THE CENTRAL BANK AND MONETARY POLICY RATE

Boniface Chizea contends that the central bank should focus on achieving stability at the foreign exchange market

The Central Bank concluded its bimonthly Monetary Policy Committee (MPC) meeting which took place on January 23-24, 2017 during which a hold decision was taken by the full complement of the 10- member Committee. But both before and after the meeting all the discussions and expectations revolved around how the outcome of the meeting would impact the Monetary Policy Rate (MPR). The expectations are that the MPC would at least twinkle the MPR to reduce it at least as a show of support for the need for monetary policy to be seen as contributing its role to the efforts being made by the fiscal authorities to cause a reflation of the economy to commence the process of the exit of the country from the ravaging recession. And this expectation has lingered over several MPC meetings commencing from the September 2016 meeting when last the MPR was actually increased from 13 to 14 per cent and had since remained at that level.

It will not be proper to continue this discussion by assuming that everyone is quite versed regarding what the term MPR means and therefore to ensure that we are all on the same page it is as well to digress by shedding some light on the term. One of the roles expected of the central bank in discharging its monetary policy obligations to maintain price and exchange rate stability in the country is to act as a banker to the government and a lender of last resort to banks to ensure that banks that temporarily suffer illiquidity have a window to access for accommodation. Naturally the central bank would not lend this money to the banks free and therefore the money is lent to the banks at an interest rate; which is the MPR. This explains why this rate is considered very indicative as it is at once represents a floor for interest rates in the economy and foreshadows the thrust of monetary policy over the period since an increase in rate would signify tightening to make borrowing costlier while a lowering would connote relaxation to inject more liquidity into the system. Therefore the expectations across board is that since there is this intention to jump start the economy by boosting activity that the rates should long have been reduced for monetary policy to be seen to be playing a complementary role in this quest to reflate the economy. One other thing which is not often appreciated by most compatriots is the actual implications of the corridor which is often indicated whenever the rates are announced. For instance for the MPC meeting which just ended the asymmetric corridor was indicated as +2 and -4 which means that banks approaching the central bank for an accommodation will be charged an interest of MPR+2 which in this case is 16 per cent while the banks that would wish to deposit money with the central bank would be paid an interest rate of MPR-4 which in this case is 10 per cent often as a disincentive as banks have no business approaching the central bank to deposit their funds despite all the fixed income securities regularly on offer which the banks could patronise to warehouse funds surplus to their immediate requirement.

Tracking developments with regard to the rate of MPR following the various meetings indicate that the rates have not actually remained unchanged. The rate was 12 per cent with a symmetry corridor of +-200 basis points after the September 18-19 meeting of 2014. It was increased to 13 per cent following the November 24-25, 2014 meeting; was reduced to 11 per cent during the meeting held on January 25/26, 2016; was increased to 12 per cent at the March 21-22, 2016 meeting and was increased yet again to 14 per cent after the July, 2016 25-26 meeting at which level it has remained since then despite all the clamour and expectations that it should be reduced to better align with the desired thrust of policy for a reflation of the Nigerian economy in recession.

It would be salutary to look at the problems of the Nigerian economy as outlined by the MPC. The committee is of the view that the key under currents i.e. scarcity of foreign exchange, low fiscal activity, high energy costs and the accumulations of salary arrears cannot be directly ameliorated by monetary policy. Though the view held by some analysts is that the drought in the inflow of foreign exchange in the economy is due to the uncertainty surrounding the rate of exchange as such an environment does not provide a scenario which is investor friendly and therefore the request for the central bank interventions in the determination of the rate of exchange to be terminated for the market to more or less determine the rate. The argument being that such a scenario would foster an environment which will enable overseas investors transcend from the prevailing uncertainty regarding the rate of exchange to the realm of risk which is a more familiar territory which the investors are more conversant with and more adept at managing.

The big question is how does the central bank stop its intervention with regard to the determination of the exchange rates as it is the dominant if not the sole supplier of foreign currency in the economy? It is on record that we have asked this question on several occasions. So I have had cause to ask to be enlightened regarding what allowing the naira to float entails and how it would play out practically. Some otherwise informed commentators have also argued that it is late in the day to be talking about floating the naira; that we missed the opportunity to have done so timeously at the onset of the contraction which the economy suffered. It is in response to this argument that the central bank by mid-2016 introduced the flexible approach to the determination of the exchange rates with the key expectation that such a move would unlock the flood gates for investors to bring their dollars into the economy. What has been the result so far? The exchange rate lost over 40 per cent of its value at the official window and almost 100 per cent at the parallel market with negligible additional inflow of foreign exchange arising from investors bringing in their money. But with far reaching price increases which have resulted in an inflationary environment with a record inflation rate of 18.55 per cent, the highest rate in more than a decade precipitating untold hardship on the citizenry.

It is also in order to illustrate that the problem of the economy is not illiquidity as such as to warrant the sort of relaxation being expected. The communique of the MPC meeting observed that money supply (M2) grew by 19.02 per cent in 2016, being 8.0 per cent higher than its programmed limit. And growth in Net Domestic Credit (NDC) was 24.79 per cent at the end of December, 2016 being 17.94 per cent above its provisional benchmark for 2016. Likewise growth in net credit to government, 58.84 per cent surpassed its programmed target of 47.4 per cent. Therefore in effect all the major monetary aggregates exceeded their programmed provisional benchmarks for fiscal year 2016 and therefore its erroneous to continue to argue for further relaxation by reducing the MPR to encourage more credit growth even against the background of an increase in the policy rate by the US Fed in December, 2016 with the implications of this decision for international interest rates and capital flows

Dr. Chizea is a management consultant