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Monetary Policy as Tool for Economic Recovery

James Emejo assesses the effectiveness of monetary policy measures in enhancing output growth and recovery of the Nigerian economy amidst the adverse impact of the COVID-19 pandemic as well as summarises the outcome of the recent MPC meeting

The Nigerian economy posted a positive GDP growth in the first quarter of the year, further cementing its performance in the fourth quarter of the preceding year, which had help to exit the second consecutive recession in recent times.

Not many believed that the economy actually exited recession in Q4 2020, due to some theoretical misunderstanding on what should constitute an exit from recession.

While some analysts believed that if it took two consecutive quarters of negative growth to fall into recession, it also required two consecutive quarters of positive performance to exit the downturn.

However, another school of thought had argued that it requires only a quarter of positive growth to exit a recession – and this argument appeared to align with the books.

Nevertheless, the Q1 2021 GDP performance of 0.51 per cent and 0.11 per cent in the preceding quarter had finally settled the dusts – as everyone now agrees that the Nigerian economy has effectively exited recession, though still fragile.

Nonetheless, a post-recession has considered the role of the monetary authority in stimulating growth as well as pulling the economy of the woods.

Many believed the Central Bank of Nigeria (CBN) played a dominant role and deserved credit for the resuscitation of the economy following the bank’s historic and aggressive interventions in critical sectors of the economy particularly agriculture and health among others.

Analysts also agreed that the apex bank had effectively deployed its monetary and developmental intervention tools to weather the storm.

The CBN’s COVID-19 Targeted Credit Facility for households and small businesses, for example, through which about N300 billion had so far been disbursed, had been a major relief for beneficiaries and had been able to provide some level of stability to Nigerians, apart from other regulatory forbearances in the financial sector which was initiated by the CBN.

With severe inflationary pressures amidst declining productivity, and volatility in oil price, the CBN has had to fall back on the use of development finance tools to stabilise price and achieve other macroeconomic objectives which had kept the country afloat.

Also, confronted with daunting macroeconomic challenges, the MPC which appeared less swayed by the dangers of posed by inflation which is far above the Monetary Policy Rate (MPR), rather than tighten policy instruments at its recent meeting, decided to retain interest rate at 11.5 per cent.

Providing insights on the committee’s resolutions as well as appraisal of the apex bank’s contribution to output growth, CBN Governor, Mr. Godwin Emefiele, said: “I think it’s important to say that for us at the CBN we are not surprised. We are not surprised because if you recall, Nigeria is just one country that is peculiar for what I call a situation that is out of the ordinary, because you find Nigeria among several countries, being one country that is challenged by stagflation.”

According to him: “Stagflation is a situation where inflation is running high, prices are being high and at the same time output growth, in this case the GDP is contracting.

“And if you understand how this works, you will find that as monetary policy committee, your core responsibility is to rein in inflation by ensuring that you keep supreme your price and monetary stability mandate.

“And to do so means that you have to tighten to be able to rein in inflation.

“On the other hand, the economy is confronted by a contracting output where growth is negative and the normal way in economics you would want to really recover from a contracting economy is to stimulate the economy with a lot of easing and injecting liquidity into the system to stimulate consumption and investments; increase government expenditure, increase export earnings and possibly see what you can do to reduce your imports. That is basically the definition of output growth.”

He said: “But what did we do? At the monetary policy, particularly at the last meeting, we said we would try as much as possible to be pro-growth so as to continue to see what can be done to accelerate output, but at the same time put an eye to whatever can be done to rein in inflation.

“And in doing this what did they say? At the last meeting, MPC said we are going to adopt a series of systematic synchronisation of monetary policy variables that will help to rein in inflation and at the same time boost output.

“MPC also encouraged the management to adopt some form of administrative measures to mop up liquidity or to control money supply in the system and in the process rein in inflation by reducing money supply that would help to control inflation while at the same time, because what you would find when you rein in inflation by mopping liqudity is that it becomes constraining but at the same time on the output side.

And what should we be doing? Let us use our development finance tools to boost output by ensuring that liquidity and funding is made available at concessionary rates to employment generating and output stimulating sectors of the economy.

“It is not surprising that we are seeing what we are seeing now. What monetary policy decided we should be doing today is how do we proceed, what are those indicators that led to us having these kinds of results?

“And that was why MPC said let’s hold, look at those items – For inflation, continue your administrative measures, on the output side, continue to use your interventions at subsidised interest rates to agriculture, manufacturing, to targeted credit facilities, make sure we are able to stimulate consumption and investment that will ultimately yield results and growth for the economy.

He said indeed, out of the targeted credit facility we have, almost the whole of N300 billion has now been disbursed and monetary policy committee has encouraged the management to increase it even to N400 billion.

“So what does that also mean? More money is going to be made available to households, to small businesses for them to go back to business, which will ultimately yield employment and also grow our economy.

“So, for us, it is not science, when people begin to say they doubt all the numbers the National Bureau of Statistics (NBS) is releasing, I think they are speaking from a position of being uninformed about what is happening in the Nigerian economy.”

