Between Price Stability and Economic Growth

28 Nov 2012

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3006 CBN Head Office , Abuja.jpg - 3006 CBN Head Office , Abuja.jpg

CBN Building

Obinna Chima supports the call for the Central Bank of Nigeria (CBN) to ease the tight monetary policy conditions next year, so as to unlock the credit market and stimulate economic growth
There has been an increasing call for the Central Bank of Nigeria (CBN) to loosen the tight monetary policy regime that has been in place since last year.

This flurry of debate was further heightened by the latest National Bureau of Statistics (NBS) report which revealed a slowdown in economic indicators.

On the aggregate, the economy, when measured by the real gross domestic product (GDP), lowered by 89 basis points to 6.48 per cent in the third quarter of 2012 as against 7.37 percent in the corresponding quarter of 2011, the latest NBS report showed.

The economy, comprising two broad output groups of oil and non-oil sectors, also witnessed slower growth output in the third quarter of 2012 as a result of declines in non-oil sector output.

In spite of these, the central bank’s Monetary Policy Committee (MPC) last week resolved to leave the Monetary Policy Rate (MPR) at 12 per cent. It also left other monetary policy instruments such as the cash reserve ratio (CRR) (12 per cent), and the liquidity ratio (30 per cent) unchanged.

However, the apex bank has never hidden its desire to achieve price stability since last year. No doubt, this has brought about stability in exchange rates, positive forex reserves accretion and moderation in inflation rate which currently stands at 11.7 per cent.

However, financial market analysts have stressed the need to create a balance between price stability and macro-economic growth. Monetary tightening, according to them, pushes the economy towards a point where less money chases more goods. This, they said, happened when consumers are broke and firms cut back on hiring and spending; leading to a decline in the general price level.
Real Sector Growth

To the President, Finance Houses Association of Nigeria (FHAN), Mr. Samuel Durojaye, a restrictive monetary policy regime suffocated the growth of businesses as well as the real sector.

Durojaye argued: “I can tell you that all over the world, when you implement a tight monetary policy, it does not help any business. Well, the central bank has its reason for the tight monetary policy that is in place presently as it says it needs to cage inflation.

“We have a peculiar system in this country where we are operating a tight monetary policy but with expansionary fiscal policy. You will find out that the structure of the country’s budget is such that 85 per cent goes to recurrent and as this money is coming out, the CBN tries to take it away from the system through its monetary policy instruments.”

According to him, it is now very difficult for operators in the finance house sub-sector to access credit because of the tight monetary policy.

“Interest rates have gone up. We now get money at a higher rate than when the central bank was operating a less restraining monetary policy,” he added.

In the same vein, A Senior Analyst at BGL Securities Limited, Mr. Olufemi Ademola, argued that considering the recent slowdown in economic growth, the price stability objective of the central bank as well as the consequent high benchmark interest rate over the last three years might have started to hurt the Nigerian economy.

In addition, he pointed out that given the level of resource unemployment -human and material, monetary surpluses/excesses that were channeled to productive use were unlikely to cause inflation.

Ademola added: “We therefore conclude that the perceived structural disconnect in the economy can be helped by balanced monetary policy actions among which a single-digit lending rate is central.

“Aggregate demand channel has been negatively impacted Economic theory and research outcomes have identified a number of ways through which monetary actions are transmitted to the real economy by altering the amount of money in the economy; directly or indirectly.

“Directly through the sale and purchase of short term government securities in open market operations or indirectly through the use of the short term benchmark interest rate. The first channel of impact is through the aggregate demand on both the output and prices; a process called the demand channel.” Continuing, he explained that a tight monetary policy condition, makes borrowing costs increase, thus, making it less likely for consumers to demand commodities they would normally finance such as houses or cars.
And for businesses, they become less likely to invest in new equipment, projects, or buildings.

“Monetary tightening and high interest rates ultimately result in declining GDP growth and lower inflation. Sustained sharp and/or miscalculated monetary policy tightening could push the economy into a recession where consumers tend to cut down on spending to as low as subsistence; business production declines, leading firms to lay off workers and stop investing in new capacity; and

foreign appetite for the country’s exports may fall. The recent slowdown in the GDP growth is indicative in this regard,” he warned.
Similarly, Financial Derivatives Company Limited (FDC) has advised the CBN to relax its tight monetary policy stance by 2013, so as stimulate economic growth and lending to the real sector.

According to the financial advisory firm, “All pointers are in favour of an end to the CBN’s tight monetary policy stance and the need to boost growth and lending to the real sector. The current contractionary policy stance has been in play since October 2011 when the Monetary Policy Rate was raised by 275 basis points.

“The sustainability of a contractionary stance and its stifling impact on growth and the economy justifies the need for a change in policy direction. Our view is that the overdependence on interest rates as a tool for adjustment is precarious. In 2013, the CBN will have to moderate its stance to allow the interest rate decline and exchange rate depreciates.”

It also declared that the fact that leading economic indicators have remained positive for two months, while the latest GDP growth figure was lower than the previous year, “sends mixed signals on the direction of the Nigerian economy.”

FDC added: “In addition to this, the government is resolute in its pursuit for fiscal prudence as reiterated by the Federal Minister of Finance.”
Fight against Double-Digit Inflation

However, Chief Executive Officer, Financial Reporting Council, Mr. Executive Secretary/Chief Executive Officer, FRC, Mr. Jim Osayande Obazee, stressed the need to strengthen the consensus that fighting inflation was not only the job of the central bank, “but it should be taken as a major job.”

He added: “Nigeria is failing on two grounds in this respect. Despite the myriad schemes to expand credit, it is simply not reaching the poor. Second, the poor are paying high interest rates even though interest rate ceilings are in place to protect them.

“Indeed, economists would argue that the ceilings drive them into the hands of the moneylenders because they prevent the formal banking system from charging a rate that would enable it to recover its costs.

“Another factor pushing the poor to borrow from informal sources is the nature of their financing needs. The reforms in place in Nigeria seem to be working although we need to still approach it selflessly.
“I believe that the central bank have both the necessary tools and the experience to do it effectively.”

Tags: Nigeria, Featured, Business, Gdp, NBS, CBN, Economic Growth

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