Between Unconventional Monetary Policy and Economic Stability

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Obinna Chima writes on the Central Bank of Nigeria’s unconventional monetary policy

As the second wave of coronavirus surges, a recent report has stated that central banks are running out of ammunition.
The pandemic has caused a heavy toll of deaths and illness, has plunged millions into poverty, and may depress economic activity and incomes for a prolonged period.

Monetary authorities had entered the Covid-19 crisis with the least conventional policy space – namely, interest-rate cuts – of any post-war downturn. After pulling down borrowing costs near or even below zero and deploying massive asset-purchase programs, they are now practically begging governments to step up, a report by Bloomberg had stated.

The Bloomberg report stated that without aggressive fiscal stimulus now, the danger is that economies could develop deep scars that hobble growth over the longer term.
That could then leave central banks unable to reset and prepare for the next shock or recession. Monetary policy and fiscal policy are now interdependent.
Indeed, until the Covid-19 vaccines are widely deployed, uncertainty will continue to affect confidence in global economic recovery.

Already, the World Bank in its latest report has predicted that the global economy would expand by four per cent this year, hinging its estimation on the widespread rollout of the vaccine.
A recovery, however, will likely be subdued, unless policy makers move decisively to tame the pandemic.
For Nigeria, its real Gross Domestic Product (GDP) for the third quarter of 2020, had shown that the country had entered its second economic recession in five years.

The GDP had contracted for the second consecutive quarter by 3.62 per cent in the third quarter of 2020, compared to a growth of -6.10 per cent the previous quarter.
Since the outbreak of the virus in the West African country, its central bank has been aggressive in deploying unconventional monetary policy tools to cushion the effects of the pandemic on households and firms.

For instance, the central bank as part of efforts to tame inflationary pressure, last week disclosed plan to release about 300,000 metric tonnes of maize into the Nigerian market from its strategic anchors under its Anchor Borrowers’ Programme (ABP) next month. Owing to this, the current price of maize N155,000 per metric tonne was expected to reduce significantly.

According to the central bank, the planned release followed moves made by the critical stakeholders, working with relevant government and security agencies, to put a halt to reprehensible and speculative activities of middlemen and bandits respectively.

With the release of 300,000 metric tonnes in February 2021, it is expected that the prices of maize in the Nigerian market will drop significantly, thereby increasing demand for the crop and ultimately enhancing the gains of maize farmers.

Defending Unconventional Monetary Policy
The CBN had explained that its aggressive deployment of unconventional policies since the outbreak of the COVID-19 has been to help manage the supply shock in the system as well as calm inflationary pressure.

CBN Director of Monetary Policy Department, Dr. Hassan Mahmud, said the apex bank’s interventions in the agriculture, manufacturing, and other sectors played a major role in moderating the level of GDP contraction in the country.
“So, we need to do the interventions to manage the supply side because of the inflation number that we are seeing and also get demand to pick up.

“So, we should be seeing the benefits of all the interventions in agriculture, manufacturing, power, coming on stream. Don’t forget that these are structural issues and are challenges that have been there,” Mahmud explained.
According to him, the impact of the central bank’s intervention would be felt in the long-term.

Also, the Director, Development Finance Department, CBN, Mr. Philip Yila Yusuf, who reeled out the various development intervention initiatives of the central bank recently, said they were aimed at supporting the fiscal authorities.
Yusuf said the Commercial Agriculture Credit Scheme (CACS) was to fast-track food processing across the entire value chain which he said has been successful.

“We’ve disbursed over N600 billion and over N400 billion has been paid back. It was given at nine per cent interest rate, but the interest rate has been reduced to five per cent.
“Private sector players and also state governments have accessed it for either rice processing mills, cassava processing mills or to do large scale farming,” he added.

Speaking on the need for the country to be self-sufficient, he said, “because of the protectionist mode that a lot of countries are going into, there’s an opportunity for us to properly diversify into agriculture.
“So, we need to produce more, especially grains. We need to achieve national food security and we need to be able to start looking at how we can even begin to export for us to be able to earn forex, because there’s already a decline in the major forex inflow we get from oil.

“We really need to start looking at how we can ensure we have food self-sufficiency and also begin to export to earn more foreign exchange.
“We have significant land that has been unlocked and so we need also to ensure we are doing a lot of processing in-country.”

Yusuf also spoke on the Anchor Borrowers’ Programme launched by President Muhammadu Buhari in 2015, saying it has been largely successful.
According to Yusuf, without the Anchor Borrowers’ Programme, especially since the pandemic, “I can imagine what would be happening in Nigeria.”

He spoke on other development finance interventions and the funds disbursed so far by the apex bank, saying, “Once the COVID started in China, what the leadership of CBN under Governor Emefiele did was to try and create different scenarios of how we would respond to the pandemic depending on how it affects Nigeria.

“We brought out a broad stimulus package worth about N3.5 trillion across SMEs, manufacturing and healthcare because Governor Emefiele wanted activities to go on despite the lockdown, and then health, because our hospitals have not moved from basic provision of services to more advanced healthcare.

“With N3.5 trillion, the first thing we did was to put in place a N50 billion Targeted Credit Facility for households and SMEs. As I speak to you, we have disbursed N72 billion to over 120, 000 beneficiaries and Governor Emefiele has increased the fund from N50 billion to N100 billion.”

Yusuf added, “We also put in place N100 billion credit support for the healthcare sector. We provided them cheap access at five per cent, through the deposit money bank to access the N100 billion set aside. As we speak, we’ve disbursed over N44 billion to over 40 projects.

“We also looked at helping to domesticate our pharmaceutical and hospice-related activities. We also set aside N1 trillion for our manufacturing sector; that’s where we have huge, significant employment – textile, housing, food and agro-processing, etc. – and during the COVID-19 period, we have disbursed over N200 billion to a wide range of people.”
Also speaking recently, CBN Governor, Mr. Godwin Emefiele, said the bank decided to raise its COVID-19-targeted facility from N150 billion to N300 billion in order to accommodate more Nigerians in a bid to cushion the impact of the pandemic that had pushed the nation’s economy into its second recession in five years.

He had said that doubling of the COVID-19-targeted facility to N300 billion was to spur consumer spending and accelerate recovery from the COVID-19- induced recession.
Raising the targeted credit facility was expected to boost consumer spending, stimulate output and ensure that all the six geopolitical zones benefitted from the palliative.

“The important thing is that we want to use this as an opportunity to see what can be done to boost consumer spending for our people and also see to it that output is stimulated positively for the good of our people,” he added.

He pointed out that realising the consequences of the pandemic, the board of the central bank as well as the MPC took a unanimous decision to grant provisioning for banks.
To the Deputy Governor, Corporate Services of the CBN, Mr. Edward lamtek Adamu, the Bank is focused stimulating economic growth.

Adamu said, “I want to reiterate the strong commitment of the CBN towards supporting measures that would bring the nation from our over dependence on imported goods, so that we can create wealth, create jobs for our teaming youths and just improve lives and livelihood of Nigerians as we strive to promote a very stable financial system.

“I want to emphasis what the CBN governor has consistently said, that the central bank is committed to its core mandate of maintaining price and exchange rate stability. We are also committed to ensuring that we have a conducive macroeconomic environment for growth.

“We are committed to fostering development for an efficient credible and reliable credit system. We are committed to a very stable exchange rate and the growth of our reserves and diversifying the economy…
“We are committed to supporting the diversification through our intervention programmes and development finance in the agric sector, manufacturing sector, MSMEs because they are critical to the development of the economy.”