Last week, The Central Bank of Nigeria Monetary Policy Committee increased the monetary policy rate for the umpteenth time in the last two years. This was despite public opinions against the move. The monetary policy rate represents the lending interest rate at which the CBN lends money to the deposit money banks if and when any of the banks have a liquidity problem and need a loan to meet customers’ demands. By this, the rate serves as the signal for banks to increase or decrease their interest rates on loans to their customers. It is the minimum a bank can charge its customers. By implication, an increase or decrease in the MPR by a central bank signifies to the deposit money banks to increase or decrease their lending rates.
Prior to the meeting of the 296th meeting of the MPC last week, the organised private sector and individuals warned that an increase in the MPR would further worsen the inflation status in Nigeria as the cost of running businesses would rise significantly. At the end of the meeting, the CBN, in line with the decision of its committee, raised the MPR by 50 basis points to 26.75 per cent from 26.25 per cent. The CBN claimed, as usual, it was to control inflation as “prices are expected to moderate in the near term.”
Surprisingly, the CBN attributed rising prices, especially food inflation, to insecurity in the food-producing areas and the high cost of transportation, as well as some other variables in the structural realm of the economy. That is, the CBN does not see its interest rate hike as one of the major contributors to inflation but views the use of monetary policy, in this case, interest rates, in moderating inflation.
For over 20 months or since the time of Godwin Emefiele as the Governor of the Central Bank of Nigeria, the bank has been using an interest rate hike to fight inflation and it has not worked. The CBN action conforms with the World Bank/IMF doctrine which has been the economic policy guidepost of this government and the source of economic woes we have been facing. Inflation in Nigeria is more of a structural than a monetary phenomenon. The only monetary element is the exchange rate which also has a root in structural factors. We saw how recent massive exchange rate depreciation caused rapid inflation and the price deceleration that followed the appreciation of the currency when the CBN took appropriate action.
Savings do not respond to interest rate movements as they do with income in Nigeria. If we improve the income of citizens, savings will grow and taxes will also grow as both are derivatives of income. More appropriately, the interest rate that is going up with the MPC’s policy is the lending rate rather than the savings rate. The savings rate in Nigeria currently remains below 10 per cent. There is hardly any business you do in Nigeria that will give you an annual profit of 20 per cent except forex speculation, but the lending rate in Nigeria is over 30 per cent! The policy is killing all types of businesses and by extension, employment and personal incomes, and government revenues.
In economics, and I suspect in other disciplines, we have positive, negative and neutral feedback. Thus, for monetary policy, we have positive monetary feedback, negative monetary feedback and neutral monetary feedback. The same goes for fiscal policy, trade policy, et cetera. As these concepts imply, positive feedback means that the outcome of the policy is in tandem with the objective that leads to initiating the policy; while negative feedback means that the condition the policy is trying to solve worsens; or refuses to change for the better or for worse in the case of neutral policy feedback. Each of these outcomes would elicit a policy response. Both negative and neutral feedback requires change in policy while positive feedback requires policy follow-through. Every past increase in interest rate by the MPC has led to worsening inflation, and the committee did not think of a reversal!
When the President was sworn in, he declared that the subsidy on fuel was removed and the immediate response of the economy was a sudden increase in prices in virtually all sectors and all products. The prices of consumer goods rose, transportation costs shot up, prices of petroleum and diesel jumped up and the price of electricity also rose: all in response to the removal of subsidy on petrol. Thereafter, and while the effects of oil subsidy removal have not settled down, the economic managers directly removed subsidies on electricity tariff to allow electricity distribution companies to raise prices in adjustment to cost. The same was allowed in the telephone sub-sector and others. Workers’ salaries were held down, taxes and levies increased, money was withdrawn from the economy to negatively affect consumer purchases, unemployment grew, insecurity and living conditions worsened. Overall, the poverty level or economic hardship increased, and we are still living with that today. The policies were giving negative feedback, and the financial managers continued looking for further subsidies to remove and economic activities to tax.
Within a twinkle of an eye when the President removed the petroleum subsidy, the foreign exchange market was attacked. Different exchange channels were merged to unify the forex market. The forex market was thrown open to market forces without consideration for the peculiarities of our circumstances and the need to put in some restrictions. Even in advanced economies, the market is not entirely in the hands of the market mechanisms. For instance, it is impossible to take cash of $10,000 out of the United States or the same amount in pound sterling out of the United Kingdom. Here, people not only stack foreign currencies in their wardrobes or home vaults but do carry such currencies across countries through the airports. It is not a characteristic of the market economies we try to mimic.
Also, we cannot match the sophistication of currency speculators who operate with some level of vengeance on vulnerable currency markets. That was why it took some time and extensive damage before the CBN could find a solution to the nefarious activities of cryptocurrency outfits, particularly Binance. There are some levels of regulations on the forex markets everywhere and the CBN should get regulation models in different countries to choose from. The CBN cannot be dogmatic about free capital inflows and outflows in an economy with some structural difficulties, in the name of obeying World Bank/IMF policies or conforming with the doctrine of capitalism.
The palliative policy was being repeated without the desired positive results. Palliative can be viewed as another word for subsidy. Subsidy can be geared toward consumption where citizens are empowered financially to aid consumption which invariably makes producers produce more to meet the demand for their products. It can also be given to producers to improve production and get out of recession.
The palliative exercises this government has embarked upon since its assumption of office have been on consumption, even though our problems have to do largely with production. Apart from the fact that the policy was not properly implemented due to corruption, lack of pre-implementation planning and lack of transparency and accountability during implementation, it was a wrong route in the face of shortages of goods. After two trials and the policy feedback was negative, the economic managers ought to have looked in the production direction before embarking on the third level.
However, it seems production is rightly being given attention now. There must be agreements with producers and not just throwing money at them. What is the current level of production and employment? What are the production plans for the next one, two, and three years? The plan should show funding requirements, output growth, and employment generation. The disbursement should be sequential and based on the achievement of the stated growth projections. More importantly, the process should involve transparency and accountability with outlined punishment for inability to meet plans.
Sticking to policies that produce negative or neutral feedback for a long period could be very injurious to an economy and even result in irreversible outcomes. Economic activities are dynamic and policies should be dynamic. Dynamism occurs because world economies are interdependent and as changes are taking place in one or more countries, it has reverberating effects on the others. Let economic managers take note.
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