MONETARY POLICY COMMITTEE as metaphor for the blind leading the blind
BY LES LEBA
Central Bank’s Monetary Policy Rate (MPR), in practice, is the strategic benchmark for modulating best practice standards in the critical economic indices of inflation, cost of funds and exchange rate. Consequently, the CBN’s MPR sets the standard for prevailing money market interest rates, as it represents the ‘penalty’ cost for banks’ that need to borrow short-term funds from the apex bank for whatever reason.
Thus, the higher the MPR, the higher also will be the rate at which banks will, in turn, lend to both their public and private sectors customers. Additionally, apart from cost, the CBN also controls the extent of available domestic credit by insisting that commercial banks keep specific proportions of their assets as cash or other readily convertible instrument. Thus, the higher the stipulated ratios for cash or liquid assets, the less will be the ability of commercial banks to also expand credit. Conversely, the lower the required ratios, the wider will be the credit that banks can extend to customers.
Last week, Monetary Policy Committee (MPC), which statutorily determines the CBN’s monetary benchmarks, unanimously decided to maintain its current tight monetary stand with the existing high monetary policy rate of 12 per cent, in order to restrain spending and drive inflation below the current level of about eight per cent.
The MPC report, however, recognizes that although the ultimate goal of transiting to a “truly low inflation environment" has remained unattainable, the current tight monetary policy had partially restrained credit expansion, particularly for federal government borrowings; nonetheless, the committee was, however, concerned that the growth of credit to the industrial sector, with its potential for increasing economic growth and employment opportunities, has regrettably continued to lag behind.
It is evident, nonetheless, that the Nigerian economy will never attain its real potential for rapid economic growth with increasing job opportunities and enhanced social welfare, with a high MPR, which may, indeed, attract speculative foreign investment inflows, but also has a downside of adverse consequences of real sector contraction with the threat of capital flight, at any slight hint of instability in both domestic and international economies.
The pertinent question, therefore, is whether we should continue to kill our industries and impoverish our people, so that foreign investors can feed fat on our government's economic folly of borrowing in spite of alleged systemic surplus cash induced by the same CBN.
Besides, we should also ask why the MPC’s attention is fixated on attraction of volatile foreign capital inflows, while our own Central Bank sits on an idle zero-interest-yielding cache of about $40bn.
Incidentally, the MPC comprises of highly accomplished men and women with great intellect, experience and education, but it must be worrisome that the focus of the committee's deliberation largely remains as an the attempt to sustain our festering economic sore rather than the actual healing of the malaise.
It is not rocket science to recognise that the prime cause of high rate of inflation, high cost of funds and a constantly challenged naira exchange rate can all be traced to the unabating existence of alleged ‘excess’ cash in the system. Evidently, when surplus cash is pitched against relative scarce goods and services in any economy, spiralling inflation will undoubtedly be the outcome; so also, if systemic surplus naira is constantly pitched against deliberately rationed dollar supply, a weaker naira will also be the product.
The Monetary Policy Committee is also not apparently concerned that the alleged surplus naira ironically exists side by side with scarcity of funds to build quality educational and health institutions or to indeed, deliver potable water and modern transport facilities to enhance mass social welfare.
It is inexplicable and worrisome that Nigerians, including professors of economics in various universities in Nigeria as well as the Nigerian intelligentsia at home and in the diaspora, have remained mute as a mule to Sanusi's unforced confession last year, that the CBN, and by extension, the Monetary Policy Committee, itself, had for decades, consciously sustained a very foolish policy of giving away government funds at zero per cent to banks, only to proceed soon after to borrow these funds back at a cost of between 12 and 17 per cent, and thereafter farcically simply warehouse the loan proceeds as idle funds.
The CBN Committee also mischievously concluded that "the recent pressure on the naira exchange rate was largely the result of forex outflows induced by the marginally improved rate of interest in the United States’ money market.
In reality, the MPC appears oblivious of the reality that the actual cause of subsisting naira depreciation is the alleged ‘eternally’ surplus naira in the system. Evidently, a weaker naira, not only instigates a rise in the general price level, but also makes the naira unattractive as a store of value, and such public perception of our currency will ultimately lead to capital flight. Worse still, a weaker naira, in spite of increasing oil revenue will also lead to higher domestic fuel prices, and the collateral of trillions more of subsidy payments annually. (See “The Avoidable Oppressive Burden of Fuel Subsidy” of November 2013, at firstname.lastname@example.org).
The real question is certainly how to address the true cause of ‘eternal’ systemic surplus cash. Observant Nigerians would have noticed that the CBN generally decries the existence of the villain of surplus cash soon after the monthly disbursement of hundreds of billions of naira allocations to the three tiers of government. Incidentally, in spite of 80% total distributed revenue being dollar-denominated, inexplicably, exclusively naira values are ultimately distributed. The substitution and supply of a unilaterally determined naira equivalent for monthly distributable dollar revenue inadvertently provides a platform on which banks can extensively leverage credit expansion, regardless of the attendant collaterals of unbridled inflation, high cost of funds, a weaker naira, increasing national debts and fuel subsidy values, not to mention the challenge of successfully deregulating the downstream petroleum sector.
Instructively, the adoption of dollar certificates for payment of monthly allocations of dollar-derived revenue will restore commonsense and sanity in the management of our economy.
SAVE THE NAIRA, SAVE NIGERIANS!!