Emefiele

By Chris Uche

A big sigh of anguish greeted the Monetary Policy Committee, MPC, decision to increase the Monetary Policy Rate from 12 to 14 percent. Expectations were high that the MPC would do the needful and the conventional by holding the rate in order to check the threat of depression and negative growth rate. Alas, the MPC took a bet on hope by defying accepted economic wisdom not to raise rates and went for the long term, rather than address the immediate and short term response to a contracting economy, which would further overburden Nigerians with hardship.

It should be said that the MPC is a very professional and serious minded policy body that looks at the entire trajectory of the economy before adopting the best solutions in the circumstance. A man whose house is on fire does not sit idly and wait for the fire service; no, he will try everything within his ability before they arrive. So the MPC may be justified by taking the long term approach of hope in dealing with a dire situation.
But what is this difficult situation confronting Nigeria which the MPC had to resolve? We can immediately identify eight challenges facing the economy, which the MPC had to deal with. First, government revenue has dropped by over 50 percent because of crash in oil prices which is the main stay of the economy, thus creating general economic dislocation given that we are an import dependent economy. Second, revenue estimates and projections for the 2016 budget have dropped by almost 40 percent as a result of militant activities in the Niger Delta, thereby compounding an already bad situation.
Third, benchmark inflation has been on rampage rising by over a double from just 8.2 percent in July 2015 to 16.5 percent in June 2016, creating serious economic hardships, discouraging savings and exposing fixed income earners, such as workers and pensioners to value depreciation. Fourth, an over exposed banking sector reeling under heavy NPL, tight liquidity squeeze, and unable to undertake lending activities. Fifth, we have a turbulent foreign exchange market that has challenged the creative ingenuity of the monetary policy authorities with the foreign reserves dropping from over $29 bn a year ago to $26 bn.
Sixth, the expected investment inflow has remained largely elusive as the risk profile of the economy still rates high and the environment hostile, leading to recent downgrade of the economy by some rating agencies. Seventh, the economy is now in reverse gear moving from a 4.7 GDP rate in 2015 and the expected 4.2 percent in 2016 to -3.7 percent in the first quarter and a projected annual average growth of -1.7 in 2016. Finally, there is a near absence of a fiscal policy support, creating a vacuum and leaving economic policy to stand on one leg – monetary policy manipulation.
This is the conflicting and complex situation the MPC must resolve to keep the economy going. As is common in public policy, this required delicate balancing and careful trade-offs. In a classical Keynesian economics, an economy under recession requires a large dose of stimulus to create income and demand and reflate the system. Since the Great Depression in 1929, this has become the standard response to economic down-turns.
When the world economy faced a meltdown in 2008 at the inception of the Obama presidency, with widespread bank failures and mortgage foreclosures, Prof. Paul Krugger, a 2006 Nobel Prize winner in Economics, advocated in his book, Depression Economics, which is a revised doctoral thesis on Keysian theory, a stimulus. With Larry Summers, a Harvard professor, as Chief Economic adviser, and Tim Gaithner, head of New York FED, as Treasury Secretary, President Obama rolled out a $700 billion stimulus package and saved the world from economic disaster.
But that is like comparing apple and orange; our situation is somewhat different and more aggravated. With inflation in double digit and forex rate at an all time high of over N300 at interbank, a massive intervention will create a hyper inflation that may further punish the people. However, not reflating the economy may lead to depression, which was what happened in 1929, when President Hoover refused to stimulate the economy. This is the dilemma the MPC faced but their option, as reasoned and informed as it may seem, is an escape from reality.
This explains why many experts are disappointed with the position of the MPC. By taking a long term approach to an immediate challenge the MPC shifts the burden to the already over burdened people, as Keynes said himself, in the long run, we are all dead. In Nigeria, the people are the whipping dog and usually cajoled to tighten their belt with no succour in anticipation.
Raising rates will create more money for government, cripple production and exacerbate unemployment, but unfortunately it will not curb inflation which is the main target, because the source of our inflation is not too much money supply but cost of forex and removal of subsidies. Deciding to hold inflation and sit out the recession is defeatist and reactionary. For an economy in recession, with suffocating unemployment, and huge infrastructure deficit, it could do with some level of inflation by stimulating to avoid slipping into depression.
People should be put to work to create income and demand and eventually growth. Hiking interest rate would not do that. Instead, it would make borrowing more expensive and remove the possibility of growth.
Waiting for the economy to be reflated with N350 billion after N3 trillion had been withdrawn from the financial system is unserious. Recall that the N1.7 trillion capital projects vote in the 2016 budget is to be borrowed.
Hope is important in life but it cannot be a substitute for effective economic policy.
Our crisis is compounded by the absence of fiscal policy leadership, which is like the tail wagging the dog. We agree with Mr. Bismark Rewane, CEO, Financial Derivatives, that, for the MPC, it was a clear position of monetary policy dilemma and there was no easy option. But the MPC erred irredeemably by opting for the easier, less controversial, and less creative and less courageous alternative by following a familiar and well beaten path. According to him, “tactical moves do not solve structural problem.”

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