The Limit of Monetary Policies



By Obinna Chima

Last week, a 10-member committee of the Monetary Policy Committee (MPC) voted to retain the monetary policy rate (MPR), otherwise known as interest rate, at 14 per cent. They further left banks’ cash reserve requirement and the liquidity ratio unchanged at 22.5 per cent and 30 per cent, respectively, and retained the asymmetric window at +200 and -500 basis points around the MPR.
The MPR is the rate at which the CBN lends to commercial banks and it often determines the cost of fund in the economy.

In arriving at its decisions, the CBN Governor, Mr. Godwin Emefiele, who read the committee’s communique at the end of its two-day meeting in Abuja, said the committee assessed the fragile macroeconomic conditions and the strong headwinds confronting the economy, particularly the implications of the twin deficits of the current account and budget deficits, the rise of nationalist sentiments across the West and implications for national elections in France and Germany, as well as the forthcoming referendum in Italy.
He said other considerations included the yet-to-be-unveiled long-term uncertainties of Brexit and expectations of significant shifts in US economic policy.

The committee further reaffirmed the urgency of prioritising the diversification of the economy given the emerging gloomy protectionist outlook of the global economy.
Emefiele said the committee further evaluated the impact of its July and September 2016 actions on the macro-economy, noting that while foreign exchange inflows into the economy had improved significantly in July and August, it declined after the September MPC meeting, leading to rising inflation and increasing negative real interest rates.
However, outflows significantly dropped, lending credence to the propriety of the decisions of the July and September MPC meetings, he added.
The MPC also reiterated the limitations of monetary policy in reversing the current stagflationary condition in the economy, which it traced to supply and demand shocks.
Members stressed the need for a robust and more keenly coordinated macroeconomic policy framework that would restart output growth, stimulate aggregate demand and rein in inflationary expectations.
Consequently, the MPC commended efforts at resuscitating planning, noting the progress made in developing the medium-term economic recovery plan.
The central bank governor also admitted that banks are currently facing different risks, but said the risks are not peculiar to the economy and surmountable.

The outcome of the MPC meeting was announced barely a day after the National Bureau of Statistics (NBS) revealed that  Nigeria’s third quarter real gross domestic product (GDP) growth data showed that the country sank deeper into recession, contracting by 2.26 per cent from -2.06 per cent in the second quarter of this year, and -0.36 per cent in the first quarter. This represented a 0.18 per cent drop from the growth recorded in the preceding quarter and lower by 5.08 per cent relative to the corresponding quarter in 2015.
This did not come as surprise to most market analysts and economists. Inflation in Nigeria climbed to 18.33 per cent in October.
Commenting on the outcome of the MPC meeting, the Chief Economist, Standard Chartered Bank, Razia Khan, said there was little surprise from the meeting.
Khan welcomed the clarification on the rumours that have gripped Nigeria in recent days relating to the Law Reform Commission’s review of FX regulations, noting however that while the clarification was important for confidence, broader macroeconomic challenges remain.

“With the current shortage of FX clearly having a detrimental effect on growth, there is little evidence of any meaningful policy initiative that might be able to resolve this,” she added in a note.
A former bank CEO, Mr. Okechukwu Unegbu, in his comments, welcomed the decision of the MPC to leave all the key monetary policy tools unchanged, saying doing otherwise might not augur well for the economy.
“This is the end of the year, we are expecting the 2017 budget and the 2016 budget has not been fully implemented, so tampering with the monetary policy rate could cause some distortion in the market,” Unegbu who is currently the chief executive of Maxifund Securities Limited said.
He however stressed the need for the central bank to allow the interplay of demand and supply to determine the true value of the naira on the interbank FX market.

To analysts at Cowry Assets Management Limited, they noted that the rising cost of living would continue to erode disposable income of consumers, resulting in little incentive for lower income earners to save.
“On their part, the fiscal authorities will seek to source longer term debt from offshore markets due to their relatively cheaper cost. We expect the fiscal authorities to complement monetary counterpart by fast-tracking key socio-economic reforms that will improve ease of doing business and help boost productivity which is necessary to spur economic growth,” Cowry Assets added.
Also, analysts at the Time Economics Limited pointed out that the combination of a slowing economy and rising inflation had put the MPC in a quandary, saying any change to the MPR intended to solve one of these problems would have exacerbated the other.

“MPC’s earlier rate increase during its July meeting has been partially successful in slowing the increase in inflation. However, the slight uptick in the rate of increase in inflation from September to October concerned the MPC slightly.
“Since it is still too early to say conclusively if this increase means that inflation is starting to pick up again, we believe that a major factor in the MPC’s decision to maintain the status quo was a desire to properly examine the November and December inflation figures.
“Giving themselves a few more months to observe the direction of inflation in the country will allow the MPC to determine if the trend has reversed in favour of a rising rate of increase in inflation or if this month’s increase was just an anomaly,” Time Economics said.
Reacting to the worrying GDP growth data for the third quarter of the year, economists harped on the need for the federal government to resort to fiscal stimulus to revive growth and reset the economy.

The Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said the latest NBS report showed that “some things are definitely not working right”.
“This is a bad news. We are in real trouble. With three consecutive quarters of increasing negative growth, that means we are getting deeper into recession.
“The stimulus package has to be increased and intensified and the interest rate has to come down and they have to make forex available. The forex market arrangement now is not working and something has to be done and very quickly. There is no easy answer to it, but we must face the reality and find our way out of this situation,” the FDC boss stated.

Also, the Global Chief Economist at Renaissance Capital, Mr. Charlie Robertson, in a note yesterday, held the view that “in an ideal world, Nigeria will let its currency float too in 2017. No investor we spoke to will put money into Nigeria, unless it copies the currency reform story that Egypt and Russia have both done.”
Similarly, the Director General of the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, said the delay in approving the federal government’s $30 billion borrowing plan may continue to hurt the economy.
“To be honest, the government needs resources to spend and the delay in approving the borrowing is a problem. The lawmakers need to approve it for government to borrow quickly and put the money into capital project. That is very important.

“Secondly, a lot of the states are still not paying salaries. The federal government has to find a way of supporting the states to pay salaries,” the former vice-chancellor of the University of Uyo said.
The foregoing clearly shows that central banks don’t have the power to control growth and inflation at all times. If the country is desirous of reversing its declining growth, there is need to make fiscal policy more effective as it appears monetary policy has reached its limit. Too much had been left to the central bank to sort out in the past which did not augur well for the system. It is therefore time for increased monetary and fiscal policy convergence.