Retains Monetary Parameters

However, the CBN had resolved to retain Monetary Policy Rate (MPR) otherwise known as interest rate at 11.5 per cent.

The MPC also voted to maintain the asymmetric corridor of +100/-700 basis points around the MPR and left the Cash Reserve Ratio at 27.5 per cent and Liquidity Ratio at 30 per cent.

The MPR is the rate at which the CBN lends to commercial banks and often determines the cost of borrowing in the economy.

In arriving at a decision to hold the rates, the CBN governor, said whereas the committee remained overwhelmingly committed to supporting the efforts of the federal government in ensuring full restoration of the productive capacity of the economy, members remained much more focused towards achieving price stability in the short to medium-term.

He pointed out that economic growth could be hampered in an environment of unstable prices adding therefore, that the choice was between loosening the stance of policy to ease credit further or tighten to moderate price development or maintain a hold stance in order to allow previous policy measures continue to permeate the economy while observing global and domestic developments.

Emefiele argued that an expansionary stance of policy could transmit to reduce pricing of the loan portfolios of deposit money banks and result, therefore, in cheaper credit to the real sector of the economy.

He, added, however, that this expected transmission might be constrained by persisting security challenges and infrastructural deficits.

“On the other hand, while a contractionary stance will only address the monetary component of price development, supply side constraints such as the security crisis and infrastructural deficits can only be addressed by policies outside the purview of the central bank.

“A tight stance in the view of members, will also hamper the bank’s objectives of providing low cost credit to households, Micro Small and Medium Enterprises (MSMEs), agriculture, and other output growth and employment stimulating sectors of the economy,” he said.

Recommendations to Fiscal Authority

However, the CBN, while commending government’s efforts in combating the headwinds imposed by the pandemic, urged the latter to avoid an entire nationwide lockdown as was experienced in 2020, adding that this will reverse the wholesome gains jointly achieved between the government and the apex bank in response to the outbreak of COVID-19.

He said the MPC carefully assessed the options on direction of policy in the short to medium term and re-appraised current measures by the government to purchase COVID-19 vaccines and the general preparedness of relevant public health agencies to guard against the spread of the mutating strains of the virus.

To this end, the CBN governor said the committee noted the appropriate steps taken by the government to ensure that up to 70 per cent of the populace get vaccinated to drastically drive down the infection rate in the country and hence, sustain economic activities.

He said: “The committee noted the persisting security crisis, especially in major food producing regions of the country and the severe toll on food supply and prices. It noted that inflation had moderated marginally due to the unrelenting effort of the bank in supporting agriculture to boost food supply and prices.

“The committee, thus, re-iterated its call to the government to intensify effort towards addressing the security situation in the country to ease supply bottlenecks and bring down food prices.

“The MPC further noted government’s commitment towards investing in public infrastructure despite constrained fiscal position and urged a continued focus on this objective, while exploring the option of effective partnership with the private sector, as improved road networks, telecommunications and power supply will greatly and proactively impact the supply chain and moderate price increments.”

Emefiele also stressed the need for collaboration with Nigeria’s huge diaspora, through the issuance of diaspora bonds targeted at specific infrastructure projects.

This is even as the committee noted that the public debt stock was currently high, it was of the view that project specific diaspora bond issues could conveniently pay itself back without imposing a burden on government finances.

The committee also noted the complementary role this would play in boosting foreign exchange supply, accretion to reserves and easing of the current exchange rate pressure

Analysts Appraise Policy Initiatives

However, analysts in separate interviews with THISDAY expressed their opinions on the CBN’s execution of its primary mandate of price stability and fighting inflation particularly in the current situation where the bank had retained monetary policy tools.

An economist, Dr. Muhammad Rislanuddeen, said the position taken by the MPC was the best option in the circumstance.

“Given the fragility of the reported GDP growth, maintaining status quo is the best option as reduction in MPR will be a disincentive to critical investment needed to consolidate on the GDP growth.

“Also increase in MPR perhaps to support more foreign direct investment will simply be inflationary and further worsen both the already high inflation and unemployment situation and also impact negatively on the sluggish GDP growth.”

Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, also aligned with the policy direction of the apex bank.

He said: “CBN was right to retain MPR at 11.5 per cent, though far lower than inflation rate. The reason for retaining rates could not be far from maintaining stability already achieved in interest rates, exchange rates and other monetary policy indicators.

“Increasing MPR would lead to increase in interest rates and increase in inflation rate. Reducing MPR would lead to increase in money in circulation and increased pressure on FX demand. So retaining MPR was the proper thing to do.”

On his part, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, was of the view that the challenges faced by economy continue to be structural, pointing out that the central bank had limited influence in intervening in that aspect.

He said insecurity, lack of power and generally poor infrastructure were still the major issues affecting the economy stressing that these have to be tackled on the fiscal side.

Shelleng said: “The apex bank has maintained its stance of not wanting to rock the boat amidst multiple fiscal challenges. With the country seemingly out of recession according to recent GDP figures, it has justified the central bank’s hawkish stance.

