LIKE A BOLT FROM THE BLUES

The hike in the base interest rates will impact the cost of credit in the economy, argues Boniface Chizea

The Communique of the 108 MPC meeting came like a bolt from the blues in consideration of the fact that the major decision took most commentators by surprise. It was expected that the fact that the Nigerian economy has gone into recession following negative growth rates for two consecutive quarters that the MPC would be more concerned with reflating the economy which is not consistent with the resulting tightening posture which was subsequently announced as an outcome of the meeting. It is also a fact that the Governor of the Central Bank himself following his briefing of the Senate just a few days before the meeting did serve notice that he was going to focus on growth instead of fighting inflation and therefore the expectation was that there is going to be a hold decision at worst, even if a hold decision was returned after the last meeting in May with the proviso that the decision was taken with a view to allowing the fiscal authorities some time to kick-start fiscal measures for a reflation of the economy. Though reflexively most economists would recommend tightening in the face of rising inflation but sometimes it is ideal to take a step back to consider the objective circumstances that have accounted for the rising and persistent inflationary spiral which in our particular situation had shown an upward trend since the month of February.

It is obvious that the cause of the persistent inflationary spiral is due to structural factors i.e. the monoculture reality of the Nigerian economy whereby the country is overly dependent on the oil sector to earn foreign exchange inflows; the rising energy cost as a result of the removal of subsidy with its pass through effect on transportation costs and therefore farm produce and other related costs; the electricity tariff which has now been beclouded by some uncertainty as the courts has ordered a reversal of the recent hike in tariffs of 45% which increase was effected to commence the attainment of cost reflective tariffs to meet the clamour and demand of the private sector investors; which is then capped with the rising costs and uncertainty due to the volatility of the exchange rate and massive loss in value as the country embarked on the flexible exchange rate regime in deference to the clamour by most stakeholders that the peg regime was not aligned to the fundamentals of the economy.

With the unsavoury fallout of increasing the risk profile of the economy as international rating agencies proceeded to delist Nigeria thereby reducing the availability and at once increasing the cost of credit. What is somehow reassuring is that we are at one with the MPC in the correct diagnoses of the cause of the rising inflationary spiral as it observed that, ‘’The rising inflationary pressure was largely a reflection of structural factors, including high cost of electricity, high transport cost, high cost of inputs, low industrial activities as well as higher prices of both domestic and imported food products.” And therefore to most informed analysts and commentators it beggars belief that in spite of this correct reading of the situation that a decision to hike the Monetary Policy Rate (MPR) by 200 basis points was returned based on a vote of five for and three against.

What must be admitted is that in spite of the fact that cost push factors would seem to account for the rising inflationary spiral that monetary targets were also exceeded implying that we cannot wholly discount excess liquidity as a contributory factor. When annualised, M2 (The broad measure of money) grew by 16.52 per cent in June 2016 against the provisional growth benchmark of 10.98 per cent for 2016. Also net domestic credit grew by 12.52 per cent in the same period; annualised at 25.04 per cent. The increased credit to the private sector is a welcome development as it aligns with the desire to boost productivity in the economy as the private sector remains the veritable engine for economic growth.

But the decision to hike the MPR has been rationalised as due to the consideration that the core mandate of the central bank is the maintenance of price and exchange rate stability and therefore in attempting to prioritise, it was felt safe to keep fidelity with this core mandate by concentrating on fighting inflation. It has been argued that the central bank has limited capacity on its own to facilitate the growth of the economy in spite of its imperatives and therefore should be better advised to calibrate its intervention as it deploys available instruments by fighting first inflation which also indirectly could boost productivity as the value of money is increased. Then there was of course the palpable concern that the recently introduced flexible approach to the determination of the exchange rate which has precipitated further weakness on the exchange rate attributed to the normal reaction to a new regulatory reform has been slow in delivering the anticipated low hanging fruits of resumed inflow of portfolio investments which meant that there is some work to do to achieve this objective. Therefore the hike in interest rate would also in addition to the attempt to remove the bemoaned uncertainty in the hitherto adopted pegged approach to the determination of the exchange rate, improve on the attractiveness of the fixed income securities. And if perchance by means of this policy we can improve dollar liquidity in the economy leading to more stability in the exchange rate which could in turn boost productivity and therefore facilitate the much desired growth of the economy.

The immediate consequence of the hike in the base interest rates is obvious as it will immediately impact the cost of credit in the economy which based on demand elasticity will be passed on to borrowers thereby impacting negatively the prevailing price levels. Therefore in the interim the salary earners would be grossly affected as their purchasing power is reduced leading to contraction in productivity; loss of jobs and an overall elevation of the misery index in the land. The domestic money banks will be negatively impacted as rising interest rates would normally precipitate rising credit defaults with the consequent effect of undermining bank profitability as equity capital is eroded. The Stock Market will be impacted as investment flows from the money market to fixed income securities to capitalise on enhanced returns often to the disadvantage of equities probably undermining critical indices for the measurement of the viability of the stock market. It is also a known and acknowledged fact regarding the imperatives of coordinated action between the monetary and fiscal authorities, anchored by fiscal policy, to initiate recovery at the earliest possible time which must not be underestimated. Therefore the federal government is encouraged to fast track the implementation of Budget 2016 which held out so much promise for the reflation of the economy to resume productivity and growth to enable the country spend itself out of the dangling sword of Damocles of recession. Dr. Chizea is a management consultant

THE RISING INFLATIONARY PRESSURE WAS LARGELY A REFLECTION OF STRUCTURAL FACTORS, INCLUDING HIGH COST OF ELECTRICITY, HIGH TRANSPORT COST, HIGH COST OF INPUTS, LOW INDUSTRIAL ACTIVITIES AS WELL AS HIGHER PRICES OF BOTH DOMESTIC AND IMPORTED FOOD PRODUCTS