The action of the Central Bank of Nigeria (CBN) holding rates steady for the 15th time in the last 30 months portrays the apex bank as one that would rather err on the side of caution rather than initiate policy that can move the economy forward.
The CBN, by a unanimous vote kept the Monetary Policy Rate (MPR) at 14 percent, thus drawing a horizontal line across the economic timeline of the country since July 2016. The MPR is the rate at which the CBN lends to commercial banks and often determines the cost of borrowing in the economy.
The objective for remaining cautious was to achieve some level of stability in key economic metrics including the exchange rate of the naira against major currencies. To the CBN’s credit, convergence has been achieved between the Bureau de change and the parallel market rates. While this is commendable, I believe that that cycle has been left to run for too long and it is time for the Central Bank to take the economy to a different level; one that is based on expectations of the events leading up to the election.
The nea Dovish stand of the CBN is occasioned by its decision to await clarity on macroeconomic performance after the general elections in February and March 2019. Although said to be based on perceived confidence by foreign players and influx of foreign capital into the Nigerian economy, despite the perception of election risk, it is a reactionary stand. The Godwin Emefiele led CBN has always been reactionary. They have the opportunity to influence that outcome but chose to fritter it away. This is surprising giving that it is in its mandate to influence and engender macroeconomic outcomes. Why wait for it to get into a certain situation before ‘intervening’? This may inadvertently slow down the economy further, especially if oil price is challenged in the midst of our revised low OPEC production quota.
The expectations that politics induced cash will flood the system in the weeks leading up to the election in addition to developments that have come prior, like restriction in food supply from herders/farmers clash are likely to lead to spikes in inflation. Raising rates by a few basis points can checkmate that.
On the other hand, businesses and households are likely to be wary about spending during the election and instead keep a stash of cash waiting for the dust of the uncertainties surrounding the elections to settle in which case, the CBN should be able to encourage them by cutting rates.
The two scenarios present an either or situation for the CBN; control inflation or encourage growth. But the institution would rather sit on the fence and wait for dust to clear instead of taking control and direct the economy.
But Emefiele argues that he is vacillating because either option will not augur well for the economy. According to him, to loosen is not an option; he stressed that going by the observed risk confronting the economy, including the global and domestic inflationary pressures, which have intensified the risk of currency depreciation, the MPC was of the view that a loosening option was very remote.
Similarly, he will not tighten reason being that ‘weighing the balance of its judgment on price stability conducive to growth, tightening would result in the loss of the gains so far achieved, noting that this may drive the banks to re-price their assets; thus increasing the cost of credit as well as elevating credit risk in the economy, adding that it will also worsen the position of non-performing loans of the banks.
The MPC further observed that tightening monetary policy would dampen investments and hamper improvements in output growth, given the already fragile growth performance so far achieved.
While these arguments may appear compelling, they are merely speculative and born out of indecision, a morbid fear not to appear as the one to upset the apple cart. The same inability to act played out in the face of a raid on the naira just before the economy slumped into recession. It is time the CBN shed off this Hamlet effect of reciting ‘to be or not to be’ and take positive action towards directing monetary policy either to encourage growth or tame inflation.
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