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Reflationary imperatives for monetary policy

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Economy-spectacles-1THERE is now a prevailing consensus that the Nigerian economy is in dire need of reflation if as a country we will continue to keep fidelity to the promise of improved quality of life for our citizenry which is the essence of governance. One growth sector in the economy today is the unemployment market.

There is no household in this country which has not been visited by this dehumanising scourge and therefore, the first order of business for the current administration is to deliberately create and grow job opportunities even if we have to trade off rising inflationary spiral.

President Barack Obama, when he assumed office in 2008, inherited the worst economic situation. Unemployment, which reliable figures were trending upwards, was religiously tracked every month and there were massive closures on mortgages as the bubble burst on the housing sector and companies were going bankrupt. Obama did not resort to allowing the retrenchment on the economy even against unprecedented budget deficit situation.

He decided even in the face of the unprecedented downturn to reflate the economy. It will be recalled that General Motors and Chrysler were amongst the companies which benefited from the 2009 auto bailouts. He even gave tax breaks to individuals, increased pensions and recorded the worst deficit in recent memory. Obama won effortlessly his re-election and he is basking in the glow of this wonderful feat. There are lessons in this anecdote for the Buhari administration!

This success could not have been recorded if the Federal Reserve did not align itself to adopt a posture that aided the reflation of the economy. The Fed followed the example of the fiscal authorities by sustaining its accommodative stance which commenced in 2003 by first reducing the MPR from 5.25% to 4.75% and at some point in time, the rates were at 0% by the end of 2008 as the depression intensified. But the stock market received a shot in the arm as investors discouraged by non-remunerative returns on money market instruments had nowhere to go but the stock market and therefore, the market, did not have any alternative but to be bullish. Business got transfusion as it were with reduced cost of borrowing to grow productivity and jobs and there was evident rebound of the housing sector and as a matter of fact, a wholesale rebound of the American economy.

Now, let us contrast the scenario above with the decisions taken by the MPC at their meeting which was held on Monday/Tuesday, September 21 and 22, 2015. Before we go into the details of the outcome of this meeting, it will be salutary to gauge the expectations. I recall that when asked of my expectations of the outcome of the meeting, I promptly retorted that on this occasion that a hold decision was certainly out of the question. I gave my reasons for this conclusion based on the recently enforced Treasury Single Account (TSA) which was widely reported to have drained an estimated N1.2 trillion from the banks, the delisting by JP Morgan of Nigerian Bonds from its Emerging Market Government Bond Index that immediately resulted on bearish sentiments ruling the stock market, the declining GDP rates, rising inflationary spiral and above all the emerging consensus to reflate the economy.

I then predicted that the reserve ratios will be changed and that, in fact, there was no longer need for the reserves on public sector deposits if public sector funds were being moved to the Central Bank under the TSA platform and that I expected that the reserves on the private sector deposits which were harmonised at 31% will be reverted to status quo ante of about 23%. I predicted that the liquidity ratio will be reduced to positively impact the cost of funds for the banks and that the MPR which has remained at the same rate for almost four years will be reduced albeit notionally to signal the desired direction of policy in this regard. But what was the outcome of this meeting? There was surprisingly a hold decision except that I am sure the governor must have prevailed to achieve a reduction in the cash reserve ratio from 31 to 25%.

Reading the governor’s agenda which he presented upon assumption of office, he clearly indicated his readiness to see a Central Bank that would adopt a developmental posture; that would be concerned about the unemployment levels and overall wellbeing of a generality of the citizens of the country. In fact, he made the point that the data on unemployment would be a regular input to the decision of the MPC under his watch.

Bismarck Rewane tells us that those of us who are against the devaluation of the naira are not: “Market intelligent Economists!” As far as die in the wool economists are concerned, inflation is trending upwards and if anything, you can only be tightening up by increasing interest rate which probably explains why the MPR has remained static for almost four years now. Bismarck thinks that all we need is a devaluation of 10% and we will arrive at Eldorado! But under the administration at the apex bank, despite the advertised known aversion of the governor to devaluation, naira has been devalued by about 23% in under one year! If we followed Rewane’s recommendation and devalued by another 10 per cent, we would still be facing the same challenges except there is a sudden rebound at the oil market.

What devaluation does in our environment is that it imports inflation, exports badly needed jobs and has not be shown to be an effective allocator of resources and most certainly undermines local production and this is why in as much as we do not say you cannot throw in devaluation as a mix of policy, devaluation cannot be the panacea it is being claimed to be.

It was recently reported that the Federal Government wants the Central Bank and the Pension Commission to provide funds at single digit interest rates for the financing of project in the power sector. I hope that this has been correctly reported as Pencom is most certainly not in the business of extending credit and playing financial intermediation role.

It is not cut out for that and even its enabling Act is quite rigid regarding the sort of asset structure it is allowed to hold consistent with the need for prudence to hedge against risk of massive loss which would jeopardise the interest of pensioners. But the need to reflate this economy now is no longer negotiable and the sooner the MPC takes a cue from the experience of the Fed and aligns its decisions accordingly, the better for all concerned.
•Dr. Chizea wrote from Lagos.


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