Accommodating monetary policy stance
THE Monetary Policy Committee (MPC) following its meeting which took place on Monday and Tuesday November 23/24 took decisions to relax the hitherto suffocating tight stance of monetary policy which had been long anticipated by the informed and patriotic economist and knowledgeable public commentators.
But it should be surprising and indeed beggars belief that the benchmark interest rates remained unchanged for a long period of six years! It is impossible for this experience to be repeated in advanced economies of the world. In most countries the monetary policy authorities only have interest rates to play with and the signal an adjustment in interest rates sends is often potent and immediate.
A reduction in interest rate by say 50 basis points in England, for instance, has immediate impact on the servicing of the mortgage which automatically puts more money in the pocket of the citizens thereby enhancing purchasing power. We were able to keep benchmark interest rates at same level for such a long time because the focus was more to the external sector and therefore the rate of foreign exchange.
And most of the discordant voices we have heard so far following the recent measures taken by the Central Bank to conserve depleting external reserves and refocus on growing the economy to create badly needed jobs have come from those who pander unnecessarily to the external sector almost to the unfortunate neglect of the fortunes of the domestic economy.
In addition to the reduction in benchmark interest rate by 200 basis points from 13 to 11 per cent, the Cash Reserve Ratio was reduced from 25 to 20 per cent while the corridor around the MPR was adjusted from the hitherto symmetric position of 200 basis points to an asymmetric rate of +2/-7 points which implies that the Central Bank will lend to Deposit Money Banks at the rate of 13 per cent while deposits made with it will attract only four per cent signaling the preferred thrust of policy in this regard as it is consistent with the prevalent posture of more credit delivery to the real sectors of the economy.
The Central Bank decried the posture of the banks when recently similar accommodation was made following its last meeting when the CRR was reduced from 30 to 25 per cent when the banks preferred to invest in fix income securities rather than lend to the real sectors of infrastructure, agriculture, mining and industry.
The bank has served notice that fund releases will only be made to those financial institutions that express their preparedness to lend to the real sector as identified by it. We await further details in this connection, as it should be expected that it would take uncommon ingenuity to be able to evolve a safe proof strategy to do so as money as we all know is fungible!
What have been the reactions so far? As should be expected the reactions have come thick and fast and have also been varied. It is probable in order to recount the reaction of the President himself as an opener as conveyed during his swearing in of the newly appointed ministers when he observed, ‘The Central Bank assisted 30 states in the federation with concessionary loans to offset salary arrears for their workers.
On the monetary side, the CBN has implemented country specific and innovative policies that have helped stabilise the exchange rate and conserve our reserves.’ I have also heard views expressed to the effect that what the CBN has now done is unorthodox as it is attempting to inject liquidity into the financial sector while retaining capital controls at the foreign exchange market! The fact is further bemoaned that this development would also spike inflationary spiral, which will discourage foreign investments particularly of the portfolio variant.
Some have commented by pointing out the rumoured intention of the U.S. Federal Reserve to increase interest rates in America toward the end of the year pointing out that it could lead to a reversal of investment flows to the U.S. But such reactions have not factored in the celebrations from the galaxy of our Micro, Small and Medium Scale Enterprises in anticipation of the likely potential consequences of this development as it impacts on the cost of capital in the positive direction demonstrating this overly excessive focus on the likely consequences of policy measures on the external sector to the neglect of development in the domestic economy.
Those who have opposed this development would rather prefer that the MPC continues with its tightening stance of policy at the expense of continued closure of companies and rising unemployment, which accounts for the rising tide in anti-social behaviors.
It has been estimated that the relaxation just announced is likely to inject an estimated liquidity into the financial system in excess of 700 billion naira. The MPC prefaced the relaxation stance of policy by citing an indicative reduction on the rate of inflation between the last two quarters as supportive of this measure.
But my take is that while conceding that the core mandate of the Central Bank is to maintain price and macro-economic stability, the challenges confronting the country today calls for a slight shift in focus on this policy to reflate the economy, bring back idle capacity to work, grow jobs and purchasing power while ameliorating the misery index in the land.
We should, therefore, be prepared to trade off a slight increase in the rate of inflation even if it goes outside the preferred target range of single digit. The banks are reeling from a liquidity crunch particularly following the recent introduction of the Treasury Single Account which drained massive amount from the banking sector estimated in multiple of billions of Naira. Therefore this move should amount to extending a lifeline to the banks, which should be most welcome as it enables the banks to continue to sustain a going concern.
Interest rate charged by banks is aimed to recover the cost of deposits which they mobilize, provide for the direct cost of offering service, that is, overheads including deposits sterilize in reserves, the payment of the insurance premium and provide for the estimated risk inherent in extending the credit and make a return on investment.
The benchmark interest rate is simply indicative as it only comes into account when a bank borrows from the Central Bank, which most banks will not do in a hurry as it directly raises a red flag to the Regulator. It remains a fact that interest rates in the Nigerian economy have been prohibitive particularly to the SMEs; the engine that should drive the economy.
Therefore if this measure achieves a reduction in the cost of funds across board, it should give a boost to activities in the economy. What will be most impactful is if the authorities are able to get the banks as indicated to extend credit to the real sectors of agriculture, mining, industry and infrastructure arising from this liquidity infusion. Fiscal authorities are expected to embrace supply side economics so that there is complementarity of policies for the achievement of maximum results to achieve quick and rapid reflation of the economy.
• Dr. Chizea wrote from Lagos
No comments yet