Recession: Harmonising Fiscal and Monetary Policies


The just-concluded 252nd meeting of the monetary policy committee of the Central Bank of Nigeria(CBN) has brought to the fore the urgent need to have a robust fiscal policy to complement the monetary policy, requisite for the economy to swim out of the murky waters of recession, reports Kunle Aderinokun

At its last meeting, the Monetary Policy Committee of the Central Bank of Nigeria (CBN) decided to hold monetary policy instruments at their respective rates. The MPC explained that it took the decision to allow the positive effects of the current monetary policy stance and other measures like the foreign exchange market reforms to fully manifest. The committee, however, pointed out that at the appropriate time, it would consider easing the policy stance.

Essentially, the MPC rose from its 252th meeting in Abuja and left unchanged the monetary policy rate (MPR) at 14.00 per cent; cash reserve ratio (CRR) at 22.5 per cent; liquidity ratio at 30.00 per cent; and asymmetric window at +200 and -500 basis points around the MPR.

By retaining the rates, especially the MPR, the CBN has defied pressure from the Finance Minister, Kemi Adeosun, and the manufacturers, amongst others, who have pushed for reduction in the benchmark interest rate to stimulate consumption and spending.

Addressing the media shortly after the bi-monthly meeting, CBN Governor, Godwin Emefiele, noted that, even though the MPC considered the numerous analysis and calls for rates reduction, it however, concluded that, “the greatest challenge to the economy today remains incomplete fiscal reforms which raise costs, risks and uncertainty.”

The calls, Emefiele acknowledged, came “mainly from the belief that reducing interest rates will spur credit growth, not only in the private sector but also by the public sector, which will help provide liquidity to stimulate consumption and investment spending.”

While the CBN noted that it understood the importance of increased consumption and massive spending in times of recession, it, however, argued that rather than serving its desired objectives, rates cut in times past, had given undue advantage to traders who secured liquidity to fund their insatiable appetite for forex, thereby putting pressure on the foreign exchange market and pushing up the exchange rate. Besides, the apex bank contended that if the MPC cut the rates, the resultant effect would worsen inflationary pressure.

According to Emefiele, “The committee was of the view that in the past, the MPC had cut rates to achieve the above objectives; but found that rather than deploy the available liquidity to provide credit to agriculture and manufacturing sectors, the rate cuts provided opportunities for lending to traders who deployed the same liquidity in putting pressure on the foreign exchange market which had limited supply, thus pushing up the exchange rate.”

He explained further that, “with respect to providing opportunity to the public sector to borrow at lower rates to boost consumption and investment spending, the committee agreed that while it was expected to stimulate growth through aggressive spending, doing so without corresponding efforts to boost industrial output by taking actions to deepen foreign exchange supply for raw materials will not help reduce unemployment nor would it boost industrial capacities.

“The committee was also of the view that consumer demand for goods which will be boosted through increased spending may indeed be chasing too few goods which may further exacerbate the already heightened inflationary conditions.

Aligning with the MPC decision, the Emir of Kano and former Governor of the Central Bank of Nigeria (CBN), Muhammadu Sanusi II, was pleased with the committee for leaving the MPR and other rates unchanged.

According to Sanusi, “To be honest, when the fiscal authorities and many people in the private sector said they wanted a lower interest rate, I was concerned that the central bank would succumb to pressure. The fact that the central bank did not, shows that the central bank is beginning to reclaim its independence, which to me is a very good thing.

“I was very pleased with the MPC. In fact, I was waiting for the outcome of the meeting. When the central bank said they are not bringing the interest rate down, then I said ‘yes’, that is what I like to see. These are economic issues and you make choices.

“As an interested party and a former central banker, I can see why the central bank was not willing to reduce the interest rate at this point in time. If you lower the MPR by 100 or 200 basis points (bps), it is not going to lead to a rapid increase in credit growth. You will not see an increase in credit growth that would reverse the downward trend in output by lowering MPR by 100 or 200 bps.

“You would however further fuel inflation and you would reduce the yields on fixed income securities at a time when you are trying to attract foreign exchange.
“The immediate oxygen that this economy needs is foreign exchange and portfolio investors are important.”

Acknowledging the poor outing of the economy, Emefiele emphasised that the MPC indicated that to get the economy out of the quagmire, monetary policy must be complemented with robust fiscal policy, which was currently non-existent.

“The committee acknowledged the weak macroeconomic performance and the challenges confronting the economy, but noted that the MPC had consistently called attention to the implications of the absence of robust fiscal policy to complement monetary policy in the past,” he noted.
Due to the foregoing, the CBN governor stated that, “the urgency for a monetary-fiscal policy retreat along with trade and budgetary policy, to design a comprehensive intervention mechanism is long overdue.”

However, economic analysts and market watchers have greeted the MPC decision and policy direction of the CBN with mixed feelings and cautious optimism.

Managing Director, Global Analytics Derivatives Consulting Ltd, Tope Fasua, believed that by holding the rates, the MPC members were only being cautious. According to him, “With this decision, the MPC has decided to watch the economy for a while.”

Fasua recalled that, “The reason why MPR was increased to 14 per cent two months ago, in the first place, was because they had an eye on inflation and decided to curb the rise,” pointing out that, “they intended to stem the apparent stagflation in the economy.”

“I believe though, that if a downward pressure is commenced against interest rates for now – as the Minister for Finance proposed – inflation will not necessarily climb. This is because the banks are not really lending, and will not lend more just because interest rates are lower. I believe the MPC can begin lowering interest rates by its next meeting,” he posited.

In his own analysis, Executive Director, Corporate Finance Department of BGL Capital Ltd, Femi Ademola, said the MPC decision was not “totally unexpected based on the comment attributed to the CBN Governor that the economy has attracted $1 billion since the introduction of the flexible exchange rate and probably due to the monetary tightening.”

Ademola said, “Since the MPC has stated that they would rather focus on attracting foreign investors to help the exchange rate than support growth, their action is in sync with their belief,” however pointing out that, “It is just that it may not be exactly what we need at the moment.”

According to him, “We have been consistently deploying monetary tightening for over five years in bid to fight inflation and attract foreign investment. Unfortunately, the results don’t suggest that it would continue to work hence it would be a good time to test lowering interest rate and focusing on targeted withdrawal of excess liquidity from the sector that has liquidity surfeit. This blanket high interest rate across the market may not be making sense again.”

But he pointed out that, “in most economies, the likely immediate reaction is monetary easing, although cautiously at first, but later strong enough to push likely back to the economy, increase domestic production and improve employment.”

“This is why most analysts and economists expected that the MPC would at the last meeting commence the process of monetary easing even if a little and probably introduce policies that would boost liquidity to the productive sectors of the economy as the most potent mean of getting the country out of recession.”

Nevertheless, Ademola, advised “Nigeria to create its unconventional monetary policies (UMP) to move out of recession”, which are “mostly home-grown and fit for purpose.” According to him, most economies depended more on UMP to get out of the financial crisis since 2008.

To the Macroeconomic and Fixed Income Research Analyst at FBN Capital Ltd, Chinwe Egwim, the MPC decision was a surprise. According to her, “We expected a hike in the MPR by 100 basis points on the basis of attracting foreign flows which would assist in stabilising the new FX regime as sizeable autonomous inflows will supplement the CBN. The fastest route to this destination is through investment by the offshore community in naira-denominated assets.”
Egwim noted that by holding the rates, the CBN’s MPC preferred to adopt a wait and see approach, believing that the tightening of the last MPC meeting was sufficient.