By Omoh Gabriel

Fiscal and monetary policies are the instruments government use to manage the economy. The main focus of economic policy is the over all well being of the citizenry. Economic policy worldwide is meant to gear the economy towards full employment of resources, stable prices, balanced growth, and a favourable external reserve as a back up to exchange rate stability. These overall objectives can be conflicting and it requires men and women with deep knowledge of the workings of the economy to manage the unintended outcome of policy. In Nigeria today, it will appear that monetary policy is concerned mainly with price and exchange rate stability with little concern for balanced growth and the attainment of full employment.

The bane of the Nigerian economy is low productivity with a large army of able bodied men and women who are looking for jobs that are not just available.

When the global financial crisis erupted in 2007, the various Reserve Banks employed measures that were not conventional to propel the economy. The US for a very long time has not supported private enterprise with tax payers’ money, but in order to pull the US economy out of the doldrum the sub-prime mortgage lending plunged the economy into, it evolved a stimulus package for industries to survive. The reverse seems to be the case here in Nigeria.

The CBN Monetary Policy Committee met on the 23rd and 24th of September 2013 to review the domestic and international economic developments. The MPC assessed the challenges facing the Nigerian economy in the near term, primarily since its last meeting in July 2013. At the conclusion of the meeting, the MPC maintained the following stance; 12 percent benchmark rate (MPR) with an asymmetric corridor of +/- 200bps, 12 percent Cash Reserve Ratio (CRR) on private sector deposits, 50 percent CRR on public sector deposits, Liquidity ratio at 30 percent of total assets, Net open position of 1.0 percent of shareholders’ funds.

CBN’s calculation is that it is better to have the current level of unemployment than trade some of it with inflation rate. A reduction in the monetary policy rate is needed now to grow the economy. The real sector of the economy, manufacturing and agriculture can not take loans at 22 percent. It is the real sector that can lead to the diversification of the economy, create jobs and bring about the transformation agenda being preached by all principal officers of the Jonathan’s administration. Portfolio investment, which the president and the minister of trade and industry are jubilating about are very transient. It is pertinent to grow the real sector and prevent the economy from any further decline as revealed in the GDP figures.

The CBN management team should put on a thinking cap and redesign policies that can offer affordable credit to the real economy, as any economy desirous of growth in real terms must encourage real sector growth by facilitating easy access to low cost funding and create an enabling environment for infrastructure delivery.

National Bureau of Statistics data suggests that real GDP grew by 6.18 percent in the second quarter of 2013, a drop from the 6.99 percent and the 6.56 percent posted in fourth quarter of 2012 and first quarter of this respectively. This is also lower than the projected GDP growth for the fiscal year at 6.91 percent. It is curious to note that the CBN monetary policy committee seems not to be worried that the National Bureau of Statistics has principally attributed the decline in GDP to the persistence drop in the contributions from the oil sector to the domestic economy. The oil sector output decline by 1.2 percent apparently higher than the 0.5 percent in the first three months of 2013 and in the first half of the 2013, principally due to the reported incidence of growing crude oil theft and significant revenue leakages in the oil sector.

The declining contribution of the oil sector to GDP further buttresses the urgent need to give breath to the real sector through access to cheaper funding, which the current interest rate regime cannot guarantee.
The decision of the CBN monetary policy committee to hold key policy rate may encourage further foreign funds inflow into the economy that could stem the pressures on the naira.  This approach certainly will continue to make Nigeria remain vulnerable to hot money reversals as a result of the quantum of Foreign Portfolio Investments in the country. The high interest rate environment and benign inflation outlook bear this out.

The persistent domestic foreign exchange demand pressures as rightly observed by the committee are from political activities and not for productive purposes. Allowing the political class to continue to put pressure on the exchange rate by the CBN gives cause for worry. It suggests that the CBN is dancing to the whims of the political class. Coupled with this, is the ever increasing dollarisation of the economy by the same political class.

The CBN says it remains committed to defending the naira, even if this requires depleting the nation’s foreign reserves. It has identified the major threat to the naira as the build-up of political activities, resorting to dollarisation of the economy. This remains a key risk to the stability of the naira. CBN should roll out policies that tackle this pressure point by insisting that all local payments, purchases be made in naira and refusing foreign exchange cover for imports that are not essential needs.

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