed this “unconventional” monetary policy but is it?
Many other countries have tried this preferential foreign exchange access and other protectionist policies, especially in the 1980s. Most countries have given up on those kinds of policies. The reason they seem “unconventional” to us is because they are bad policies that most have abandoned.
Of course, we know that the real story behind the CBN’s quest for demand management is the balance of payments problems. Anytime the current account turns red the central bank starts to attack demand for foreign exchange. In essence, trying to close a negative current account balance by shrinking demand for foreign exchange. That is, it’s unconventional policy. But again, we know that kind of thinking is not new. There is nothing unconventional about it.
Many other countries tried it and abandoned it. The best way to deal with the persistent balance of payments problems is a currency movement and not trying to maintain a fixed peg. Officially, we do not maintain a fixed exchange rate but in practice, the currency is managed around a fixed rate. Another unconventional policy has been abandoned by most countries. Even those who have managed exchange rates tend to manage it around the real effective exchange rate.
Then we have the final unconventional policy of central bank direct intervention in certain sectors by providing loans at low-interest rates. The jury is still out on this one. Many countries have gone down this route although mostly through the development banking model of using some state institution to guarantee risk in targeted sectors. The “unconventional” part is that the CBN is lending directly. I would be curious to see the CBNs non-performing loans ratio with regards to its lending, but that data is unfortunately not available.
By now, I am sure you get my point.
The idea of unconventional monetary policy as practised around the world during specific periods of zero interest rates or very low inflation is different from the “unconventional” monetary policy we claim to be practising here. If it seems unconventional it is because no one implements monetary policy in that way anymore. The world has moved on and we should too. No need to label policy as unconventional when it is really just bad policy. Perhaps we need to go back to conventional policy for now.
NONSO OBIKILI
Nonso Obikili is the Chief Economist for BusinessDay
