MPC and the blind leading the blind By Henry Boyo


The Monetary Policy Committee is the ‘Think Tank’ that designs the blueprint for best practice strategies that should drive Nigeria’s economic growth and prosperity. Thus, if the MPC’s recommendations were appropriate, and progressive, inclusive economic growth would evolve; conversely if the MPC’s diagnosis or prescriptions are off target, then our current stunted growth experience will inevitably be the product of implementating those Monetary Policies midwived by the committee from time to time.

Nonetheless, while the complimentary role of fiscal policy to a nation’s economic growth is undeniable, best practice money supply management, can redeem a grotesque fiscal plan; conversely, however, an “excellently structured” budget will grossly diminish in value if extant monetary strategies induce spiraling inflation, increasingly high cost of funds and a Naira exchange rate that is 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 purchasing power of the Naira 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 rising wave of insecurity! For these reasons, the role of the MPC in promoting best practice management of money supply, will be recognised to be pivotal for the achievement of 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 to keep inflation below best practice level of 2% and stabilize the value of all incomes; furthermore, subsisting monetary policy directions have also failed to bring down cost of borrowing, to the supportive level of middle single digit interest rates. It is clearly unrealistic and foolhardy to expect credible economic growth or indeed successful diversification, when cost of funds exceed 20% for domestic real sector investors.

Incidentally, the management of money supply is of universal application and a nation’s Central Monetary Authority may from time to time reduce or increase cash supply to control consumer consumption and also modulate the lending capacity in the banking system, in line with the peculiar needs of their economy. For example, when unemployment is so deep as in our case, Monetary Authorities will be expected to aggressively increase the supply of money and also crash the cost of funds to stimulate consumer demand and facilitate new investments.

Conversely, the MPC and CBN would be expected to promote policies that could reduce the extent of “spendable money” and deliberately also spike the prevailing cost of funds to discourage investment and consumption and reduce the perceived inflationary pressures in an economy nearing full employment by this process.

Regrettably, however, it is inexplicable that despite our abiding heavy burden of unemployment, our MPC ‘Think Tank’ has over the years, consistently endorsed inappropriately high double digit CBN benchmark interest rates, which in turn, readily set the pace for banks to lend to customers, including the productive sector at oppressive rates, above 20%.

Incidentally, when the MPC concluded its 103rd bimonthly meeting last week, it retained its existing anti-growth, benchmark cost of funds at 13% 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 the CBN appears impervious to the crying need of the real sector for access to cheap funds; furthermore, the adoption of a cash reserve ratio which is still as high as 25%, also suggest that the CBN clearly considers the prevailing level of money supply worrisome and counterproductive to price stability and the apex bank therefore intends 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 instituted would restrain investment and industrial capacity utilisation and also impede job creation in the economy.

Thus, for reasons best known to them, the MPC’s regime of inflation and interest rates are clearly out of tune for an economy with low consumer demand, a shrinking industrial base, and the attendant 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 an already, discomfortingly bloated money supply to facilitate increased consumer spending which could trigger inflation well beyond 10% and threaten the purchasing power of Naira incomes and the maintenance of economic price stability.

Instructively, the recent enforcement of the Treasury Single Account, allegedly led to a 10% reduction in excess liquidity. Regrettably, this reduction appears to be clearly insufficient to tame the oppressive burden of systemic excess money supply and the collateral threats to job creation, economic stability and social prosperity.

This persistence of incurable surplus money supply is clearly demonstrated by CBN’s notice of the 4th September ,2015 that it would mop up some of the perceived excess money in the system and restrain inflation by borrowing over N800bn from the money market between September 17th to the 3rd December this year.

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 contain the inflationary pressures propelled by the threat of unbridled money supply chasing relatively few goods and services.

Alarmingly, the CBN now pays over N500bn interest annually to warehouse 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 of production and job opportunities.

In this event, all sectoral intervention funds to stimulate economic activity and job creation, will inadvertently, further expand the bloated cash surplus already in the system, and become indiscriminately mopped up also once again with high such interest rates that are clearly discordant with rates payable on sovereign risk free loans by countries 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; in this event, the CBN may have by the reduction of CRR inadvertently also increased its portfolio for idle loans which attract oppressive interest rates. Incredibly, inspite of these policy contradictions, a gullible media and public still believe the MPC/CBN will lead our nation to Eldorado.