MPC AND THE MONETARY POLICY RATE

The CBN readiness to target inflation as focus of policy is welcome, writes Boniface Chizea

The Monetary Policy Committee (MPC) held its inaugural meeting under this administration at Abuja on 26-27 February 2024. The last meeting of this policy setting Committee for obvious reasons was held last year, July 26, 2023, about eight months ago, an unusual development. Ordinarily, the meeting is held every other month; that is once in two months. All the 12 members of the Committee were reported to be present at this meeting. This development is not surprising, being the first meeting since the Constitution of the Committee. It might not send correct signals, for any members to be absent at this point in time. One aspect which was missing from the briefing which the Governor made after the meeting is the indication of the voting pattern as the decisions were taken.

The key decisions of the Committee are; an unusual hike in the base rate by 400 basis points, an increase in Cash Reserve Ratio from 32.5% to 45% and Liquidity Ratio which was retained at 30%. The Monetary Policy Rate (MPR) for the avoidance of doubt is the rate the CBN lends to banks as it discharges its lender of last resort obligations while the Cash Reserve Ratio is the prudential deposits which banks are obliged to keep with the Central Bank and the Liquidity Ratio is the liquid assets which the banks must maintain. It is in order to observe that these measures were taken to better manage and align the excess liquidity in the economy to facilitate a reduction in the headline inflation in the country estimated at 29.90% in January, 2024, rising from 28.92% in December while food inflation is estimated at an unsustainable rate of 33.9%.

A high inflationary environment is inimical and damaging to the growth prospects of any economy. The growth in the Gross Domestic Product (GDP) for the last quarter of 2023 has been estimated at 3.46%, rising from 2.54% in the third quarter. With this rate of growth in excess of estimated annual population growth rate of about 2.5%; there should have been development within the economy contrary to the prevalent experience. And without being privy to the methodology used, this index flies in the face of felt experiential conditions in the economy today, that one is left scratching the head wondering how the growth came about!

Relative high rates of inflation in any economy besides making the economy uncompetitive punishes the poor and mostly income earners who do not have the facility to pass on such price increases. This situation in the economy today largely accounts for the wild cat spate of protests in the land. In an unprecedented manner, many Nigerians today go to bed hungry, and as should be expected, many are angry. It is a welcome development that the CBN has indicated arising from this meeting, its readiness to target inflation as a focus of policy. We wish also that the rate of exchange, which largely accounts for spiraling rates of inflation, will be targeted to checkmate the free fall in the rates of exchange. The other causes to the prevalent high inflationary environment are disruptions in the supply chain of farm products largely due to the insurrection in the land; banditry, kidnappings for ransom and of course climate change. Budget deficits and how they are funded by the fiscal authorities impact the level of inflation particularly if funded through the Ways and Means finance as we experienced lately.

But is the whopping hike in interest rate the panacea? We must also see interest rates as factor costs which feeds into the cost of business. Unfortunately, Central Banks across the globe are hindered from the perspectives of available instruments to fight inflation. The only recourse they have is to increase base rates. But such increases are effective to the extent that inflation is demand pull. If the causative factor is cost push, the situation is compounded as we only end up complicating the situation as such measures have cost add on implications. We might however take consolation in the observation made by the Governor of CBN to the effect that previous hikes were effective but not far reaching.

But the rate hikes affect bank borrowers negatively because as a result of this development, most debtors will witness increases in their interest charges. But on the other hand, bank customers who are depositors are regularly short-changed as deposit rates are rarely above 10% which signals massive payments of inflation tax by such depositors. For instance, if inflation rate is 30% and deposit rates are about 10% depositors are paying high inflation tax of 20%.

There is also the concern that the banks; the whipping boys are now holding the wrong end of the stick. The banks are expected to leave 45% of their deposits with the Central Bank as per Cash Reserve Ratio requirement; which implies that only 55% of deposits are available for lending and in addition the banks are obliged to hold 30% of this balance in liquid assets which therefore will be only available for short term lending. There is therefore the need to keep a keen eye to commence relaxation as soon as the conditions become favorable.

The MPC has also indicated the fact that there is the need to recapitalize the banks as a hedge against risks. We advise caution here as we observe that there is the need to exercise due care in this regard. The operations of the banks have been severally disrupted and hampered with recent developments in the economy such as the recent attempt at currency redesign, that there is no doubt that the banks could do with the allowance of time to breathe and to cool off. And recent efforts at fighting inflationary pressures leading to inevitable hike in interest rates will lead to a growth in the bad debt loan book of the banks. There is therefore the need to be circumspect so that we don’t act as if we want to kill the goose that lays the golden egg.

We are also excited with the developments with the Bureaux De Change (BDCs) as the CBN has decided to resume the sale of foreign exchange to them at the rate of 20,000 dollars each. It will be recalled that this sale was stopped about two years ago. As the CBN explained this is aimed at achieving an appropriate market-determined exchange rate as distortions are removed at the retail end of the market. This sale will be at the rate of N 1,301/$ representing the lower band rate of executed spot rate at NAFEM the previous day. While the BDCs are to sell to their customers at a margin not exceeding one percent. The signaling effect inherent herein with regard to ideal rate of exchange must not be ignored. We urged the Central Bank to move towards a target band for the movement of the rate exchange as a way out of the deleterious free fall which we now experience. The BDCs are being remodeled with some designated as

Tier one and others as Tier two envisaging the scope and range of operations with appropriate management structures advised. But we just stumbled on the television program where some of the newly licensed BDCs were given very odd names and this was the subject of discussion; Hourglass Bureau De Change, etc. For shouting out loud, this country is in a veritable crisis and it is time to go beyond these shenanigans aimed at self-aggrandizement and focus for once on getting us out of the rot we find ourselves in.

We wish Governor Olayemi Cardoso well and God’s speed as he undertakes his onerous task of rescuing the Nigerian economy from the doldrums. As he himself recently observed, he has the second most difficult task globally. It is just that he did not let us into who has the most difficult job in the world who we suspect must be Joe Biden.

Dr. Chizea is

CEO, BIC Consultancy Services

Lagos