Propelling the Economy with Monetary, Fiscal Policies


The Central Bank of Nigeria’s resolve to leave the policy rates unchanged, with a view to ensuring monetary stability and engendering growth may help thrust the economy towards recovery, if accompanied with fiscal stimulus, reports Kunle Aderinokun

Citing the need to mitigate the headwinds in the domestic economy and uncertainties in the global environment and in effect, continue to strike a balance between price stability and growth, the Central Bank of Nigeria (CBN) retained the policy rates at their old positions.

The CBN monetary policy committee (MPC), which held its 254th meeting last Monday and Tuesday in Abuja, decided to maintain the status quo, having realised that inflationary pressures were still weighing in on consumer prices in an economy that is plagued with the harsh realities of recession.

As such, all the 10 MPC members voted to retain the monetary policy rate (MPR) at 14.0 per cent and cash reserve ratio (CRR) at 22.5 per cent as well as left the liquidity ratio at 30.00 per cent and maintained the asymmetric corridor at +200 and -500 basis points around the MPR.

Addressing the media shortly after the meeting, CBN Governor, Godwin Emefiele, explained that conscious of the prevailing market sentiments in favour of a rate cut, the committee reasoned that most of its decisions in 2016 were informed by the need to address the delicate balance between price stability and growth.

According to him, recognising that, “the pressures on consumer prices were yet to abate and even as the economy continued to be in recession despite the intervention support by the Central Bank, the Committee stressed that it was not oblivious of the full ramifications of the economic challenges facing the country. “

More importantly, Emefiele pointed out that, the MPC was concerned that the current situation was not amenable to simplistic analyses and quick fixes such as have found expression and increased attention at different fora and the media. “The domestic economic challenges which include a chronically import dependent consumption culture, lack of competitiveness of many sectors of the 25 economy and yawning infrastructural gap, have combined with an unfavourable external environment to complicate the macroeconomic policy environment. The monetary authority had on many occasions, and to the extent feasible, taken extra-ordinary steps to support other policies as well as compensate for aspects of structural gaps in the economy even at the expense of its core mandate.”

The governor, however, echoed the committee’s optimism that, “the inflationary pressures would begin to subside as non-oil output recovers and the naira exchange rate stabilises.” “Until then, it stressed, a rate cut would worsen the inflationary conditions and undermine the current outlook for stability in the foreign exchange market. The Committee also feels that doing so would further aggravate demand pressures while undermining existing income levels in the face of the already expansionary 29 monetary policy and increasing inflationary pressure which will make the economy unattractive for foreign and domestic investment. Given these limitations, the Committee was reluctant to lower the policy rate on this occasion but remained committed to doing so when the conditions permit.”

Besides, Emefiele, while also adducing additional reason for the MPC decisions, noted that, “Given the growth in money supply arising from unconventional monetary policy operations of the bank and implications for price and exchange rate developments, the committee is committed to moderating growth in narrow money in the 2017 fiscal year in line with the bank’s monetary growth benchmarks.”

The MPC decisions have elicited reactions from economic analysts and market watchers, who, mostly, were not surprised. In fact, all the analysts, whose projections were obtained by THISDAY had predicted that the CBN would hold all the policy rates.

Analysts Speak

A former CBN director and Director-General, West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, expressed no surprise at the MPC decisions as he had predicted that all the rates would be left unchanged. He, however, cautioned that the federal government must not waste time in passing the budget so that the requisite fiscal stimulation could be implemented with a view to salvaging the economy.

According to him, “It was a step in the right direction. The economy is in a recession and it is only the visible hand of government that can rescue the economy via spending. The MPC is also correct by calling for quick passage of the 2017 budget. A prolonged delay in passing the budget would have adverse effects on the economy. For now the economy must be energised through fiscal policy.”

However, Managing Director and Chief Economist, Global Research, Africa, Standard Chartered Bank, Razia Khan, whose estimation on the policy rates were satisfied, cautioned that, “The key takeaway from the CBN’s MPC meeting was what was being signalled regarding future policy.”

“Some element of mixed messaging appears to be creeping in. On the one hand, we had a repeat of much of what we had heard last year: that the economy – although expected to recover – remains in a vulnerable position. Nonetheless, inflation is expected to decelerate on a pronounced base effect and better agriculture growth, and the CBN may even – at this meeting – have been signalling future policy easing yet to come,” she pointed out.

But Khan added that, “the CBN also demonstrated that it is not immune to the criticism that money supply is running well above target, and to try to reassure on this front, the CBN has pledged to redouble efforts to bring narrow money growth back within its preferred benchmark range.

“The proof is likely to lie in what actually ends up happening to money supply growth. All of the data, including CBN financing of the government, will be carefully scrutinised going forward.”

