Perfect storm, time to ease up

THE Nigerian economy has been buffeted by slow growth in the face of high unemployment and rising cost of living. Add high cost of borrowing, you get a perfect storm of stagflation, high misery index, and gross distortions of prosperity (GDP). A confluence of factors – precipitous decline in oil prices, fiscal leakages and mismanagement, low productivity and policy uncertainty – has contributed to the perfect storm.

In an article on “MPC at crossroads” in The Guardian of November 2014, this writer had warned that with the high rate of unemployment and jobless growth, it is safe to state that the economy is already below its potential output growth; and added to it are the potential recessionary gaps from realised and emerging shocks. With negative supply and oil price shocks, trying to aggressively maintain an inflation target could restrain output growth and worsen the unemployment situation. It was argued that there was no need for elevated policy action on the interest rate in the short term.

Recent data on inflation, output growth and unemployment now support that thesis, although the Fiscal Authority was in denial at the time while the Monetary Policy Committee (MPC) increased its monetary policy rate from 12% to 13%. This action, along with 22% devaluation of the naira, designed mainly to placate speculative foreign portfolio investors, still did not stop Nigerian bonds from being ejected out of the JP Morgan’s Government Bonds Index—Emerging Markets (GBI-EM).

Output growth rate has declined more sharply, with economic growth rate, according to NBS, slowing to 2.4% in second quarter of 2015 compared to nearly 4.0% in first quarter of 2015, and 6.2% in fourth quarter of 2014. The combined unemployment and underemployment rate has climbed up to 26.5%. Although the inflation rate has inched up to 9.3% as expected due to the depreciation of the naira, the interest rate is still high in real term and when benchmarked against comparator countries.

It is time to start easing up on monetary policy in view of the emerging stagflation, rising non-performing loans, and liquidity constraints engendered by the withdrawal of public sector deposits of N1.5 trillion ($6.5 billion) via the Treasury Single Account (TSA), and the expected foreign portfolio capital outflows ($2.0 billion) from the decision of JP Morgan to eject Nigerian bonds from its GBI-EM.

One would expect that the MPC, at its September 2015 meeting, would start bringing down significantly the MPR (13%), CRR (31%), and liquidity ratio (30%). It is sincerely hoped that the Central Bank and its MPC will not fall into the same trap of collective self-delusion of the speculative foreign portfolio traders and the erstwhile Fiscal Authority. This brings us to the composition and contributions of the Board and MPC of the Central Bank. It has been well noted that the external members of its board are predominantly non-economists.

As it stands, the MPC can be divided into four groups within a quadrant. The independent thinkers, comprising of three external members, have consistently argued their positions. Their positions are based on three different schools of thought—market-oriented, Keynesian, and monetarist perspectives. The second category is the groupthink category consisting of mainly three internal members, who try to reach consensus by shaping opinion.

The third category of free riders consists of two external members and one internal member, who simply regurgitate findings of the staff report. The fourth category of mediocrity consists of two external members and one internal member, who add no value to the discussion of the MPC.

Hopefully, the independent critical thinkers and the groupthink members will recognise the gravity of the economic situation and be able to make a strong case for relaxing monetary constraints.

Failure to address the perfect storm of stagflation, high cost of borrowing and gross distortions of prosperity may accelerate the landing of the tsunami that has hit the fiscal revenue-generating agencies and oil sector institutions at the doorstep of the monetary and financial regulatory agencies.
•Oshikoya is an economist.