The Monetary Policy Committee (MPC) following its meeting which took place on Monday and Tuesday, November 23 and 24 took decisions to relax the hitherto suffocating tight stance of monetary policy which had been long anticipated by most informed and patriotic economists and knowledgeable public commentators.
It is on record that I had predicted on a Channels Television Business Morning programme interview while discussing the likely outcome of the MPC meeting held in September, 2015 that the benchmark interest rate would be reduced coincidentally by two hundred basis points, just as it has just happened. I had then argued that the fiscal authorities have not made any secret of their intention to reflate the economy to grow badly needed jobs for the teeming unemployed youths of the country and also to bring idle capacities back to work to generally decrease the level of unemployment, reduce the misery index in the land and the increasing tendency to anti-social behaviour, grow tax income and augment the general welfare of a generality of our population.
I had argued that the MPC better take a cue and begin to take steps to drop the MPR albeit notionally otherwise just as the president had given his support for the anti-devaluation stance of the central bank, it would not be farfetched if one extrapolates to expect that he would similarly speak up in condemnation of the committee if it continues to fail to align with the expectation of most compatriots in this connection. I say most compatriots are in agreement with the thrust to diversify the economy advisedly because as should be expected there are those not in agreement as we would soon make clear as we track reactions trailing the announcement of this redirection in policy stance by the central bank.
But it should be surprising and indeed beggars belief that the benchmark interest rates remained unchanged for a long period of six years! It is impossible for this experience to be repeated in advanced economies of the world.
In most countries the monetary policy authorities only have interest rates to play with and the signal an adjustment in interest rates sends is often potent and immediate.
We were able to keep benchmark interest rates at same level for such a long time because the focus was more to the external sector and therefore the rate of foreign exchange.
Let us remind ourselves of the complement of the decision taken by the MPC following the meeting under review. In addition to the reduction in benchmark interest rate by 200 basis points from 13 to 11 percent, the Cash Reserve Ratio was reduced from 25 to 20 percent while the corridor around the MPR was adjusted from the hitherto symmetric position of 200 basis points to an asymmetric rate of +2/-7 points which implies that the central bank will lend to deposit money banks at the rate of 13 percent while deposits made with it will attract only 4 percent signaling the preferred thrust of policy in this regard as it is consistent with the prevalent posture of more credit delivery to the real sectors of the economy.
The central bank decried the posture of the banks when recently similar accommodation was made following its last meeting when the CRR was reduced from 30 to 25 percent when the banks preferred to invest in fix income securities rather than lend to the real sectors of infrastructure, agriculture, mining and industry.
The bank has served notice that fund releases will only be made to those financial institutions that express their preparedness to lend to the real sector as identified by it.
What have been the reactions so far? As should be expected the reactions have come thick and fast and have also been varied. It is probable in order to recount the reaction of the president himself as an opener as conveyed during his swearing in of the newly appointed ministers when he observed, “The central bank assisted 30 states in the federation with concessionary loans to offset salary arrears for their workers. On the monetary side, the CBN has implemented country specific and innovative policies that have helped stabilize the exchange rate and conserve our reserves.”
I have also heard views expressed to the effect that what the CBN has now done is unorthodox as it is attempting to inject liquidity into the financial sector while retaining capital controls at the foreign exchange market! The fact is further bemoaned that this development would also spike inflationary spiral which will discourage foreign investments particularly of the portfolio variant.
Some have commented by pointing out the rumoured intention of the US Federal Reserve to increase interest rates in America toward the end of the year pointing out that it could lead to a reversal of investment flows to the US. But such reactions have not factored in the celebrations from the galaxy of our Micro, Small and Medium Scale Enterprises in anticipation of the likely potential consequences of this development as it impacts on the cost of capital in the positive direction demonstrating this overly excessive focus on the likely consequences of policy measures on the external sector to the neglect of development in the domestic economy.
It is salutary at this time to speculate on the likely impact of the recent shift in posture by the MPC. It has been estimated that the relaxation just announced is likely to inject an estimated liquidity into the financial system in excess of N700 billion. The MPC prefaced the relaxation stance of policy by citing an indicative reduction on the rate of inflation between the last two quarters as supportive of this measure.
But my take is that while conceding that the core mandate of the central bank is to maintain price and macro-economic stability, the challenges confronting the country today calls for a slight shift in focus on this policy to reflate the economy, bring back idle capacity to work, grow jobs and purchasing power while ameliorating the misery index in the land.
We, should, therefore be prepared to trade off a slight increase in the rate of inflation even if it goes outside the preferred target range of single digit. The banks are reeling from a liquidity crunch particularly following the recent introduction of the Treasury Single Account which drained massive amount from the banking sector estimated in multiple of billions of naira.
Therefore this move should amount to extending a life line to the banks which should be most welcome as it enables the banks to continue to sustain a going concern.
Interest rate charged by banks is aimed to recover the cost of deposits which they mobilize, provide for the direct cost of offering service, that is, overheads including deposits sterilize in reserves, the payment of the insurance premium and provide for the estimated risk inherent in extending the credit and make a return on investment. The benchmark interest rate is simply indicative as it only comes into account when a bank borrows from the central bank which most banks will not do in a hurry as it directly raises a red flag to the regulator.
Having made this observation it remains a fact that interest rates in the Nigerian economy have been prohibitive particularly to the SMEs, the engine that should drive the economy.
Therefore if this measure achieves a reduction in the cost of funds across board it should give a boost to activities in the economy.
What will be most impactful is if the authorities are able to get the banks as indicated to extend credit to the real sectors of agriculture, mining, industry and infrastructure arising from this liquidity infusion.
BY BONIFACE CHIZEA