Nigeria’s economic policy jam

Two things are clear about Nigeria’s fiscal and monetary policy options in 2017, one is that there are no easy choices and two; the choices available would require spandex tight collaboration between the fiscal and monetary authorities.
The economy suffers from a number of basic issues, for one, Inflation though declining is still far above the preferred target range of between 6 and 9 per cent per annum. Over the last six months inflation has fallen from just under 19 per cent per annum at the beginning of the year to a more recent June 2017 figure of 16.1 per cent. The 16 per cent drop in inflation has demonstrated the effectiveness of the central bank of Nigeria’s commitment to bringing down the average annual price level. But this has come at a huge cost. The tight approach to money supply by the CBN has kept domestic interest rates at levels that have muffled the economy’s ability to grow at a faster pace; gross domestic product is expected to grow at less than one per cent in 2017. Prime lending rate currently hovers between 22 and 25 per cent while typical commercial borrowing costs range between 26 and 28 per cent. This does not make for an easy investment environment, especially when it is realized that corporate earnings are taxed at a hefty 30 per cent (compared to South Africa’s 28 per cent) and personal incomes are taxed at a stiff 7 per cent with a rolling marginal rate of 4 per cent.
The recent July decision by the CBN’s monetary policy committee (MPC ) the policy formulating body of the bank , to keep monetary policy rate (MPR) at 14 per cent and bank cash reserve ratio at 22.5 per cent underscores the banks dogged decision to keep inflation in check and defend the naira from falling in the foreign exchange market.
As good as this seems, it still creates some difficulties for the administrations fiscal objectives, especially that of creating employment. Nigeria’s unemployment rate (13 per cent) is one of the highest on the continent and perhaps only lags that of South Africa’s (presently estimated at 26 per cent). The problem is that the fiscal authorities (the finance minister, Kemi Adeosun, and her co-travelers in the ministry) want to expand the economy by bringing down local interest rates and put more money in the hands of local consumers who they hope will spend the economy out of a recession; unfortunately Nigeria’s central bank has different ideas.
More concerned with the consequences of inflation on the real value of money and the impact of loose money supply on the foreign exchange market; Godwin Emefiele, the nation’s central bank boss, has given the fiscal authorities a cold shoulder. The CBN chief has made it abundantly clear that he would not let up on a policy of cutting bank money supply and bringing down inflation particularly at a time the country was battling with falling international oil prices and widening budget deficits. This has often placed the MoF and the Bank on opposite sides of the policy fence, with the CBN so far coming out tops. So where does this leave the country’s business community? Confused if nothing else.
The mixed signals given off by the fiscal and monetary authorities are already creating higher levels of uncertainty in financial circles. High interest rates are primed to rise even further; output may also slide by at about 5 per cent in the course of the year as inflation drops to a probable low of 13.5 per cent per annum. However, analysts share a common view that inflation in 2017 will stay above the CBN preferred band. Dr Biodun Adedipe, Chief Consultant B.A .Adedipe & Associates, notes that, ‘you cannot pursue growth and inflation targets simultaneously, one thing has to give for the other, and in our peculiar circumstances growth considerations should trump inflation. We need to get the economy moving again and then inflation will begin to decline’, he said on the sidelines of a recent Financial Correspondents Association of Nigeria (FICAN) seminar in Lagos.
Adedipe’s position becomes particularly noteworthy when it is realized that youth unemployment in Nigeria stands at a staggering 25 per cent, or about twice the national average. When it is further realized that over 60 per cent of the nation’s population is below the age of 35, then signs of a looming social crisis becomes unmistakable. According to Adedipe, ‘we have got to do something now to defuse this ticking unemployment bomb’.
Analysts have argued that the CBN has been too keen in fighting the symptoms of average price increases rather than the disease of low domestic productivity and output. In its fight to get inflation into single digits it has willfully ignored cost push considerations which seem to be the primary cause of sustained local price hikes. Economists of this persuasion insist that rising interest and exchange rates have fed into the local wholesale and retail businesses to raise the costs of goods sold across domestic markets and led to an increase in the average consumer and producer price indexes. The argument is that falling oil revenues and worsening exchange rates has led to ‘imported’ inflation which has been made worse by the federal government’s repeated funding of the budget deficit by running to the local treasury bills market for easy cash thereby raising domestic interest rates and ‘crowding out’ private sector operators.
Indeed, at the beginning of the year treasury yields in the country ranged from 16 to 18 per cent per annum, meaning that investments in treasuries gave double digit risk-free returns that proved far superior to risk-adjusted private sector money market investments. According to, Surajudeen Akinyemi, an economist and chief executive officer of Surka 713, ‘the fixed income market in the last two years has been an investors delight; buying into the 180 and 360 day treasuries has kept savvy investors smiling for quite some time’, he notes.
As recently as last week the fiscal authorities disbursed a beefy N652.2 billion to the three tiers of government from the month of June 2017 revenue allocations just as the CBN took preemptive measures to douse potential inflationary pressure from the stimulus by issuing N229.14 billion worth of fresh treasury bills this week.
The political tug and pull between the MoF and the CBN has so far lead to unintended consequences and if both authorities refuse to harmonize their policy tools to ensure inflation-free growth the sluggish economy could topple into deeper problem in months ahead. Analysts admit that the task of pursuing growth without inflation in an import-dependent economy is problematic, but unfortunately, it is the only game in town; especially if the government is to meet its 2015 campaign promises and avoid the ire of a prickly electorate come election time in 2019.