Cardoso’s tough job & the dilemma of the MPC

Two (2) important committees support the work of the twelve (12) members of the Monetary Policy Committee and they include the Monetary Policy Technical Committee and the Monetary Policy Implementation Committee.

Their work is to gather macroeconomic data that can help the MPC to determine fiscal and credit conditions to decide whether to raise, hold, or cut the monetary policy rate, as well as set credit policy.

The current inflation to interest yield curve stands at 11.15 percent, which is 7.15 percent higher than the 400-basis point band that the MPC has always maintained. Since the Russian invasion of Ukraine in January 2022, the MPC has raised the rates from 11.5 percent to 18.75 percent, an increase that represents a 725 basis point hike.

Now before we talk about the forecast for the 293rd meeting scheduled for February 26-27th, let’s first backtrack to how we got here.

In 2015, the Budget Office in coordination with the fiscal authorities in their wisdom decided to change the fiscal strategy in its medium-term expenditure framework (MTEF) to an expansionary monetary policy where it planned to stimulate growth in a document it titled the ‘’Economic Growth & Recovery Plan (EGRP)” by

· Removing the cap on Ways & Means as provided in section 38 of the CBN Act of 2007 specifies a 5% limit of the previous year’s real revenues

· Raise the budget target without raising the revenue-to-GDP ratio, which at that time stood at 6.9%

· Raise the deficit financing ratio from 16.8%, and abandon the 3% cap of interest on debt to GDP ratio

· Exchanging Nigeria’s crude oil for just one (1) of ten (10) derivatives—premium motor spirit (that deprived Nigeria of $3bn monthly) that was being paid by NNPC to CBN, and pooled to form Nigeria’s net external reserves for balance of payments.

This new direction started with the increase of the non-discretionary private sector Cash Reserve Ratio (CRR) from 15% (which happens to be the global benchmark) to 32.5%, as one of the contributors to funding central bank overdrafts, which are first advances for the first 3-months, and then become overdrafts, attracting MPR +3 after three (3) months.

These loans, which were funded through public & private sector CRR, quantitative easing (that was the government printing money it didn’t have assets or reserves to back), raised the balance from N869 billion to N30.6 trillion within eight years.

This monetary policy expansion was meant to fund development finance for direct intervention programs the government hoped was going to finance real sector growth and raise the GDP growth rate, and budgetary support, in a ratio of 74:26%.

Instead, the funds recorded huge impairment losses like the Anchor Borrowers’ Programme that had 1.4 trillion naira in allocation, and couldn’t account for 74% of its loans in recoveries. The only notable area Nigeria saw real improvement was in rice production, but that sector still has a deficit of 7m metric tonnes of paddy because of the insecurity in the North East & West.

As M1 money supply rose without a corresponding increase in production output, coupled with the external shocks from global supply chain disruptions in Eastern Europe & the Middle East, inflation spiraled.

The MPC in a bid to curb inflation rise, raised MPR, the continual migration from naira to USD denominated assets in order to prevent negative return on yield exacerbated the situation, and led to serious imbalances in the foreign exchange policy framework where the government could no longer hold a peg of +-3 per day, that was prompting them to pay nearly $300m in FX subsidies monthly.

The drop of net reserve balances from the Central Bank borrowing from external asset managers through swaps and local banks through forwards, below the guidotti level (that specifies net balance of payment reserves unencumbered, that is equivalent to net balance of trade for One (1) year that I estimate to be around $7bn), caused further sell pressure on the naira and capital flight.

And so, the international rating agencies followed with their assessments on country risk, equity risk, credit default swap levels, issuer default rating, and further complicated the ability of the sovereign and every multi-national entity attached to the sovereign to raise money from the international debt capital markets, because of its asset quality.

There are no easy solutions to the problem. Raising MPR by 400-500 basis points at the February meeting while it will reduce the pressure of migration from naira to USD denominated assets, also has the tendency of raising the commercial lending rates (above 35%) such that it will significantly impair the non-performing loan books of deposit money banks and reduce their asset quality especially as it regards capital adequacy ratio.

While the Central Bank is making important changes to the foreign exchange act, and rules on all in rate, second cheque, net open positions, non-banking financial institutions, we have to realize that the problem was first fiscal before it became monetary, and the fiscal authority needs to embark on structural changes, key of which will involve:

1. Changing the principles of derivation to give financial autonomy and responsibility to states especially considering that the devaluation has seriously bloated their balance sheet for the external debt owed

2. Implementing the Stephen Oronsaye Act to reduce the size of government and consequently the cost

3. Both Harmonize the taxes and levies across federating units as well as provisioning for one central revenue collection agencies as a tool to increase the revenue to GDP ratio to a target of 18-20%

4. Optimize the revenue that comes from government owned enterprises by activating the potential of the SPV that was set up (Ministry of Finance Incorporated) for warehousing them

5. Unleash the power of NNPC by audit, book-building, IPO, capital projects, as a tool to raise the revenue to GDP ratio from upstream and midstream Oil & Gas, and as a tool to reduce deficit financing

Olayemi Cardoso has a difficult job and unfortunately, he has to pick up the pieces after years of mismanagement—I don’t envy him.