The Monetary Policy Dilemma

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Obinna Chima

Contrary to expectations by some market analysts that the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) would cut its policy rate, the committee rose from its last meeting for the year held last Tuesday and retained the Monetary Policy Rate (MPR) at 14 per cent.

The MPC also retained the Cash Reserve Ratio (CRR) at 22.5 per cent, the Liquidity Ratio (LR) at 30 per cent and asymmetric corridor around the MPR at +200 and -500 basis points.

Many believed that following the report released last Monday by the National Bureau of Statistics (NBS) that showed that the Nigerian economy grew by 1.4 per cent in the third quarter (Q3) of this year, effectively doubling the revised growth rate of 0.72 per cent recorded in the second quarter, the MPC ought to have cut down interest rate to signal the commencement of gradual easing of its monetary policy.

Their position was further reinforced in the NBS report which showed that economic expansion in the third quarter was solely driven by Oil Sector Gross Domestic Product (GDP) which grew by 25.89 per cent in the third quarter, in contrast to non-oil GDP which contracted by 0.76 per cent during the period.

The NBS in its latest figures revealed that the nation’s GDP grew by 1.40 per cent in Q3 2017 (year-on-year), marking the second consecutive growth since the economy exited the recession in the second quarter (Q2) of 2017.
The new growth rate was 3.74 percentage points higher than the rate recorded in the corresponding quarter of 2016 (-2.34 per cent) and higher by 0.68 percentage points than the GDP growth rate recorded in the preceding quarter (Q2 2017), having been revised by the statistical agency to 0.72 per cent, from 0.55 per cent.

The Q2 growth rate was revised, following revisions by Nigerian National Petroleum Corporation (NNPC) to oil output, culminating in revisions to Oil GDP in the period.
After contracting for five consecutive quarters, the Nigerian economy had exited the recession in Q2 2017, growing at 0.55 per cent (now revised to 0.72 per cent
The MPC has left rates unchanged since July 2016, even though consumer and business confidence have been on the rise since the first quarter of 2017.

MPC Outcome
Explaining the rationale for retaining its key monetary policy tools, CBN Governor, Mr. Godwin Emefiele, said the MPC took into consideration several factors in arriving at its decisions.
He said: “In arriving at its decision, the committee appraised potential policy options in terms of the balance of risks. The committee also took note of the gains made so far as a result of its earlier decisions, including the stability in the foreign exchange market and the moderate reduction in inflation and thus extensively deliberated the options regarding whether to hold, tighten or ease the policy stance.

“While tightening would strengthen the impact of monetary policy on inflation with complementary effects on capital inflows and exchange rate stability, it nevertheless could also potentially dampen the positive outlook for growth and financial stability.
“On the other hand, whereas loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing, it could aggravate upward trend in consumer prices and generate exchange rate pressures.

“The committee also feels that loosening would worsen the current account balance through increased importation. On the argument to hold, the committee believes that key variables have continued to evolve in line with the current stance of macroeconomic policy and should be allowed to fully manifest.

“Members noted that the developments in output and inflation required effective close monitoring to gain clarity on the medium term optimal path of monetary policy.”
Emefiele stated that in consideration of the foregoing, the committee decided by a vote of eight to one to retain the MPR at 14 per cent alongside all other policy parameters, adding that one member voted to reduce the MPR by 100 basis points.

Emefiele further noted that forecast for key macroeconomic variables indicated a positive outlook for the economy up to the first quarter of 2018, adding that this was predicated on continued implementation of the 2017 budget into early 2018, anticipated improvements in government revenue from the implementation of the Voluntary Asset and Income Declaration Scheme (VAIDS) as well as favourable crude oil prices.

On the development of finance initiatives by the CBN in the real sector, particularly in agriculture, he said, were expected to continue to yield positive results in terms of output expansion and job creation.
“Focusing on the downside risks to the outlook, the committee noted the low fiscal buffers and weak aggregate domestic demand. On the external front, widening global imbalances, and rising geo-political tensions were some of the crucial risks identified,” he added.
According to him, the MPC noted with satisfaction the second consecutive quarterly growth in real GDP following five quarters of contraction.

Divergent Views

To the Director General of the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, the MPC ought to have reduced the MPR slightly.
“If I am still part of the MPC, I would have vote for a reduction of the MPR to about 13 per cent. GDP growth is now 1.4 per cent and inflation has come down to about 15 per cent. So now, the CBN should support that fiscal push by lowering the interest rate.

“The forex market is stable at about N360 to a dollar. So, this is the time for monetary policy to be accommodative. But we must not forget that we are still in an era of stagflation because unemployment is still very high, and inflation is still at double-digits.
“So, in the long run, we still need to make sure that the structure of our economy changes,” Ekpo who was a former MPC member stated.

Also, the chief executive of Financial Derivatives Company Limited, Mr. Bismarck Rewane, stressed the need for the central bank to consider loosing its tight monetary policy.
According to him, the fact that all other sectors in the GDP report apart from oil and agriculture were negative, should be a source of concern to the MPC.

“So, if you take away oil, we are technically still in a recession and that is because our interest rate is still high. So, the central bank needs to bring down the interest rate.
“All the interest rate sensitive sectors showed negative returns. The central bank must understand that it is time to bring down the interest rate. You can’t wait for the patient to get well before you begin treatment.
“The central bank is the only doctor I know that is saying the patient should get well before they can administer medicine. It is time to give a boost to the economy,” Rewane argued.

However, Ecobank Nigeria’s analyst, Kunle Ezun, welcomed the decision of the MPC.
According to Ezun, despite the marginal GDP growth recorded in the third quarter and the slowdown in inflation, the MPC did the right thing by maintaining all its monetary policy tools unchanged.
“The growth we have seen still needs reinforcement from the fiscal side. Looking at how much has been spent on capital expenditure so far, they need to do more to drive the economy.

“The central bank is also concerned about returns on investments because it still has its eyes on portfolio flows. For the central bank to maximise the benefits of the investors’ and exporters’ window, it must ensure that the government securities remain attractive.
“Let me quickly add that we are going into 2018 and half of the 2017 budget may be carried over into 2018 and this might increase money supply which might be a downside risk in achieving single-digit inflation rate.

“Also, 2018 would commence the election cycle and so there might be an increase in spending,” Ezun explained.
Also, the chief executive, Cowry Assets Management Limited, Mr. Johnson Chukwu, noted that in as much as he did not expect the MPC to adjust the interest rate at the last meeting of the year, the committee should ensure that it reviews its monetary policy stance in the first quarter of next year.
“Government’s efforts to reflate the economy can only be appreciated if the non-oil sector begins to appreciate. Today, we have low purchasing power.

“Today, even the sectors that resisted the economic crisis are also declining. So, if nothing is done to restore liquidity, which the MPC needs to do by reducing either the MPR or CRR, then we are going to have a very volatile growth,” Chukwu added.

Clearly, another source of concern for the MPC in the first half of 2018, would be the move by the federal government to increase minimum wage as President Muhammadu Buhari last Thursday approved the appointment of a 30-member tripartite national minimum wage committee for the negotiation of a new national minimum wage for the country.

If the move for a minimum wage increase is implemented, the MPC would be concerned about the likely effect of increased money supply as well as wage push inflation on the economy.

The foregoing clearly shows that monetary policy faces a serious dilemma. On one hand, while there is a need to support economic growth, on the other, there is the fear that if the restrictive monetary policy regime is loosened, it might jeopardise the central bank’s battle against inflation, forex stability as well as its drive to sustain capital flows.