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How monetary, fiscal managers can cooperate to cushion impact of recession

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At negative 6.1% gross domestic product (GDP), economic managers have a lot of work to do to save the country from the greatest recession ever.

The very high rate of contraction caught everyone by surprise and points to another quarter of negative growth to confirm the economy is in recession.

Already, the economy is suffering from stagflation amid rising inflation, slow growth, rising unemployment, and high foreign exchange (forex) rate.

Analysts had predicted the third quarter (Q3) will be worse if urgent steps are not taken by monetary and fiscal authorities to support economic activities urgently in the areas of investments in critical infrastructure – health, railway, roads as well as giving stimulus packages to ailing sectors.

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A professor of Finance and Capital Market at the Nasarawa State University Keffi, Uche Uwaleke, believes the CBN interventions have gone a long way in containing the impact of the pandemic on the economy.

According to him, what is required presently is effective monitoring and evaluation of relief packages rolled out by the apex bank to ensure that the desired impact on Micro, Small and Medium businesses (MSMEs), in particular, is achieved.

To this end, Uwaleke urged the CBN to direct the Participating Financial Institutions (PFIs), to publish the list of companies that benefitted from these facilities.

Alternatively, he said the CBN can publish on its website the list of beneficiaries of these intervention funds to facilitate proper monitoring.

“Recall that the real GDP contraction of 6.10% recorded in Q2 2020 was lower than many had predicted including the National Bureau of Statistics.

“I think that this had a lot to do with the COVID-19 relief packages rolled out by the monetary authority, such as the reduction in interest rate to 5% with a moratorium regarding all CBN intervention schemes. Also, the forbearance to the banking sector which allows the banks to restructure loans, the N50 billion, which was disbursed through the National Microfinance Bank, and the N100 billion specifically earmarked for the health sector among others.

“Only recently, the CBN had also expanded the interventions to accommodate non-interest Banking. I think a lot of measures have been introduced by the CBN to support economic growth in this period in line with its development Finance function,” he said

Sheriffdeen Tella, Professor of Economics, Olabisi Onabanjo University, Ago-Iwoye, Ogun State, said the actions of monetary and fiscal authorities were currently more complementary than during the 2016 recession.

He said the reduction in interest rates and direct interventions by the CBN are in the right direction.

However, he argued that the financial interventions should not be free, but should attract low interest rates so that the businesses do not see it as a largesse but working capital.

According to him, there is a need for the funds to pass through appropriate institutions that will monitor usage and repayment.
On the fiscal side, the university don said there should be some tax incentives for businesses. “To promote output, tax rates can reduce as outputs increase. However, the monetary and fiscal authorities’ intervention should be directed at specific sub-sectors of the economy.

“These should be in the production of consumer goods such as food, pharmaceutical, clothing and agro-allied industries. Timeliness and monitoring of the interventions from both monetary and fiscal sides are of great importance to the success of the programme.”

Chief Research Officer of Investdata Consulting, Ambrose Omordion, said appropriate monetary and fiscal policy coordination would go a long way to mitigating the impact of the looming recession

He argued that without efficient policy coordination, financial instability could ensue at any time, leading to high interest rates, exchange rate pressure, rapid inflation, and adverse impact on economic growth.

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He said: “It is true that monetary and fiscal policy complement each other, but in Nigeria the reverse is the case considering mismatched and counter policies emanating from different agencies of the government.

“Fiscal authority reform policies since 2019 have been fuelling inflationary pressure before, even before the outbreak of the pandemic that exposed government inefficiency and lack of policy direction.

“The CBN monetary policies were able to lift Nigeria out of recession in 2016 due to sizeable reserves and investors friendly policy that attracted foreign and domestic investors.”

Just last week, the Monetary Policy Committee (MPC), of the CBN reduced the Monetary Policy Rate (MPR), from 12.5% to 11.5%.

According to the CBN Governor, Godwin Emefiele, the Committee reviewed the choices before it, bearing in mind its primary mandate of price stability, and the need to support the recovery of output growth.

Consequently, the Committee noted she needs to tighten the stance of policy, as this will not only moderate the upward pressure on prices, but will also attract fresh capital into the economy, and improve the level of the external reserves.

MPC was of the view that this action would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment, and support the recovery of output growth.

However, Omordion argued that mismatch in fiscal and monetary policies have messed up efforts to stabilise the economy, and is likely to delay recovery.

“With the recent hike in electricity tariff and fuel pump prices in the midst of border closure, rising insecurity, poor infrastructure, forex issues and other negative macroeconomic challenges, the adverse effect of the pandemic and consequent recession may become more severe,” he said.

Recall that Nigeria’s economy had been grappling with weak recovery from the 2014 oil price shock to the 2016 economic recession exacerbated by the on-going coronavirus pandemic.

The Covid-19 crisis has generated shocks that have caused economic fluctuations globally. The pandemic hit the world like a thunderbolt towards the end of December 2019.

At its inception in Wuhan city in China, it was regarded as a regional health challenge whose global potential risk was summarily underestimated.

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Unfortunately, the outbreak of the coronavirus has thus disrupted the conduct of major macroeconomic policies across the globe.

Like many resource-dependent developing countries, Nigeria has faced the brunt of fluctuations in the price of crude oil, which accounts for about 70 per cent of its GDP, and 65 per cent of total government revenue.

The rise in government spending driven by the need to combat the effect of Covid-19 had increased the country’s fiscal deficit and susceptibility to high public debt vulnerabilities.

The depressing global capital flows, which put serious pressure on Nigeria’s foreign exchange reserves and exchange rates have also affected the conduct of various monetary policies in the country.

This situation is expected to result in macroeconomic consequences on outcomes such as economic growth, inflation, unemployment and exchange rates.

The preponderance of the vulnerabilities of macroeconomic variables due to the consequence of infectious diseases on the economy therefore calls for proper alignment of the nation’s fiscal and monetary policies.

The effectiveness of government’s response is important to determine the speed, quality, and sustainability of Nigeria’s economic recovery.

This would also help to moderate the recessionary pressures and mitigate the effects of economic shocks.

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