“Whilst maintaining a double digit MPR amidst a low growth environment may be considered detrimental, the peculiar nature of the inflationary drivers in the country may have justified the CBNs decision to hold.

“Cost push factors have been mainly caused by structural/fiscal challenges and as such have been out of the purview of monetary policy.

“Given the illiquidity of FX, it has also been vital for the apex bank to maintain attractive rates to continue to lure portfolio investors.”

In his contribution, Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Abuja Branch, Prof. Uche Uwaleke, further backed the resolution of the CBN to leave policy rates unchanged.

He said: “I think a hold position was the most expedient decision to take given the prevailing economic condition of the country.

“As long as stagflation continues to challenge the economy, the CBN’s monetary policy stance will be dictated by the need to strike a balance between tackling inflation and supporting economic growth.

“Against the backdrop of elevated inflation, a reduction in MPR or other policy parameters, though persuasive, will only serve to worsen forex pressure despite recent attempt to unify Exchange rates, and exacerbate inflationary trend.”

He said: “On the other hand, given weak economic growth and the need to support an economy still reeling from the impact of COVID-19 pandemic, tightening monetary policy via increase in MPR is capable of rolling back the modest progress being made.

“It’s instructive to note that the non-oil sector GDP actually tanked during the first quarter of 2021.

“So, maintaining the status quo while strengthening the CBN’s intervention initiatives in critical sectors of the economy is a wise decision.”

However, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said: “The CBN has taken the cautious stand again by retaining the MPR at 11.5 per cent”.

He said: “These measures have increased inflation in the past and the various CBN interventions have still not yielded positive results to turn around the economy.

“To increase productivity in the economy, there should be the loosening of policy stance of MPR to allow more access to capital by key sectors of the economy. If we want continuous improvement in the GDP and be on the road to substantial recovery of the economy.

“The MPR policy stand has made the Naira to witness continuous devaluation month on month. The CBN has not been able to generate enough forex to service demands by forex users thereby hampering productivity.”

Olive Branch for Bandits

Yet another major highlights of the MPC engagement was Emefiele’s plea to bandits terrorising the country and others involved in unlawful activities to drop their arms and embrace the central bank’s Anchor Borrowers’ Programme (ABP).

According to Emefiele, his appeal to criminals to embrace family is because there is a linkage between security and economic growth.

Responding to a question, he said: “If you want an economy to grow, the level of insecurity must be low because if there is a high level of insecurity like what we see today, the economy will suffer.”

He added that security agencies were doing their best to tackle insecurity.

“Efforts are now targeted at the south-eastern and north-eastern parts of the country. About three years ago, the federal government and the United States signed a pact that resulted in a government-to-government acquisition of military equipment.

“Out of which, we are expecting 12 fighter planes that would help us solve our insecurity. I am aware that six of them are coming to the country in the month of July and August.

“I, therefore, would like to appeal to our brothers, who decide that they want to live in bushes and forests, that they should please, begin to retreat, drop their arms and come and embrace the anchor borrowers’ programme.

“If they do so, it will help them; if they choose not to do so, they will be confronted by the security as this battle continues.

“I am optimistic before the end of the year that the security challenges confronting the country will substantially abate.”

Cryptocurrency Crash, Victory for CBN?

On whether the CBN had been vindicated following the crash of cryptocurrency market after the apex bank had opposed its operations in the country, Emefiele said it was not about CBN being vindicated, adding the CBN investigated and found out that a substantial percentage of Nigerians are involved in cryptocurrency which is “not the best.”

He said: “Don’t get me wrong, some may be legitimate, but I dare say most are illegitimate and I will corroborate that. Under cryptocurrency and bitcoin, Nigeria comes second right? But in the global size of the economy, Nigeria comes 27th.

“So do you think that there is some correlation? You think those countries whose economies are second and 26th will allow you to grow your cryptocurrency business to second position, if what is inside is a big deal that is going to profit everybody?”

Emefiele added: “Of course, we saw it that the market collapsed…Elon Musk twitted sometime about the time the CBN said our banking and payment infrastructure will no longer be available for cryptocurrency transactions – he twitted, that he was going to invest about $1.5 billion in crypto and the rates went to the highest roof.

“And he then twitted again and raised a few concerns and the thing plunged. Elon Musk had himself decided that he will no longer deal in cryptos.

“And so if a man who felt it was good suddenly decides to say it’s no longer good and then you…don’t forget, those who invented crypto said it is encrypted.

“When they say it’s encrypted, it means that whatever is happening between me and you is only known to the two of us. And you know what? In case I defraud you because it is encrypted, you can’t even disclose my name and you can’t even get your money back.”

Digital Currency for Nigeria

Emefiele had also hinted that the idea of operating a digital currency will soon become a reality in the country, adding that the central bank had already set up its committee, which is working on the project.

According to him: “That is not what a responsible central bank would support. I have heard about digital currency, we are working on it, we have set up our committee at the CBN and I can assure everybody that digital currency will come to life even in Nigeria.”

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