Several attempts at salvaging the moribund economy by Central Bank of Nigeria (CBN) though its Monetary Policy interventions have proved counter-intuitive as manufacturers in the country have continued to express worry over retention of Monetary Policy Rate (MPR) at 14 per cent, saying it will would hinder business growth and prolong the current economic recession.
The rate at which inflation and other economic indices negatively accelerate have defied measures adopted by the apex bank to arrest consequential hardship facing Nigerians. These formed the bases for increment of the MPR by 200 basis points, from 12 per cent to 14 per cent, Cash Reserve Ratio at 22.5 per cent and Liquidity Ratio at 30 per cent, to combat inflation and stimulate growth. The asymmetric window (representing allowance for banks’ lending) was left at +200 and -500 basis points around the MPR. This means the apex bank will lend to banks at 16 per cent and borrow from them at nine per cent.
Defending the position of the Monetary Committee, after meeting last month, the CBN Governor, Godwin Emefiele, said inflation was largely structural and so the CBN’s current tight monetary policy stance combined with an improved agricultural harvest should limit growth prices of goods and services. He added that “Considering the importance of price stability and being mindful of the limitations of monetary policy in influencing output and employment under the conditions of stagflation, committee decided unanimously in favour of retaining the current stance of monetary policy.”
Reacting, an ex-official of the Manufacturers’ Association of Nigeria (MAN), John Aluya, posited that “high lending rate is a product of high MPR. There is no way a bank will lend to manufacturers at single digit rate when it can invest its money in sovereign debt at 14 per cent. Government cannot promote economic activities in this situation because businesses will not thrive; SMEs cannot borrow at 25 or 30 per cent and survive. CBN has to loosen up; in a period of recession, government has to spend more to reflate the economy, to create jobs and opportunities.”
Financial analysts also observed that some of the CBN’s policies are killing the economy, arguing that retention of the interest rate would not attract investment especially dollar investment, the forex market ensure that it never happen. The lack of a true market operation of the forex market, continue to only support the banks and BDC. How does the central bank believe that BDC price would come down, when they can get dollar at N350 from CBN and sell at N450. The banks have completely abandoned any form of banking and are in the business of speculation.
Some of the stakeholders also posited that the ongoing recession would not be solved when if the apex bank is mopping up the liquidity that the government is pumping into the economy. The policy makers need to allow the market trade forex with no price controls and reduce the interest rate, because it is neither bringing in investors nor reducing inflation.
Nigerians have also advised that for the government to keep fiscal deficits within the safe levels which appear consistently in the budget proposals, Federation Account dollar allocations should be disbursed to beneficiaries in a secure and corruption-free manner for conversion as and when desired to Naira amounts via a single forex market, which has not been operated in Nigeria till date. And in order for the Naira exchange rate to be realistic and stable, Nigeria’s decades-long currency dualism should cease. The retention of the currency dualism 18 months into President Muhammadu Buhari administration is a matter for absolute regret. The reasons is that the Federal Government has the exclusive responsibility to guarantee and protect at all times Naira-denominated economy but it failed to exercise a charismatic authority.
MPR is the benchmark rate at which commercial banks can borrow from the central bank to boost the level of liquidity in the economy. However, the situation at hand has turned things bad with the GDP, measuring the country’s overall economic activity, shrank by 2.06% in the second quarter of 2016, following a 0.36% decline in the first quarter. Those two consecutive quarters of negative GDP growth rates meant that Nigeria’s economy registered its first recession in more than two decades. The overall GDP growth rates, however, mask the sector performances. Non-oil sector’s growth rate declined by 0.4% while the oil sector shrank by 17%. While agriculture which grew by 4.5%, ICT, and other services such as education were the bright spots, other sectors, notably manufacturing, construction and trade services performed poorly.
The declining economic growth rates then, along with inflation and the combined unemployment and underemployment rates of 17.1% and 31% respectively, as well as rising interest rates with the treasury bills reaching over 20% meant that the country’s misery index was on the rise. Financial markets, most especially the equity sector, were also in contraction as profitability of companies in the real sector nose-dived with low consumer purchasing power, and business confidence impacted by policy uncertainties. Capital flight, especially, portfolio outflows continued unabated as capital importation declined by 75.7% from a year ago, putting further pressure on the naira, which has since depreciated to N425 in the parallel market and to N320 against the U.S. Dollar in the official market.
The tragedy now is that the situation has not improved! There are well-known key drivers of the economic difficulties that Nigeria had experienced for almost two years, leading to the recession and the continued hard times. A major driver is the fall in oil prices from $115 in July 2014 to a low of $27 in February 2016, before rebounding to a range of $40 to 45 in recent months. As oil prices fell by more than 70%, government revenue plunged with oil-related revenues accounting for 95% of export earnings and 70% of fiscal revenue. Public sector spending is curtailed by low oil revenue, while non-oil sector slows down indirectly as lower foreign exchange reduced imports of both consumer and capital goods.
