MPC’s Delicate Balancing Act



 By Obinna Chima

Faced with the dilemma of an economic recession and rising inflation, the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) at the end of its fifth meeting for the year held last week, resolved to leave interest rate as well as other key monetary policy tools unchanged.

Specifically, the committee decided to retain the Monetary Policy Rate (MPR) at 14 per cent, left the cash reserve requirement (CRR) at 22.5 per cent as well as the liquidity ratio at 30 per cent.

The CBN Governor, Mr. Godwin Emefiele explained at the end of the meeting that easing the MPR at this point would only worsen inflationary conditions, which the central bank described as still benign in its outlook.

The Minister of Finance, Mrs. Kemi Adeosun had called for a reduction in the CBN rate to aid growth and lower the cost of government borrowing from the financial sector.

But most financial market analysts have supported the MPC decision, saying increasing or lowering interest rate may be counterproductive.

To analysts at Afrinvest West Africa Limited, hiking rates further would have done little to thwart inflationary pressures, which remain largely structurally driven, while easing rates in response to political pressures would have communicated policy inconsistency and worsen capital account position.

“The CBN has further demonstrated its commitment to the policy tightening stance by aggressively mopping up liquidity in the financial system this week via open market operation (OMO) auctions at rates similar to previous auctions.

“We believe that the decision of the MPC to maintain policy consistency and resist political pressures to cut rates will reinforce the independence of the CBN which has come under scrutiny over the last few months, whilst also emphasising priority policy objectives necessary for businesses and markets to reasonable form expectations.

“In the medium term, we think it is also positive for financial assets as capital inflows are returning, albeit tepidly, to the market,” they added.

To a senior lecturer at the Department of Economics, Pan-Atlantic University (PAU), Dr. Bongo Adi, the MPC members decided to leave interest unchanged because they were “caught in a dilemma”.

Adi explained: “We are battling inflation and at the same time we are in an economic recession. Reducing the interest rate might lead to a spike in inflation and we are already battling spiralling inflation.

“I think they are adopting a wait and see attitude. This is a situation whereby doing nothing is even something. This means they have reached the limit of monetary policy tightening.”

The Managing Director of Cowry Asset Management Limited, Mr. Johnson Chukwu, however, argued that the MPC members ought to have adopted an accommodative monetary policy stance.

“For me, at this point in time, I think the emphasis should be how we should restore growth and ensure that credit gets back to the hands of those in the productive sector. There are a lot of small and medium sized businesses in the country today that cannot access credit and partly because of lack of foreign exchange liquidity.

“But at this point in time, maintaining a restrictive monetary policy will not necessarily lead to an improvement in FX supply. So, I was thinking that the MPC would consider the overriding need to restore growth in the economy instead of targeting price stability,” Chukwu added.

Chukwu, however reiterated the need for the federal government to consider the sale and concession of some critical assets in the country so as to raise funds that can be channelled to productive sectors.

Time Economics Limited, in its assessment, aligned with the MPC, stating that given the reality of Nigeria’s situation, past efforts to cut rates in other to stimulate spending were misapplied by commercial banks who rather than lend to the real sector, diverted loans to traders, importers of manufactured goods, and government.

“Furthermore, cutting the MPR could do more to erode the credibility of the CBN with regards to the conduct of monetary policy. Such action, in our opinion, will help worsen the already growing negative real interest rate and could further discourage the return of foreign investors – something the CBN has worked so hard to avoid.

“Moreover, the pursuit of an expansionary monetary policy in order to support growth, in the face of rising inflation and currency depreciations could prove to be counter-productive, particularly in the absence of complementary fiscal policy reforms,” the economic research firm said.

But the Emir of Kano and former CBN Governor, Alhaji Muhammadu Sanusi II backed the resolve of the MPC to retain the benchmark monetary policy rate (MPR), as well as other monetary policy tools. Sanusi also expressed optimism that the Nigerian economy was on the right path and would rebound.

Sanusi said: “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.”

He urged Nigerians to be patient and expressed optimism that the Nigerian economy would rebound.

According to him, “The last two or three MPCs ago, as far as I was concerned, the central bank got the decisions right by going to a flexible exchange rate and by tightening monetary policy.”

He pointed out that the naira is currently undervalued just like most stocks on the Nigerian Stock Exchange (NSE), but fixed income securities were offering high yields.

“Now, do we really have a flexible exchange rate? That is what we need to look at. These things require courage because some of the decisions you would take would seem to fly in your face in the first week or two.

“So, what does that tell you? If you allow people to actually come in with their dollars and sell at whatever rate, people want to buy and people see that they are going to make money on fixed income, or on equities and on currency appreciation, you will have liquidity in the market.

“Now, so long as you don’t allow that, you are not going to have the flows that you want. It is the inflow of dollars into the economy that would move the naira towards its fair value and for it to get to where you want it to be.

“It is not by fiat. The market does not accept orders. You don’t sit down and say where you want the naira to be. It would never happen because it has never happened.

“They tried that in Ghana, we have seen it in Venezuela, we also saw it in Zimbabwe. If you don’t have dollars in the system, your naira is weak, simple!

“So, the question is, how do you attract dollars? Now, are portfolio investors the final solution? No, they are not.

“But anyone who thinks that a long-term investor is going to take a 10-15-year risk in an economy where we don’t get short-term macroeconomic decisions right is wasting his time.

“You have to have the macro right. You are not going to have the IMF or World Bank or even banks invest in your bonds, because they are looking at the huge gap in macroeconomic decisions,” he added.

On his part, an economist at Exotix Partners, a leading investment firm based in the United Kingdom, Alan Cameron, supported the CBN’s decision, describing it as one of the regulator’s “most sensible statement in months (and) one clear about the mandate and policy limitations.”

He believed that the naira was no longer over-valued, but rather at fair value on a real effective exchange rate basis – or perhaps significantly below (N325-N350).

He said it would take another three to six months of high nominal yields before some cuts in 2017, if external dynamics continue to improve, noting that the MPC statement “should be confidence-building, albeit from a rather low level.”

Similarly, Senior Macroeconomic Specialist at Ecobank International, London, Gaime Nonyame, supported the rate retention by the banking system regulator. She said the CBN could not reduce the policy rate because of inflation and could not afford to increase it because the country was already in recession.

This, she insisted, would not be desirable and encouraging to investors, who are expected to bring in the much-needed foreign currency, which Nigeria needs to get out of recession.

Also, analysts at the foreign currency trading and investment arm of Diamond Bank Plc, Uyi Ohenhen, lauded the CBN’s action.

A Senior Analyst at Delta Investments, Mr. Ken Halim, said: “The CBN’s decision was generally in line with analysts’ expectations. I would have been surprised if the CBN had cut interest rates given that the most serious challenge facing the country at the moment is the forex issue.

“Dollars are still very scarce and companies are shutting down because they can’t access FX. Cutting interest rates would have been counter-productive and discouraged foreign investors from investing in treasury bills and bonds.”