It is difficult to see how the CBN’s Monetary Policy Committee (MPC) can continue to hold out against an interest rate hike. If not at this week’s meeting, then very soon, the CBN’s benchmark rate must go up, or (as its the CBN’s wont) find less than market-based ways to tighten domestic monetary conditions.
With general elections due next year, and a couple of governorship positions up for grabs even before then, it is no surprise that our echo chambers have resonated, of late, to political rhythms. To be fair, the political fairground has thrown up its usual offering of selfie moments — the solemn response to the people’s “clarion call” by politicians, who up until that moment of truth, were minded to retire to the comforts of their country homes; and the sobriety with which politicians, disgruntled with the flakiness of their current political platforms, walk the plank across to other parties, being but two examples of this.
Unusually at this point in the calendar, however, recent numbers out of the economy threaten to steal our politicians’ thunder. The resulting challenge is more for the ruling All Progressives Congress (APC). On balance, it has had a lacklustre 3+ years in office — stumbling from crisis to crisis, without ever making up its mind on a preferred direction. To be fair, always the combination of diverse coalitions, the party was doomed to negotiate an internal market of interests before it could reach and execute strategic decisions. That this market has regularly been rigged has not helped matters.
Yet all the interest groups in the party must agree that you do not want to go into an election next year with the economy decelerating. And that is what the economy did in the second quarter of this year. Floods having ravaged most of the nation’s riparian areas, it is a fair bet that this slowdown will be a main feature of the second half of the year. How to boost economic growth in the narrow window of opportunity before the country goes to the polls? The lowest hanging fruit is to drive oil exports. With U.S.’ sanctions against Iran due to kick-in in November, higher short-term global oil prices are guaranteed. Indeed, OPEC+ is currently wracked by disagreements over how to divvy up production quotas ahead of this possibility.
But inefficiencies arising from the internal contradictions within the APC-led government have meant that we have been unable to take advantage of the clement global oil market conditions that have prevailed for much of this year. Some would argue, though, that elevated price levels aside, these conditions are far from revenue-positive for the Nigerian economy. If anything, technologies that allow oil exporters distil light sweet crude from their traditional heavy sour blends, and the new size of the U.S.’ domestic oil market, have combined to erode the Bonny Light crude blend’s value proposition.
…the CBN has always shot in the dark. Yet, the ambience is darkening, and the chambers on its revolver nearly emptied. If it has only one shot left, better to do so now. By far the strongest argument for putting up rates immediately is, however, not just rising domestic prices alone.
Nonetheless, the bigger unintended outcome of the APC government’s inability to come to terms with its responsibilities for the country is how easily it has allowed the herders-farmers conflict in certain parts of the country adversely feed into the economy. Evidence of this was plentiful in the soft numbers for agricultural output in the second quarter, as it was in the headline inflation numbers for August. The recent floods were simply the icing on this cake.
Unlike the fiscal side of government, the monetary authorities do not have an explicit mandate for output growth, except to the extent that by maintaining price stability the central bank makes it easier for entrepreneurs and investors in the economy to plan over longer time horizons. As the Central Bank of Nigeria’s (CBN) policy committee meets (today and tomorrow), all these considerations would weigh heavily on members’ deliberations.
There is a strong case to be made for holding off policy (at least until the main elections are conducted next year) from doing any harm — most commentators have no doubt that if Aso Rock speaks to Plot 33 Abubakar Tafawa Balewa Way, Abuja, this will be the content of a message reiterated over and again. But this message must be set against the sad fact that prices have started to rise across the economy, and consensus is that the price rise trajectory will steepen. The CBN has not helped itself much. By failing to finish work on a proper model of the domestic transmission mechanism, we do not know so many things. Alas, my guess is as good as the CBN’s on how much, for instance, it needs to raise its benchmark rate to drive a desired increase in retail commercial bank rates. Nor is anybody sure what the lag is between when the apex bank moves its rates, and when the consumer price index responds.
So, the CBN has always shot in the dark. Yet, the ambience is darkening, and the chambers on its revolver nearly emptied. If it has only one shot left, better to do so now. By far the strongest argument for putting up rates immediately is, however, not just rising domestic prices alone. Across the world’s major economies, it looks like we are past the worst of the Great Recession. Accordingly, monetary authorities in Europe and North America are beginning to unwind the unusual measures they put in place to moderate the worst effects of the last financial and economic crisis. One consequence of this has been a recovery in the yields on dollar-denominated asset.
…rising prices mean that in order to keep as much of the risk-averse inflows in as possible, we must offer higher returns on investment, even as a tightening of domestic money conditions is advertised as a panacea for rising prices. But beyond all these, the CBN must now contend with portfolio investors’ rising opportunity costs.
As global fund managers respond to this reality, they have begun to re-balance their portfolios away from riskier emerging market instruments. In result, several emerging markets, from Argentina, through South Africa, to Turkey have seen their currencies come under severe downward pressure. In the cases of Argentina and Turkey, their central banks have taken the unusual measure of launching their interest rates into orbit to stanch the outflow of funds.
Idiosyncratic aspects of the different emerging countries whose currencies have come under pressure matter, it would seem. And our case is no different. Ahead of the 2019 elections, we were all persuaded that non-resident investors would take out some of their investment in the country anyway. Much of the debate until now has concluded that the CBN has enough under arms to manage an orderly exit. But now, rising prices mean that in order to keep as much of the risk-averse inflows in as possible, we must offer higher returns on investment, even as a tightening of domestic money conditions is advertised as a panacea for rising prices. But beyond all these, the CBN must now contend with portfolio investors’ rising opportunity costs.
It is difficult to see how the CBN’s Monetary Policy Committee (MPC) can continue to hold out against an interest rate hike. If not at this week’s meeting, then very soon, the CBN’s benchmark rate must go up, or (as its the CBN’s wont) find less than market-based ways to tighten domestic monetary conditions.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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