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Monetary policies and the economy



Godwin Emefiele, CBN Governor

THE Monetary Policy Committee met late last November, but its decisions may not achieve the stated objective of spurring deposit money banks to increase credit delivery to the key growth sectors of the economy capable of generating employment opportunities and improving productivity particularly in infrastructure, agriculture and solid minerals. The various economic sectors are inter-dependent and any attempt to pick specific sectors for preferential treatment, and without a holistic approach, is unlikely to solve the economic problem in focus. The limited successes of the CBN’s special intervention funds make such decisions unwise.

Nigerians are concerned that the CBN, admitting the source of the myriad economic problems, had proposed eight years ago to adopt the best-practice procedure that would guarantee beneficial impact of monetary policy measures through the proper handling of Federation Account dollar allocations only for the plan to be countermanded. At the November meeting, the first MPC decision involved reducing the cash reserve ratio (CRR) from 25 per cent to 20 per cent in order to inject liquidity into the system. Considering that the economy is perennially plagued by excess liquidity, the MPC merely enacted a ritual that fell short of addressing the problem. A historical glance reveals that the CRR ranged from 1.0 per cent with effect from April14, 2009 to 31.0 per cent set on May 19, 2015 (ignoring the different CRRs fixed for public sector funds on a few occasions before the implementation of the TSA recently. The fluctuations of the CRR made no difference to the wobbly economy.

Secondly, the MPC fixed the monetary policy rate (MPR) at 11 per cent within the asymmetric corridor whereby deposits made by banks with the CBN would earn four per cent interest. Yet, citing the need to encourage banks to free up resources to enlarge the credit market, the MPC in 2007 rightly made DMB deposits in the CBN ineligible for interest payments. But that decision was reversed in 2009. Why should the apex bank, which does not invest the DMB deposits in its vault, wrongly reward the banks sinecure-like for failing to lend such funds to the credit-starved sectors of the economy? Worse still, there had been all the while over 50 per cent (it is currently over 70 per cent) of banking sector lending capacity lying un-accessed owing to unattractive lending rates.

From Nigeria’s independence up to 1981, bank weighted average prime lending rate moved between 6.0 per cent and 7.7 per cent. In the 34 years since then, the rate jumped to investment-unfriendly double-digit levels that fell between 10.0 per cent and 15.0 per cent during only six years (none of which was after 1997) and fluctuated between 15.8 per cent and 29.8 per cent in the remaining 18 years. Since 1982, the weighted maximum lending rate has ranged from 11.5 per cent to 36.1 per cent. Propped by high inflation levels, the unattractively high lending rates not only debunk the low official fiscal deficit figures but also perfectly reflect the much higher actual fiscal deficits incurred, no thanks to the Presidency-induced CBN deficit financing being substituted for withheld oil export proceeds in the federal distributable pool.

The crushing price being paid for the faulty treatment of Federation Account dollar allocations includes CBN’s choice of methods that deplete the federal kitty and dissipate public sector forex in its ineffectual management of the resultant perennial excess liquidity. In the process, non-investable or sterilized excess liquidity funds have been accumulated as national domestic debt (NDD) that has risen to over N11 trillion. The annual domestic debt service payments today top N1 trillion. Two, by 2000, the naira exchange rate of N102.11/US$1 represented 99.5 per cent depreciation from the peak naira exchange rate of N0.55/$1 in 1980. At N197/$1 last November, the naira had suffered a further 48.2 per cent loss in value from its 2000 mark.

Three, to crown the harvest of unattractive lending rates, the Federal and State Governments and even interested big private enterprises in the country now cite lower interest rates to justify contracting external loans instead of borrowing domestically. Such loans, which pose future balance-of-payment risks, attract interest charges that are slightly higher than what was locally obtainable up to 1981 before double-digit lending rates became the norm following the insidious effect of the improper handling of the dollar accruals to the distributable pool since the demise in 1971 of the Bretton Woods system of fixed exchange rates. Besides, while domestic bank lending capacity in excess of the equivalent of $355 billion remains unutilised because of prohibitive lending rates, President Buhari recently in South Africa beseeched China to come and develop Nigeria and the rest of sub-Sahara Africa with $60 billion pledge of financial assistance to be spread over several years!

It is worth restating that only the implementation of the aborted CBN proposal on August 14, 2007 regarding disbursement of Federation Account dollar allocation in a secure form to all tiers of government for conversion as and when desired to naira revenue via deposit money banks will stem and subsequently reverse the dismal economic trends. Notwithstanding the sharp drop in oil export receipts, the economy remains well placed to generate ample forex for complementing imports needed for development just as the country, subject to proper management of the available resources, can self-finance its economic recovery and rapid inclusive growth. Fair-weather foreign direct investment should merely be a welcome supplement.

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