CBN should tackle important monetary matters

At its July 23-24, 2018 meeting, the Monetary Policy Committee decided by a vote of seven to three to retain the monetary policy rate (MPR) at 14.0 per cent. The nay-voters sought to raise the MPR by the relatively unimportant 25 basis points or 50 basis points. But on the sidelines of the annual meetings of the Association of African Central Banks at Sharm el-Sheikh in Egypt 13 days after, CBN Deputy Governor Joseph Nnanna interpreted and qualified the MPC decision by indicating that virtually all MPC members had agreed that the MPR should increase if inflationary pressures built up.

The CBN deputy governor reportedly indicated that the MPR was ordinarily set at a level that is positive in real terms, that is, above the rate of inflation. For the sake of good public information, the MPR so fixed would only have desirable economic impact on condition that the annual fiscal deficit did not significantly violate the safe limit of 3.0 per cent of GDP while the corresponding inflation expectation should hold. Sadly, the CBN has failed to adhere to the provision over the years. For example, the above indicated “rule” held true for only the initial three months since the apex bank raised the MPR to 14.0 per cent on July 25. 2016. Even then, CBN acted contrary to economic rationality when it raised the MPR to its peak ever in the pit of economic recession. Moreover, the threatened increase, if effected, is unlikely to keep the MPR positive in real terms.

Instructively, CBN’s seeming resolve to raise the MPR may not be unconnected with the IMF staff report earlier this year which practically ordered the CBN to tighten its monetary policy stance. Towards that end, the apex bank looked around and came up with sources of likely inflationary pressures including the increase of the 2018 Appropriation Act from N8.6 trillion to N9.1 trillion, anticipated increase in pre-election spending and FAAC disbursements in the wake of rising oil prices.

But those fears are not wholly credible. First, 5.9 per cent increase in the budget expenditure that is fully backed by realised revenue should not cause inflation. Second, pre-election spending does not necessarily shoot up country-wide consumption of the market basket of 740 goods and services on which the consumer price index is based. For example, in a previous election period, NBS inflation figures from August 2014 through April 2015 range from 8.0 per cent to 8.2 per cent thereby showing no evidence of pre-and election-period inflationary spike. Why will the period from August 2018 through April 2019 be buffeted by inflationary pressures? Third, although rising crude oil prices were more or less counterbalanced by short fall in budgeted export volumes, improper substitution of CBN deficit financing for apex bank-withheld Federation Account dollar allocations actually bloats money supply and fuels inflation. Nonetheless, CBN stonewalls and fails to acknowledge this factor as the source of the country’s excess liquidity and intractably elevated inflation levels. To raise the MPR in this regard will not tame this factor’s intrinsic inflationary nature. On the contrary, this factor is the major underlying cause of the steady increase of the MPR from low single digit level to its present level.

However, the end product of the foregoing factor and motivation and undisclosed reason for seeking to raise the MPR are inferiority complex that the resulting high interest rate payable on a perceived weak naira makes the naira competitive with a (perceived) strong dollar and thereby attracts foreign investment in FGN bonds or debts. This position is self-defeating because any “portfolio dollar so invested” gathers supernormal and unearned income which, upon conversion for repatriation, eats up chunks of the country’s hard earned non-portfolio foreign exchange. The IMF/World Bank suborn dashing away Nigeria’s oil receipts in this manner. So when the CBN deputy governor boastfully told Bloomberg his readiness to write a cheque and give any portfolio investor (many of whom are local impersonators ) who wanted to leave, that cheque would have a topping liberally creamed from CBN-withheld Federation Account dollar allocations and FGN external loans, which the portfolio investor did not deserve. It stands to reason, therefore, that the country will have robust forex volume at its disposal when its normal forex earnings are well managed.
Generally, it has been shown that CBN-induced excessive fiscal deficits beyond the safe limit of 3.0 per cent of GDP set in the Appropriation Act are responsible for adverse economic features such as high inflation, high MPR, high double digit lending interest rates, non-inclusive growth and the ever-rising absolute poverty level. It amounts to prolonging the economic adversities for the CBN deputy governor to canvass for raising the MPR. Hence, it should not pass as a mere coincidence that the CBN governor spoke to Bloomberg at Sharm el-Sheikh on Monday, August 6, 2018 and this newspaper on Tuesday and Wednesday, August 7 and 8 carried on its Opinion page an article captioned “ The priceless gift to Nigeria.”

The article engagingly shows how to arrive at market-determined naira exchange rate in accordance with the CBN Act and the relevant Appropriation Act. It explains how to keep within the budget inflation expectation range of 1-3 per cent, which is the foundation that both makes it possible to fix low single digit MPR which is positive in real terms and compels the financial sector to grant credit at 4-7 per cent interest rates which are also positive in real terms to the joy of the productive elements of the economy (they cut across the organised private sector, small/medium enterprises and the teeming informal sector operators fleeing from loan sharks). The article recommended that Federal Government should collect forex access tax in order to redirect to the kitty humongous revenue being lost to CBN-installed interlopers via the multiple forex market segments which serve as avenues for frittering away apex bank-withheld Federation-Account dollar allocations. The advantage is that Federal Government would possibly more than double the current level of FGN tax revenue to GDP ratio, which the Voluntary Asset and Income Declaration Scheme cannot achieve. There are other desirable outcomes therein.

The CBN should now proceed to carry out these important and beneficial monetary and fiscal measures or quickly devise and implement a visibly better alternative. All told, national interest must prevail.