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MPC and the blind leading the blind

By Henry Boyo

THE Central Bank’s Monetary Policy Committee, decided on Wednesday, April 4, 2018, to retain its Monetary Policy Rate (MPR) at 14 per cent, while mandatory Cash Reserve Ratio for banks, would remain at 22.5 per cent. Disturbingly, however, there is no real hope that, such rates which have subsisted for almost three years and inflicted so much social agony will now redeem the economy!

Clearly, the prevailing 14 per cent inflation rate will make Naira income earners poorer this year, while, industries will struggle to survive, if they pay well over 20 per cent to borrow. Similarly, government will be compelled to pay over 14 per cent to ironically borrow to service its risk free sovereign debts!

The above title was first published on October 5, 2015, when MPR was 13 per cent, CRR 25 per cent while inflation trended at 15.5 per cent; a summary of that article follows hereafter. Please read on.

“The Monetary Policy Committee is the ‘Think Tank’ for best practice strategies that should drive Nigeria’s economic growth and prosperity. Thus, if the MPC’s recommendations were appropriate, inclusive economic growth would evolve; conversely if MPC’s diagnosis and prescriptions are wrong, then our current stunted growth experience, must inevitably be the product of Policies mid-wived by the MPC.

Nonetheless, while the complimentary role of fiscal policy in a nation’s economic growth is undeniable, best practice money supply management, can however redeem a grotesque fiscal plan; conversely, an “excellently structured” budget will grossly diminish in value if extant monetary strategies sustain rising inflation with, increasingly high cost of funds and an unstable Naira exchange rate determined by fiat!

Consequently, a nation with a benevolent spread of latent wealth, with diverse agricultural and mineral resources, will remain poor if there is brazen indiscipline in managing its money supply; for example, if the authorities recklessly and liberally, continuously print or create money (values), inflation would hit the roof, and all income earners, will ultimately become traumatized and pauperized as the Naira’s purchasing power becomes steadily whittled down. Furthermore, subsisting high cost of loanable funds will also make sustainable real investments a challenge, and ultimately deepen our already suffocated job market to precipitate a wave of social insecurity! Consequently, the MPC’s role in promoting best practice management of money supply, is recognised to be pivotal for achieving enhanced social and economic welfare for our people.

Regrettably, however, for over two decades, the best efforts of MPC/CBN ‘collaboration’ have failed to successfully manage money supply and keep inflation, below best practice level of 2% to stabilize the value of all incomes; furthermore, subsisting monetary policy directions have also failed to bring down cost of borrowing, to supportive levels below 10%. It is clearly unrealistic and foolhardy to expect credible economic growth or indeed successful diversification, when cost of funds approaches 30% for real sector domestic investors.

Regrettably, however, it is inexplicable that despite Nigeria’s heavy unemployment burden, our MPC ‘Think Tank’ has, consistently endorsed inappropriately higher double-digit Monetary Policy Rates, which in turn, compel banks to lend to customers, including the productive sector at clearly oppressive rates, well above 20%.

Incidentally, when the MPC concluded its 103rd bimonthly meeting last week (21/9/2015), it retained its existing, anti-growth, 13% benchmark for CBN advances to banks, while it slashed the cash ratio, which commercial banks must retain as reserves, from 31% to 25%. The overt interpretation of such monetary indices, is simply, that CBN appears impervious to the crying needs of the real sector for access to cheaper funds; furthermore, the adoption of a cash reserve ratio which is as high as 25%, also suggest that the CBN clearly considers the prevailing level of money supply worrisome and counterproductive to price stability; consequently the apex bank’s intention is clearly to reduce both consumer spending and the capacity of banks to extend credit to their customers, despite the downside, that the high monetary policy benchmarks adopted for this purpose, would restrain investment and industrial capacity utilisation and significantly impede job creation in the economy.

Thus, for these reasons, the MPC’s regime of inflation and interest rates have historically been clearly out of tune for an economy with very low consumer demand, a shrinking industrial base, and an irrepressible and socially poisonous rate of unemployment.

“The MPC’s tight money policy is clearly traceable to the fear that a lower cash reserve requirement for banks will expand the economy’s already, dis-comfortingly bloated money supply to facilitate increased consumer spending, which could trigger inflation well beyond 10% to threaten price stability and the purchasing power of all Naira incomes”.

“Instructively, the recent enforcement of the Treasury Single Account, reportedly, led to a 10% reduction in the size of perceived surplus Naira supply in the system. Regrettably, this reduction appears to be clearly insufficient to tame the Naira liquidity surplus which drives oppressive inflation rates, and instigate higher cost of borrowing with collateral threats to job creation, social prosperity and national security.”

“The persistence of incurable systemic, surplus money supply, is clearly demonstrated by CBN’s notice of the 4th September, 2015, that it removes some of the perceived excess money in the system to restrain inflation by borrowing over N800bn from the money market between September and December this year (2015). Incidentally, the banking subsector, primarily, will earn between 12-15% interest on these loans which CBN will, inexplicably, keep sterile or idle in order to reduce the inflationary pressures propelled by the threat of unbridled systemic money supply, chasing relatively few goods and services.”

“Alarmingly, the CBN now makes annual interest payments of over N500bn to warehouse such ‘burdensome’ surplus cash it borrows and simply keeps idle in CBN vaults and records, while the real sector inexplicably suffers severe funding deprivations which invariably engender contraction in production and job opportunities. In this event, any sectoral cash intervention funds provided to stimulate economic activity and job creation, will inadvertently, ironically, further expand the subsisting bloated cash surplus in the system; so that, ultimately the additional liquidity injected will still be, indiscriminately subsequently mopped up also, once again, by CBN despite the attendant high interest rates that are clearly discordant with rates payable on sovereign risk free loans, particularly by a country with robust resource endowments such as Nigeria.”

Worse still, it has been suggested that the latest reduction of cash reserve ratio from 31% to 25% would supplement/compound liquidity by over N300bn; invariably, reduction in CRR will inadvertently also increase the CBN’s portfolio for idle debts which nonetheless, tragically attract industrially counterproductive interest rates. Incredibly, inspite of these policy contradictions, a gullible media and a trusting but misguided public still believe that the MPC/CBN will lead our nation to Eldorado.”



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