CBN Monetary Policy in 2017 - The Way Forward. At the Central Bank of Nigeria, CBN Monetary Policy Committee's last meeting for 2016, the apex bank..
CBN Monetary Policy in 2017 – The Way Forward
At the Central Bank of Nigeria, CBN Monetary Policy Committee’s last meeting for 2016, the apex bank maintained the Monetary Policy Rate (MPR) at 14% unchanged from November. The reasons for this being price stability and limitation of monetary policy. MPR was 12% until July.
This was expected by most of the economists surveyed by Reuters, marking a rare consensus in a year marred with inconsistent CBN policies that had made predict the bank’s move difficult.
The Inflation and Economic Productivity
CBN Monetary Policy was thought to be used to jump start economic growth at the expense of inflation MPR by its decisions before July. It had in November 2015 reduced interest rates despite inflation outgrowing the unofficial 6-9% target.
First of all, when the CBN increased money supply in November 2015, inflation was 9.3%. Fast-forward to 2016 and inflation had almost doubled to 18.5%.
Next, floating the Naira in June 2016 let more flexibility be over the CBN monetary policy; but the apex bank had to maintain credibility and attract foreign direct investment, the CBN needed to anchor inflation and ensure that the Naira would not depreciate substantially in the future.
Lastly, passing and partially implementing the 2016 budget initiated fiscal spending that gave the CBN more room to tackle inflation.
Despite all these there was a domineering disharmony in the current CBN monetary policy. Last year, the Finance Minister Kemi Adeosun aligned with manufacturers by demanding for a cut in interest rates mainly to minimize government’s cost of borrowing.
For an economy dominated by oligopolistic markets, a higher interest rate increases the cost of borrowing and this would be passed on to the end user and lead to higher inflation.
This positive relationship between interest rates and inflation is common in empirical monetary economics theses, usually referred to as The Price Puzzle. Evidence suggests it is in application forcefully in Nigeria.
It would seem that the CBN monetary policy of contraption points to the fact that the bank cannot control the cost-push inflation Nigeria currently experiences. Higher interest rates mostly deal related to demand-pull inflation because increasing the cost of spending and investment reduces economic output.
If this limit is true, it can be argued that the CBN cannot directly control inflation using interest rates.
The CBN Monetary Policy Strategy
The central bank’s primary strategy is to use the new flexible exchange rate to undermine inflationary pressures. If the rates are kept high, the CBN will be raising the real rate of return in the economy and maybe even attract foreign exchange supply.
More supply of dollars in the economy will cause the value of the Naira to increase. This will then let the manufacturing sector to import raw materials they cannot source for locally easily at a lower cost. This of course will increase their output.
Summarily, higher interest rates and increase in supply of dollar will reduce inflation and raises GDP.
Last September at the MPC meeting, the CBN governor stated $1bn in foreign inflows had been in the economy since July and the $80m investment of a private equity firm in Nigerian biscuit maker Beloxxi has prematurely pointed at as proof of the return of foreign direct investment.
The Setbacks of the CBN Monetary Policy Strategy
High interests rates reduce borrowing invariably output – meaning monetary policy could be negating the effect of the government’s expansionary fiscal plans. Tackling this will require that the CBN offer loans at lower rates to priority sectors especially agriculture.
If the CBN maintains this contractionary stance in the medium term to convince investors that inflation and the Naira would be controlled, the supply of dollars into the economy reduce and could mean a weak Naira in the short-term plus high inflation.
The current stubborn murkiness in determining the exchange rate can potentially undermine efforts to increase supply of dollar and erode CBN’s credibility more.
The Federal Government’s Role
Nigeria’s monetary policy is too ineffective move the country out of recession. The ball lies in the fiscal authorities, court. The CBN monetary policy may accomplish some short-term success but the fiscal policy must address long-term structural challenges.
In the supply side of the equation, policies must be put in place to help Nigeria evolve into a more productive nation. National infrastructure must be developed to foster growth and lower inflation because it will lower energy and transport costs.
Export earnings have to be further diversified.
The irony is that these suggestions are not new. The economic crisis of 1980 comes to mind under the same leader. Buhari and his government cannot afford to repeat the same mistakes again.