Recession: It’s up to you, CBN tells government

CBN

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday admitted that its monetary policy tool has run out of options and that the economy could only get the needed support from effective implementation of fiscal policies.
 
The verdict formed the basis for the committee’s decision to retain benchmark rate at 14 percent and this confirms yesterday’s exclusive report by The Guardian about impending depression as there is no harmony between monetary and fiscal policies of government.

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence the economy. It is the sister strategy to monetary policy with which the central bank influences money supply.

CBN’s statement sends a wrong signal to the economy,” Dr. Franklin Ngwu, who teaches Economics at the Lagos Business School, said by telephone.

“There are good points to what Governor Godwin Emefiele is saying but there is supposed to be proper synergy between the CBN and government to bring confidence to economic agents and investors.”

Ngwu argues that giving “impression of exhaustion” shows that the CBN and fiscal policy makers are not prepared to bring robust economic policies to address the current economic challenges.

The National Bureau of Statistics (NBS) Monday announced a third negative growth in three quarters. The Gross Domestic Product (GDP) — one of the primary indicators used to gauge the health or size of a country’s economy — for third quarter (Q3) of the year shrank by -2.24 percent after recording -2.06 per cent in the preceding quarter ending June 30, 2016.

The apex bank after its committee’s meeting Tuesday retained all major rates. It kept the Monetary Policy Rate (MPR) — the minimum rate banks borrow from the CBN — at 14 per cent; Cash Reserve Ratio (CRR), 22.5 per cent; and Liquidity Ratio, 30 per cent. 
 The asymmetric window (representing allowance for banks’ lending) was left at +200 and -500 basis points around the MPR. This means the apex bank will lend to banks at 16 per cent and borrow from them at nine per cent.
 
This is the second time apex bank is keeping main interest rate on hold since the July increase to 14 per cent, as it strengthens its efforts to battle the galloping inflation.Emefiele, said inflation was largely structural and so the CBN’s current tight monetary policy stance combined with an improved agricultural harvest should limit growth prices of goods and services.
   
He said he would expect fiscal policy to do most of the work of improving Nigeria’s growth performance.“Considering the importance of price stability and being mindful of the limitations of monetary policy in influencing output and employment under the conditions of stagflation, committee decided unanimously in favour of retaining the current stance of monetary policy,” he said.
   
Meanwhile, the committee has urged government to devise strategies to settle its contractual obligations, which sit across all sectors of the economy.“These accumulated debts have slowed business activities of economic agents; most of who are indebted to the banking system, thus compromising the integrity of the financial system.

A day earlier, the NBS data on consumer prices for October also showed that inflation increased to 18.3 per cent year-on-year, a 0.4 per cent increase from September.
 
This 0.4 per cent increase in the inflation rate was slightly higher than the 0.3 per cent rate seen between August and September, and it marks the first time since May that the rate of increase in inflation was higher than it was in the previous month.
 
The President of Abuja-based Time Economics, Dr. Ogho Okiti, said with inflation at 18.3 per cent and the MPR at 14 per cent, leaving the real interest rate at -4.3 per cent, was an attempt to walk the tightrope between supporting growth and curbing inflation, and attracting foreign investors without raising domestic borrowing costs.
 
“It may be to properly examine the November and December inflation figures,” Okiti said.“Giving themselves a few more months to observe the direction of inflation will allow the MPC to determine if the trend has reversed in favour of a rising rate of increase in inflation or if this month’s increase was just an anomaly.
 
“They also considered the need to attract more foreign exchange into the country in the form of foreign portfolio inflows (FPI) to ease the pressure on foreign reserves and arrest the fall in value of the naira.”

Dr Ngwu disagreed with Okiti. “That our Gross Domestic Product (GDP) has declined for the third time in a row is of great concern and worry to all Nigerians. It clearly shows that there is an urgent need to rethink government policies especially the monetary, fiscal and supply side policies,” he said.

“The economic team should be strengthened with more capable hands with a clear economic direction for the country urgently provided. “For a start, we need to clearly identify our areas of comparative advantage which interestingly is in Agriculture and informal economy and then robustly support each of our six geo-political regions to specialise in two or three. Nigeria is an economy with two limitedly sub-economies —the formal 25 percent and the informal, about 75 percent.”

Ngwu advised the CBN to rethink its approach in policy formulation and implementation while government policies should be evaluated and approved based on their job-creating impact. “Outside good economic policies, of fundamental importance is the need to moderate the tone of governance from the current perception of division, acrimony and negativity to that of hope, unity and prosperity,” said Dr Ngwu.