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Understanding the latest MPC communiqué

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In its latest communiqué No. 128, the Monetary Policy Committee (MPC) decided to change the cash reserve ratio (CRR) from 22.5 percent to 27.5 percent “as it will help address monetary-induced inflation whilst retaining the benefits from the CBN’s loan-to-deposit ratio policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards”. Also it was decided to “retain the monetary policy rate (MPR) at 13.5 percent; retain the asymmetric corridor of +200/-500 basis points around the MPR; and retain the liquidity ratio at 30 percent”.

To ascertain the effectiveness of the monetary tools calls for a little peep into previous MPC decisions with supporting statistical evidence of results where necessary. One, the MPR was raised from 12 percent to 14 percent, its peak, on 26/7/2016 and was adjusted to 13.5 percent on 25/3/2019. The above indicated +200/-500 percent asymmetric corridor has remained unchanged since 2016. The MPC would ordinarily raise the MPR above the level of inflation to dampen inflationary pressure. However, the country experiences unusually high inflation as a result of persistent excess liquidity caused by collusive improper fiscal and monetary practices. Thus caught betwixt and between, the MPC raised the MPR to its peak at a time the economy not only was in the thick of recession but also when inflation crested 17 percentile. That decision was regardless of the fact that raising the MPR would ordinarily worsen the recession, as the attendant increase in the cost of funds would discourage borrowing for production. Two, the cash reserve ratio (CRR) was last raised on 22/3/2016 from 20.0 percent. Three, the liquidity ratio (LR) of 30 percent has stayed unchanged since 2013 or earlier.

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However, CBN data over the last three years, for instance, show the banking industry average liquidity ratio was 45.6 percent at end-December 2017, 51-7 percent at end-December 2018 and 43.3 percent at end-November 2019 as against the stipulated minimum ratio of 30 percent. Hence, the set levels of CRR and LR have been too low and therefore ineffective to bring about optimal level of liquidity. Similarly not supported by available facts are the MPC claims in the earlier excerpt that the CBN’s loan-to-deposit ratio policy had significantly increased credit to the private sector as well as pushed market interest rates downwards. The CBN 2019 Fourth Quarter Economic Report (Q4ER) provides the following passable related information. Banks’ credit to the domestic economy at end-November 2019 stood at N23 trillion, which as a proportion of the 2019 GDP represented 15.8 percent as compared to 21.6 percent in 2018 and 22.8 percent in 2017. The report states, “The loans-to-deposit ratio at 62.9 percent at end-November 2019 was 0.7 percentage point higher than the level at end-September 2019, but 17.1 percentage points lower than the prescribed maximum 80.0 percent”. Thus contrary to the MPC claims banks’ credit to the domestic economy is trending downwards. Also the weighted average prime-lending rate (PLR) at end-December 2019 was 14.99 percent while the maximum lending rate (MLR) was 29.98 percent. Recall that PLRs and MLRs assumed such dimensions since 1987. So normal wriggling of interest rates within the established PLR-MLR band does not alter the fact that the country’s regime of high lending rates is not production-friendly. The upshot is the MPR is ineffective to control inflation and lending rates and so constricts lending for productive purposes.

Now, the MPR-in-corridor came into use beginning in December 2006. It is a heterodox method for setting dual apex bank interest rates, namely, the standing lending facility (SLF) interest rate and the standing deposit facility (SDF) interest rate. The MPR itself has no direct use. (By contrast, there conventionally exists a single central bank interest rate, which has direct application.) The highly injurious purposes which the MPR-in-corridor serves are best exemplified with CBN data. The 2019 Q4ER shows that the SLF interest rate of 15.5 percent fetched the apex bank interest earnings of N767.13 billion in that quarter while the SDF interest rate of 8.5 percent led the CBN to pay out N0.66 billion to deposit money banks (DMBs).

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The SLF and SDF interest proceeds over time lend themselves to the following breakdown, which necessitates to call a spade a spade. First, the SLF and SDF outcomes make it glaringly clear that CBN is engaged in profiteering trade to the detriment of the productive sectors of the economy in contravention of Section 34 of the CBN Act 2007.

