After what seemed like forever, the CBN released the minutes of the January 2015 MPC and as i suspected the committee’s decision was not as unanimous as it seemed to be then. I present the excerpt from the Professor Garba Abdul-Ganiyu – as ever another masterpiece.
6.0 GARBA, ABDUL-GANIYU
I am still convinced that “far too much is expected of monetary policy in Nigeria and globally today” in the context of the extant institutional environment, market malfunctions, fiscal operations, fiscal dominance and the underlying games (state and non-state). I also maintain a preference for (1) a forward-looking creative and strategic approach to monetary policy; (2) systemic and forward looking monetary-fiscal coordination that strengthens both fiscal and monetary policies to deliver low-inflation and high employment elastic growth and (3) building the capacity of the economy to seamlessly (i) transit from the globalized regimes of quantitative easing to a post-quantitative easing regime and (ii) exit from the high interest rate trap.
Given that interest rate corridors and exchange rate corridors are the core of a Hong Kong type monetary framework, the short term requires addressing key vulnerabilities (the fiscal and political risks) and the “arbitrage gap” particularly between the RDAS and Interbank markets. There is obvious evidence of speculative currency substitution. In the short term, the challenge is that of closing the arbitrage gap by changing the auction system from one that is historically inefficient and tends consistently to widen spreads and shatter the ceiling of the exchange rate corridor. It is “most critical” to make the necessary market functioning adjustments through institutional changes of the rules of the game and underlying incentive structures. Further tightening are unlikely to potently correct the fundamental market structure and market function problems. This was why I argued at the last MPC in November 2014 that: “market segmentation and arbitrage spread make arbitrage, currency substitution, sharp practices and short positions rational . . . Auction theory is clear that in repeated auctions such as RDAS/WDAS, the likelihood of collusion is very strong. Indeed, at least three Nigerian studies have provided strong evidence of collusive behaviours in Nigerian foreign exchange auction markets.” I had argued that it was important “to ensure that the auction systems in the financial markets are no longer rigged against the goals of monetary policy or the commonwealth. The Monetary Policy Implementation process would support policy effectiveness if it gives priority to quick detection and punishment of collusive behaviours.”
I still stand on my argument. It is important support the policies at the last MPC by actively and decisively correcting the market failures that work together to guide financial markets further from policy goals. In the short term therefore, the more potent tool in my reasoned view is changing the forex game by institutional and operational changes that eliminate the arbitrage gap and the leakages. Removing the subsidy in the forex market is an important first step. However, it must be backed by an efficient and effective operational system for ensuring that all players play by the rules and infractions are such that the net potential gains are negative. In addition, I am convinced that an asymmetric corridor is more effective than quantitative restrictions on the SDF window. The argument is that (1) if MPR in the interest rate corridor framework is a signal to players about the desired level of the interbank rate; (2) if the desired interbank rate in the interbank market is expected to impact on aggregate demand and inflation through short term interest rates, then (3) the shrinking of the interbank market in 2013-14 weakened policy effectiveness and efficiency of the market as an allocative and rationing device. An asymmetric corridor with plus 200 basis points on SLF and -600 basis points on SDF without any quantitative restrictions is a better incentive to the DMBs than quantitative restrictions. I believe the asymmetric corridor has a greater likelihood of reducing pressures in the foreign exchange market and in stimulating play in the interbank market. The real challenge for economic management (monetary, fiscal and political economy) still remains that of steering the economy seamlessly through the turbulence of a post quantitative easing era. The turbulence will not be limited to commodity prices and currencies. It will more likely involve asset prices, volatile financial flows in response to policy and performance divergence between the US and its European and Japanese allies and policy shocks like the “SWISS Shock” of January 15 as Central Banks act to minimize perceived potential damages that expected policy and market outcomes could inflict on their national interests. I will continue to argue for (1) the institutionalization of a purpose driven rule-based and performance oriented forward looking fiscal strategy and budgeting system and (2) the elimination of distortions that undermine markets, the fiscal system and monetary policy. I am still convinced that the economic circumstance of Nigeria today is best viewed as an opportunity for policy makers on the monetary and fiscal sides to work together to build medium to long term resilience of the economy through creative approaches to vulnerabilities, systemic coordination, commitment problems and market functioning problems. It is more difficult if not impossible to walk efficiently, effectively and sustainably on one foot.