Excerpts from March 2015 MPC

6.0 GARBA, ABDUL-GANIYU

I cast a holding vote for the set of policies decided at the January 2015 meeting of the MPC. My key reason for holding is that it is not strategic just four days before a defining election to make any strategic or policy changes. Therefore, the best short term option in my view is to hold, watch the markets and prepare for the medium to long term. In taking my decision, I took due account of (1) vulnerabilities in the real economy (slowing growth, rising unemployment, the massive supply shock and rising inflation); (2) fiscal vulnerabilities (negative effects of oil price shocks on revenue, fiscal deficits and rising public debts and servicing costs); (3) changes in ratings of the economy; (4) the closure of the RDAS window and its implications for the exchange rate corridor; (5) the breaches of the interest rate corridor after November MPC and (6) the fundamental changes in policy framework. The first three are medium to long term issues. The closure of the RDAS window a key factor in the sustenance, deepening and widening of the ‘’Bernanke effects’’ in Nigeria has eliminated the “arbitrage gap” between the RDAS and Interbank market Naira/US$ exchange rates that promoted collusion, currency substitution, speculation, arbitrage and volatility in demand and rates. It is not surprising that the combination of the closure of the RDAS window (to promote entry through the door of the Inter-bank market) and appropriate administrative actions have helped to stabilize the interbank rate. Much could still be achieved through administrative actions in the short run. It has become imperative to support market functioning in the foreign exchange market by shutting down the remaining subsidy window: the ‘’Bureau De Change subsidy’’. The continuing subsidy of the BDC cannot be justified on the grounds of efficiency or equity. The proliferation of BDCs mirrors the proliferation of petrol stations in the PMS subsidy game. Both types of proliferation undermine efficient allocation of resources by promoting rent seeking behaviours. It is obvious that the interbank-BDC rate spread is not driven by market fundamentals or the needs for efficient allocation of forex to real sector activities. It is simply part of the games of rent seeking and appropriation. Thinking medium to long term, a comprehensive strategic framework for monetary policy, financial system stability and operations is imperative. For one, the goal post has shifted and the contexts of the relevant games have changed. The closure of the RDAS windows has effectively closed the ‘’exchange rate corridor’’. In the post November 2014 MPC set of decisions, the ceiling of the interest rate corridor has suffered sustained and significant breaches. In addition, (1) the money multiplier has fallen from its peak level of 3.9 in 2010:09 when the tightening regime began to just 1.06 in 2015:02 and (2) the rate of currency substitution has progressed very fast from 14.2% in 2010:09 to about 30% in 2015:02. With 30% of M2 in Foreign Currency Deposits (FDC) and with the shrinking of M1 from its most recent peak of 7.42 Trillion Naira in 2012:12 to about 6.05 Trillion Naira in 2015:02, it is clear that informal dollarization has become a danger to policy effectiveness and to stability (financial and macroeconomic). The ‘’effective closure of the exchange rate corridor’’ and the sustained breaching of the ceiling of the interest rate corridor imply that a major shift from the ‘’two corridor’’ monetary framework that hitherto prevailed has taken place since the last MPC meeting. The implications of this change and of the two additional structural changes (collapse of the money multiplier and growth in informal dollarization) must be fully understood as part of a new strategic framework for monetary policy. I have no doubts that a new comprehensive strategic framework for monetary policy in Nigeria is long overdue and further delay is not in the best interest of the economy. I am also convinced that in the challenges that face the Nigerian economy lay opportunities for restoring the two cooperative legs of macroeconomic policy and complementing them with the twin policies for financial system stability (macroprudential policy and micro-prudential policy).

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