Second, the SLF earnings represent extorted bank depositors’ funds, which, under conventional and competitive low single-digit lending rates, would be available for the DMBs to lend to the full spectrum of bank customers for the various interdependent economic activities.

Third, what the CBN terms SDF costs represent a small portion of the aforesaid extorted bank depositors’ funds being doled out as charity to subsidise DMBs, which are unable to lend available deposits for productive activities no thanks to CBN-induced unfavourable lending rates.

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Fourth, part of the SLF earnings crop up in the ubiquitous heterodox apex bank development funding of projects. In that scenario, the profiteering CBN merely offers a pittance of the extorted funds at more or less SDF interest rate to establishments which, as bona fide bank customers, should ordinarily access the initial DMB funds at low single-digit competitive lending rates. CBN here plays the colonial agent financier. In effect, the CBN has relegated its regulatory role and encroachingly takes over the traditional functions of lower banks in a manner reminiscent of a typical rampaging socialist regime of yore.

Fifth, the apex bank apparently deploys the bulk of the SLF earnings to underwrite heterodox double-digit interest yields of Open Market Operations and other instruments for liquidity management. To that end, the apex bank extorts and diverts bank depositors’ funds to reward and promote unproductive and rentier financial sector activities. The net injection of N2.4 trillion in OMO auctions with stop rates ranging from 11.50 percent to 13.40 percent in a single quarter (as contained in 2019Q4ER) evidences CBN’s misplaced priority. Conventionally, such financial transactions attract negligible (or nominal) interest rate thereby freeing bank depositors’ funds for lending to investors in various productive sectors of the economy. That informs the wide difference in the level of banks’ credit to the economy as a proportion of GDP which dropped to 16 percent in 2019 while that indicator for Malaysia exceeds 100 percent and reaches 200 percent and upwards for the U.S.A and Japan.

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It is difficult to understand why the MPC along the leadership of CBN strayed from its explicit statutory mandate. Of the 12 members constituting the MPC, 10 owe their appointments to the President with seven of them serving on the committee by virtue of holding other CBN positions. Two MPC members are nominated by the CBN governor. The MPC was set up, with a view to “facilitating the attainment of the objective of price stability and to support the economic policy of the Federal Government”. The first principal objective of the apex bank as enshrined in Section 2 of the CBN Act 2007 is “to ensure monetary and price stability”. The annual Appropriation Act (which in tune with the Fiscal Responsibility Act fixes the fiscal deficit ceiling of 3 percent of GDP) lays down the Federal Government economic policy from year to year. The CBN’s monetary and price stability mandate in conjunction with the Appropriation Act stipulated fiscal deficit ceiling defines the price stability inflation range of 0-3 percent concretely and nullifies the deficit monetisation of Federation Account dollar allocations, which accounts for the perennial excess liquidity and high inflation.

Doubtless, the MPR-in-corridor and other monetary tools have long ceased to serve any desirable economic purpose. The road to making the tools effective is for the MPC and its principal the CBN to obey the Appropriation Act and abide by provisions of the Central Bank Act. The MPC should pay full attention to Section 16 of the CBN Act 2007, which relates to the key element of FG economic policy, namely, the Appropriation Act exchange rate. Note that Section 16 stipulates that the exchange rate (the word is SINGULAR) of the Naira shall (it is by compulsion) be determined by a suitable mechanism (the word is again SINGULAR such as the single forex market system) as against the wrong PLURAL exchange rate segments and improper PLURAL (multiple) currency practices that have been in place for decades and have gravely encumbered the economy. The 0-3 percent price stability range resulting from the foregoing eliminates the MPR-in-corridor in favour of a single apex bank monetary rediscount rate thereby paving the way for a productive economy.

It is a shame that the MPC and the leadership of the CBN do blatantly flout relevant monetary and economic Acts and yet expect national economic progress.

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