The renowned economist believed that, “For now, the only clear takeaway is that there are no imminent plans for further FX liberalisation. FX will continue to be rationed, with key sectors being prioritised. There are no immediate plans for a real policy tightening as such.”

Asking, “Could the CBN cut rates later this year?, Khan noted that, “ While this remains our core view, much will also depend on the level of debate at the MPC. What is clear from the publication of the personal statements of MPC members from the previous November meeting is that achieving a consensus around future policy decisions may be difficult.”

“The MPC gets to decide – broadly – on the policy rates that are voted on (the MPR, the corridor around the MPR, the CRR, the liquidity ratio etc.). But the ‘real action’ in terms of monetary policy may well have been the extent of money supply creation by the CBN, independent of these variables. Therein lay the policy dilemma,” she added.

Similarly, the Chief Executive Officer, Global Analytics Consulting, Tope Fasua, said the maintenance of status quo was expected because “there are risks if rates are moved either way.”

According to him, “Manufacturers are complaining bitterly that benchmark rates are punitively high at 14 per cent so a further raise is a no-no. Cutting rates also seem to be out of question because there are risks such a move will spur inflation. I believe that at some point though, the MPC can begin to look at rate cuts. Luckily inflation is now rising at a lower rate. There is a limit to which prices of goods and services can keep rising in the face of static or dwindling effective demand.”

Executive Director, Corporate Finance, BGL Capital Ltd, who reasoned that, a more accommodative monetary policy would have helped the economy out of recession, noted that, “the antecedents of this Committee indicate that the high inflation environment and the continuous exchange rate volatilities requires monetary tighten to manage; hence a middle ground of keeping rates constant was preferred.”

“The implications of this action are that the yield of fixed income instruments would remain high as well as cost of funds to the productive sector. The cost push cause of inflation would remain and hence inflation would continue to be high. The exchange rate volatilities would also remain in the near term as uncertainties and high production costs prevent increase in foreign earnings through exports. The hope of exiting the recession early in 2017 will therefore depend solely on the fiscal authority through structural adjustments and reforms and budget implementation.

“Although uncertainties in the global environment is a major concern, it is becoming clearer that the major focus should be on creating a self-sustaining domestic economy through strong productive base and improved exports. Rather than attract foreign investment at the detriments of local entrepreneur, it would be more beneficial to Nigeria to focus on creating enabling environment for local production with the consequence of reducing dependence of imports and also aid foreign exchange earnings through exports. Strong local operations would also be able to successfully attract foreign direct investments. In my opinion, it would advantageous for global competitiveness for the monetary authority to consider monetary accommodation and support local businesses,” he submitted.

Also, in its analysis, Financial Derivatives Company Ltd, noted that, “There was a clear suggestion that the committee believes strongly that domestic inflation was a victim of import dependence and that the weak naira was feeding into the price equation.”

Just like Khan, FDC observed that, “The MPC for the first time in many meetings acknowledged that money supply growth both in its narrow and broad form are catalysts of price inflation.”

“The apex bank also hinted at the possibility of a more accommodative policy in 2017. The potential of positive growth in Q4 GDP and the increase in external reserves will enhance the CBN’s capacity to reduce interest rates. The new growth and recovery plan and the external borrowing plan are expected to serve as catalysts to reflate the economy,” it added.

Besides, FDC stated: “Global oil prices have also increased at a 100 per cent mark up to $55pb from this time last year. Efforts by the government with the recent visit of Vice President Osinbajo to the Niger Delta and the compliance of militants reinforce expectations of improvements in oil production levels.

“Recent events may have prompted the apex bank to be more consistent in its policy decision. The IMF Article IV team is currently visiting Nigeria and an endorsement from the IMF will go a long way in nurturing investor confidence in the country and encouraging capital inflows. On the global front, oil price volatility and the rise of neo-nationalist and protectionist sentiments have introduced a sense of uncertainty that the MPC has identified as possible catalysts for economic headwinds.

“The MPC was also forthcoming in its guidance especially in three particular areas, which will have wide implications on the economic recovery. These areas of interest include a more accommodative monetary policy stance as the year progresses, increased monitoring of M1 movement and dynamics, and a closer level of scrutiny to ensure soundness in the financial system.”

Way Forward

Suggesting a way out of the economic quagmire, FDC posited: “Monetary policy is the effective tool for stabilising overheated economies and complements fiscal policy in times of cyclical downturns. There had been both tacit and open divergence in ideologies and policy direction between both policy camps in Nigeria. However, it is now becoming increasingly obvious that the ideological gap between these camps is closing. With this anticipated synergy between monetary and fiscal policy, a slow and painful economic recovery is underway.”