EXCERPTS FROM THE SEPTEMBER 2016 MPC

Last week the monetary policy committee (MPC) of the Central Bank of Nigeria voted to leave its key policy rate unchanged at the record 14% level despite fresh data on Monday indicating that the economy shrank for the third consecutive quarter. Not that this was unexpected as a Bloomberg poll of economists all expected no move at the MPC.

A day before announcement of its decision, the CBN released personal statements of its MPC members at the September meeting and as ever my favourite MPC member had a lot to rant about. Quite interesting.

5.0 GARBA, ABDUL-GANIYU

Context

The problem with the Nigerian economy is not recession! Neither is it stagflation. Both are effects, not causes. The principal problem I believe is a persistent and long standing unwillingness to urgently “harness, direct and put to effective use the best available intellectual and political resources” to develop a forward looking medium to long term strategic macroeconomic management framework for Nigeria with the wellbeing of Nigerians as its principal end. The shock (oil price and quantity) is also, not the problem. It is the failure to anticipate and consistently and effectively respond to shocks within a medium to long term framework that is the problem. For every building, the foundation is critical. If the foundation is deep and master builders use superior materials to expertly build the foundation suitable for the location and the building, the foundation will carry the weight of the building and withstand stresses including earth tremors. However, when inferior materials are used, the building will crumble when subjected to even the most minimal stress.

Before the GDP growth turned negative in the first two quarters of 2016, the path of the economy had turned southwards many quarters before then. Growth peaked in the third quarter of 2013 and began to steadily decline from the fourth quarter of 2013 with industry the worst hit; unemployment has been trending upwards for more than a decade; national savings and real investment has been receding as part of sustained trend of public and private dis-savings for many years; reserves of over $65 billion in 2008 was steadily depleted by the funding consumption goods and services, fuel import games and capital flight; the public debt is almost twice its level before Nigeria used more than $18 billion to free itself from the sovereign creditor cartel; the problem of twin deficits gradually crept upon us in 2014 as the inevitable negative oil price shocks followed the events associated with tapering and the misalignment of policies between the US and the EU; cost-push inflation began creeping in the aftermath of the devaluations of November 2014 and gathered steam as exchange rate spread widened from February 2015.

The “loud noise” about recession and stagflation is distracting from a deeper and clearer focus on the real problem: a perverse model of development driven by consumption of imported goods and services, fuel imports, low-value added primary exports, sustained de-industrialization; capital flight masquerading as financial flows and the creation of rent havens in both the real and financial sectors which distorts access, pricing and allocation and undermines growth and employment generating innovations. The dominance of the policy discourse by “recession or stagflation diagnostics” is dangerous because it has elevated shallow, superficial and misleading conversations into national prominence with a present hedonistic orientation that puts the future at great risks. Inevitably, the misdiagnosis is narrowing conversations to dangerous quick fixes that could potentially do great harm to the future capacity of government and citizens to leverage on endowments to build sustainable value adding economic systems.

When the federal government was advised more than a decade ago to reduce investments in oil and gas (a cash cow) and to sign production sharing contracts, the negative effects on the structure of government expenditure and on future flows of revenue was discounted. Yet, the structure of contracts is having a powerful impact on government finances. When states were empowered to borrow outside the framework of the Fiscal Responsibility Act of 2007 and repayments locked-in to future revenue allocation, the effects on the future of state finances and governance were discounted. When the refineries are not delivering values that will reduce the demand for US$, they hurt employment, growth and the stability of the Naira. Savings from domestic refining will generate far more positive current account balance than what government could raise from the Eurobond markets or from sale of assets. Reversing the disincentives to remittances by giving beneficiaries access to their resources in the currency of origin will generate far more financial inflows than portfolio flows or any similar “tapeworm remedies”.

Quick fixes in strategic vacuums such as selling national assets to fund consumption of imported goods and services, fuel imports and to attract foreign investment and support the value of the Naira; the selling of US$ to BDCs, borrowing and spending to dig the economy out of a hole, adopting accommodative monetary policies to stimulate growth, raising interest rates to attract portfolio flows to support the Naira cannot fix the weak foundations of the economy. On the contrary, they will deepen the hole and weaken the foundations further. It is important to remember that Nigeria has been selling its national assets since 1986-88; that it has willfully promoted financial contagion, asset price bubbles, capital flight and instabilities through capital account liberalization and de-industrialization that have harmed long term growth by expending its savings on the consumption of imported goods and services, fuel imports and capital flight; through de-industrializing policies (various episodes of generalized increases in supply prices; deterioration in public infrastructural assets; public bias against locally manufactured cars, furniture and consumables and the budget effects of unequal income distributions which favour imported goods and services and capital flight). Students of economic history will know that no nation successfully digs itself out of the depth and breadth of economic decline that is Nigeria’s situation in the short term. There are sufficient examples: United States and the global economy (1973-86); Japan (1990-date); Eurozone (2008-date); Brazil (2013-date) just to mention a few.

Decision

I vote to hold. The primary reason for my vote is that monetary policy rate has lost its potency for stimulating growth and employment and for reducing domestic prices and the pressure on exchange rate which passes through to prices directly and indirectly through high inflation expectations. The interest rate corridor used as the signaling device for influencing the interbank rate has long collapsed. Lower rates have been undermined by conflicting movements in money supply and by the interest rate asymmetries institutionalized by deposit money banks who pass-on lower rates to borrowers with high interest rate elasticities (the big ticket borrowers who account for most of borrowed funds) and pass-on higher interest rates quickly to borrowers with low interest rate elasticities (retail borrowers who have higher output and employment elasticities). The favoured sectors are the rent havens (oil and gas, general commerce, utilities, etc.) that have low growth and employment elasticities. The unfavoured sectors are not only constrained by costs, they are also constrained by access and by policy bias. The AMCON effect has created a liquidity challenge that has weakened the effectiveness of monetary policy since 2012. Fixing the malfunctions in the forex, money, stock and security markets to minimize the predominance of rentier activities are far more important than changing interest rates. The state of the economy, believe me, does not need any policy dissonance between monetary and fiscal authorities. I have repeatedly argued that neither fiscal nor monetary policies could solve the problem. I had emphasized that “the cross-cutting causes of the stagflation demands analytical breadth, depth and clarity well beyond the typical requirements for monetary policy because the networks of cause-effect relations that produce stagflation extend far beyond the domain and reach of monetary policy.” I have also argued that “it is a potentially disastrous error to expect and to demand that monetary policy carries the economy either through traditional instruments or in combination with expansions in its balance sheet.” It is far more dangerous to anchor policy on the savings of foreign nationals in a global economy where only the risk lovers are more likely to be attracted at unusually high and harmful premiums. I am still convinced that there is an “urgent need to harness, direct and put to effective use the best available intellectual and political resources” by both the fiscal and monetary authorities to develop a forward looking strategic macroeconomic management framework for Nigeria.” This is the critical foundation upon which medium to the long term effectiveness of macroeconomic management compatible with the long term wellbeing of Nigerians could be built.

It ought to be clear to all stakeholders that the economic and welfare costs are growing every second as the recognition, consensus and action lags by the relevant actors in the macroeconomic policy space are lengthening!

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: