(Interview) Nigeria’s inflation problem is structural ­- Chizea

(Interview) Nigeria’s inflation problem is structural ­- Chizea

Dr. Boniface Chizea, Managing Director, BIC Consultancy Services limited is a renowned economist and public commentator. In this interview with Business Hallmark, he dissects the performance of the Central Bank of Nigeria (CBN) and the economy so far. Excerpt

The CBN has worked hard at keeping inflation in check over the last 3 years, how would you assess its performance?

If you like the core mandate of the Central Bank is to achieve and maintain price stability. But the Central Bank is able to do this effectively to the extent that there is consistency between the monetary and fiscal policy. For instance, in a situation whereby the Central Bank is pursuing restrictive monetary policy to rein in excess liquidity the fiscal authorities cannot at the same time be embarking on expansionary fiscal policy by way of the maintenance of a large deficit. In such a situation where there is diversion, it becomes a difficult task being able to pull off this feat of the maintenance of price stability

What has been the situation in the case of Nigeria? We have a situation whereby the inflation in Nigeria was not caused by the usual demand and supply situation where often inflation is caused by relatively high demand vis-à-vis available supply of product and services. The cause of the inflationary spiral in the last three years is essentially structural caused by lack of availability of foreign exchange for an economy overly exposed to the external sector which automatically translated to high cost for the sourcing of products which transmission effect resulted immediately to the high inflationary pressure which was witnessed in the land.

And therefore, since the cause of the inflationary pressure is not due to demand pull factors but cost push, it means that you cannot find a solution as if what has caused the inflation is excessive demand which could then be impacted by the cost of borrowing which is benchmarked on the Monetary Policy Rate (MPR). And this is why the fiscal authorities formed the erroneous opinion that the Central Bank was withholding its cooperation as it struggles to get the economy to exit the recession by refusing to lower the MPR.  While the CBN stood its ground because it remains fully conscious that what caused the inflationary spiral in the first place was due to drought in dollar liquidity. And therefor it remains mindful of the need to maintain the attractiveness of the monetary instruments to sustain inflow particularly from portfolio investors which would be negatively impacted if rates were allowed to go southwards. This explains the reason why the MPR has essentially been kept at a relatively high rate of about 14 per cent over the period under review.

When the Governor came on board in mid-2014 the softness at the oil market was upon on us and there was the struggle on the part of the Central Bank to sustain the exchange rate of the Naira since as was explained by the Governor during his maiden press conference that he did not believe in the devaluation of the Naira as such a strategy is only recommended for an economy that is intent on gaining export market advantage. But since the main source of foreign exchange inflow in the country is already denominated in foreign currency it was no longer possible to aim at such export market share gain advantage and that any such measure would only result in imported inflation with devastating effect on capacity utilization and rising unemployment which all exacerbate the mounting misery index in the land. And therefore, a pegged rate was maintained for a very long time which resulted to the Central Bank being called all kinds of name bordering on the belief that it does not know what it is doing particularly as it was reluctant to float the Naira for its value to be determined by a nonexistent market force.

The Central Bank eventually bowed to pressure and blackmail particularly as the international rating agencies joined the fray in castigating it that it is adopting the wrong approach in its management of the foreign exchange with most compatriots oblivious of the fact that the rating agencies were simply pandering to the interests of the external investors with little or scant regard paid to the interest of Nigerians in the matter. And eventually the Central Bank introduced the flexible approach to managing the exchange rate in the expectation that it would encourage the foreign investors to return with their investments. The rate of exchange which had been controlled under the managed float regime so far went out of kilter and we almost had a free fall in the exchange rate with its transmission effect resulting in heightened inflationary pressure. The situation was clearly getting out of control when thanks to providence in response to improved fundamentals the Central Bank was able to massively increase dollar liquidity in the economy to bring matters under control. It is a matter for the records that before a reversal could be attained on the rates that it had at some point in time gotten to as low as 525 Naira to the dollar. But for the massive injection of dollar liquidity the situation could have gotten much worse with the misery index unbearable with the distinct possibility of a revolution in the land.

In continuation with the effort to sustain the rate the Central Bank provided dollar liquidity to different sectors of the economy through various windows which inevitably resulted in multiply rates of exchange. The window opened for Investors and Exporters so far has proven very efficacious as this window allows buyers and sellers to mutually agree on transaction rate effectively making the accusation of the use of administrative controls to determine the rates superfluous. The outlook is very reassuring as the country has commenced witnessing inflows of foreign exchange particularly of the portfolio variant which has accounted for the improvement in the level of transactions at the stock Market boosting its relevant indices.

And as the spread between the interbank foreign exchange window and the parallel market rates reduce the tendency to speculate is being gradually terminated. With improved liquidity supported with the stable prices at the oil market coupled with peace at the Niger Delta region, we can conclusively claim the worst is behind us. The expectation is that the gains of this unsavory experience will not be wasted particularly if we do not resist the temptation to neglect some of the strategies we have embarked upon to diversify the national economy away from its unhealthy dependence on the extractive enclave sector of the economy.

People have accused the CBN of crowding out the private sector by sustaining a high interest rate environment, do you agree?

The Nigerian economic environment has been a high interest rate one not quite conducive for economic growth and development. But the Central Bank does not have the magic wand it could use to simply cause interest rates to reduce. The prevalent interest rate in the economy must take its bearing from the fundamentals of the economy. It is not for instance possible to have an interest rate which is lower than the rate of inflation. When that is the case the depositor would be paying an inflation tax because the money he has left with his bank would be losing value under this scenario. And therefore, the situation in Nigeria where we are currently celebrating the fact that the rate of inflation has dropped progressively over a period of three months to 17.2, it would be unrealistic to expect deposit rate that is lower than this rate which is an indication of the cost of funds to the banks. And when the costs of provision of service is factored in with the payment of deposit insurance premium recovered including the payment of dividend to shareholders’ which is paid from the profit made, we begin to appreciate the dilemma which the banks face in keeping interest rates at the desired level.

And to that extent the challenge which the Central Bank faces as it grapples with the prevalent investor unfriendly MPR. There will be a moral dilemma if the MPR is markedly different from what the fundamentals of the market dictate. We read in the papers that the Central Bank has been invited by the senate to explain why it has in collaboration with the cabals at the banks sustained such injurious high interest rate in the economy .One expects that the members would have access to this interview to begin to understand and appreciate the dilemma which confronts the Central Bank in this respect. The Central Bank has no particular interest in sustaining a high interest environment and therefore there can be no deliberate policy to crowd out the private sector. We should expect that as the economy improves and the rate of inflation stabilizes and reduces that the prevalent interest rate would follow suit. There is no one who needs to be tutored on the deleterious effect of high interest in the economy particularly for the viable performance of the small and medium scale enterprises so crucial for the enhancement of the job creation potentials of the economy. But the fact remains that there is no quick fix anywhere for bringing down the interest rate in the economy.

Foreign exchange management has been an issue that has split economists, how would you assess CBN’s performance?

As I explained in the answer to the first question on the management of inflation which is essentially driven in the Nigerian environment by performance of the exchange rate, the Central Bank had received a lot of flak as it attempted to grapple with the challenges of managing the exchange rate in the period under review sometimes it does appear that we forget too soon the cause of the problem; which is lack of foreign exchange liquidity to drive the economy. To put this discussion in proper context it helps to remember that under the immediate administration at the Central Bank that the price of oil remained in excess 100 dollars a barrel and at some point in time reaching to high 140 dollars per barrel, while under this dispensation it sold at some point in time for as low as below 40 dollars per barrel and that explains all the challenge that confronted the country in this respect. And what is galling is the fact that some analysts often in our environment would pretend to know more than those that have direct responsibility sometimes based on what they have learnt which might not be particularly applicable in our environment. For instance, to those who have argued that we should leave the determination of the rate of exchange to market forces, I have often been heard to ask where the market in foreign exchange is in our economy and even what it really means to leave the determination of the exchange rate to market forces in an environment where there is a sole and dominant supplier of the foreign exchange liquidity in the economy. And for that matter we might be inclined to ask where in the world is that country that would leave the determination of its rate exchange to market forces? The Central Bank in the face of rapidly dwindling reserves as a result of the fall in oil price and the activities of the militants at the Niger Delta which impacted adversely on the accretion to reserves against the background of an unsustainable high demand of foreign exchange had an emergency situation in its hands as it attempts to grapple with this challenge. We thank God that we are beginning to witness a glimpse of the light at the end of the proverbial dark tunnel in this regard. My take is that the worse in this respect is behind us as we continue to hope that all the strategies we embarked upon would not soon be jettisoned as the situation improves. The result on ground would imply that the Central Bank is deserving of full marks as it had discharged creditably its onerous responsibility in this regard.