The Monetary Policy Committee of the Central Bank of Nigeria 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 diagnoses or prescriptions are off target, then our current stunted growth experience will inevitably be the product of implementing those monetary policies initiated by the committee from time to time.
Nonetheless, while the complimentary role of fiscal policy to a nation’s economic growth is undeniable, in reality, best practice money supply management, can redeem a grotesque fiscal plan. Conversely, however, an “excellently structured” executive budget will grossly diminish in value if extant monetary strategies induce spiralling inflation, increasingly high cost of funds and a naira exchange rate that is determined by fiat and which ironically, also, comes under a downward pressure with increasing foreign reserves!
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, as was the classic case in Germany after the war, inflation will hit the roof, and all income earners, including helpless senior citizens will ultimately become traumatised and pauperised as the naira’s purchasing power is steadily whittled down.
Furthermore, subsisting high cost of loanable funds, ironically induced by surplus money supply, will also make sustainable real investments a challenge, and ultimately explode our already suffocated job market to precipitate a rising wave of insecurity! For these reasons, the MPC’s responsibility for promoting best practice management of money supply is pivotal to the achievement of enhanced social and economic welfare for our people.
Regrettably, however, for over two decades, the best efforts of the MPC/CBN “collaboration” have failed to successfully manage money supply to keep inflation below best practice level of two per cent and stabilise income values. Furthermore, subsisting monetary policy directions have also failed to bring down cost of borrowing, to the supportive level of middle single digit interest rates which could stimulate new investments and domestic production, and also encourage the creation of more jobs. It is clearly unrealistic and foolhardy to expect credible economic growth or indeed successful diversification of our wealth base, when cost of funds exceeds 20 per cent for domestic real sector investors. There can be no genuine inclusive economic prosperity if inflation hovers around double digit rates and aligns with deterrent cost of funds.
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 manage consumer demand and the price level and also modulate the lending capacity in the banking system, in line with the peculiar needs of their economy. For example, when unemployment is 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, while encouraging existing manufacturers to consolidate or revive their businesses and in the process reduce unemployment.
Conversely, the MPC and the CBN will 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 so as to reduce perceived inflationary pressures from increasing scarcity in an economy approaching full employment.
Regrettably, however, it is inexplicable that despite our abiding heavy burden of unemployment, our MPC has over the years, consistently endorsed inappropriately high 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 per cent.
Curiously, when the MPC concluded its 103rd bimonthly meeting last week, it retained its existing anti-growth benchmark cost of funds at 13 per cent while it slashed the cash ratio which commercial banks must retain as reserves from 31 per cent to 25 per cent. The overt interpretation of such monetary indices is simply that the CBN appears impervious to the real sector’s crying need for access to cheap funds. Furthermore, the adoption of a Cash Reserve Ratio which is still as high as 25 per cent also suggests that the CBN clearly considers the residual level of money supply worrisome and counterproductive to sustain price stability. Consequently, as a remedial measure, the apex bank, therefore, steps up to restrain consumer spending and curtail the capacity of banks to expand credit to their customers, despite the downside that high monetary policy benchmarks imposed would reduce investment and industrial capacity utilisation and also impede job creation in the economy.
Thus, the current restrictive structure 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 monetary policy is clearly traceable to the fear that a lower cash reserve requirement for banks will expand an already, discomfortingly bloated money supply to spur increased consumer spending which will invariably trigger inflation well beyond 10 per cent and seriously threaten the purchasing power of all naira incomes and the maintenance of economic price stability.
Instructively, the recent enforcement of the Treasury Single Account which consolidated all government deposits in the CBN accounts, allegedly led to a 10 per cent reduction in commercial banks liquidity. Regrettably, this reduction appears to be clearly insufficient to tame the distortional burden of systemic excess money supply and its collateral threat to job creation, economic stability and social prosperity.
The unsettling reality of the mysterious, decades long, incurable surplus money supply, existing simultaneously with scarcity of cheap funds to the real sector, is clearly demonstrated by the CBN’s early notice on September 4, 2015 that it is still necessary to mop up more of the perceived excess money supply in the system and restrain inflation by borrowing over N800bn from the money market between September 17 and December 3, 2015. Incidentally, the banking subsector, primarily, will earn between 12 and 15 per cent interest (i.e. over N500bn annually) on such distortional loans which the 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.
It is alarming that banks make such easy money from government loans, while the real sector, inexplicably, suffers severe funding deprivations which invariably engender contraction of production and critically needed job opportunities. Indeed, with the challenge of untamed money supply, all sectoral special intervention funds to stimulate economic activity and job creation will inadvertently further expand the already bloated cash surplus with banks, only to become indiscriminately mopped up, also, once again with high 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 the Cash Reserve Ratio of banks from 31 per cent to 25 per cent would supplement/the sector’s liquidity by over N300bn. Thus, the CBN’s charitable gesture would again “inadvertently” compound the existing unresolved liquidity surfeit and potentially increase the CBN’s portfolio for more idle debts which attract oppressive interest rates without adding any real value to our economic and social welfare.
Incredibly, in spite of these disturbing contradictions in the strategies of the MPC, a gullible media and public still keep the faith and believe that the MPC/CBN’s macabre abracadabra will lead our nation to Eldorado.