A more effective (talk less of a transparent) monetary policy regime is, however, a huge ask if the central bank continues its bank-biased policy. Just as central banks across the world are trialling digital currencies in a bid to keep the cryptocurrency experiment reined in, there is a growing need to modernise the monetary transmission mechanism. Some commentators even argue that the increasing roles of Fintechs and mobile phone companies in the national payments architecture make this an urgent need.
The decision, last week, by the Central Bank of Nigeria (CBN) to hike its Monetary Policy Rate (MPR) by 150 basis points (i.e. 1.5 percentage points) reverses the apex bank’s long-standing pursuit of an easy money programme that was part of a portmanteau of heterodox monetary policy management. Persistently high domestic inflation rates is the proximate cause of this decision. But across the broader economic canvas, there is growing evidence that the gain from domestic output growth is not compensating for the cost of ultra-loose fiscal and monetary policies.
Would the steep increase in the central bank’s benchmark rate by itself address both these immediate and and remote concerns? Very unlikely. The Nigerian economy has flailed over the last eight years because at critical decision levels, the incumbent federal administration tried to upend a certain type of logic. In the new thinking that has come to dominate domestic policy making, outcomes are a linear expression of intent. Hence, all that matters is for policy makers to mean well.
From this theoretical vantage, at the fiscal level, government could borrow to its (good) heart’s limit, with nary a thought for the economy’s ability to usefully absorb the inflow of funds. Nor any consideration of how the projects financed by such large borrowing were going to help the economy either service the debt or pay back much later. It is scant surprise that we have ended up consuming copious amounts of the ensuing loans (paying public sector salaries, for one; not to talk of meeting due debt service payments). Of course, the return of the economy to normal and sustainable growth levels would see the next federal administration unwind this process.
Still, nowhere are the reforms that the country will need going to be as important over the next four years as in the monetary policy space. The CBN’s interest rate move is useful only because it finally recalibrates the proper direction in which the economy should move. Nonetheless, there are five lessons from the current experiment. The first is that the Central Bank Act’s limit on how much of the Federal Government’s deficit the apex bank may convert into cash…
Beyond this, however, Nigeria’s current growth constraints are also a reform challenge. The distance from Kano to Lagos (for commercial operations) is both an infrastructure and a policing challenge. Understandably, security considerations immediately worm their way into any conversation about the constraints posed by the Nigeria Police Force (NPF). This is why we have got to do whatever it takes to fix the police’s ability to tackle our adverse security environment. The police, however, present additional problems. A huge point missed by the official response to the #EndSARS protest is how its officers and men (at roadblocks and on patrol) consistently act in restraint of trade and commerce.
Still, nowhere are the reforms that the country will need going to be as important over the next four years as in the monetary policy space. The CBN’s interest rate move is useful only because it finally recalibrates the proper direction in which the economy should move. Nonetheless, there are five lessons from the current experiment. The first is that the Central Bank Act’s limit on how much of the Federal Government’s deficit the apex bank may convert into cash in any given year is wise beyond the document’s years. Secondly, the naira’s exchange rate matters. Not just for determining relative prices. But even more crucially, as a gauge of the appropriateness of policy. Then, the headline inflation rate matters in the same way. Fourth, the relative level of the central bank’s benchmark rate is important to both these gauges. And finally, interest rates are far from the biggest constraint to doing business in this country.
If these lessons teach anything at all, it is that the economy is but the result of the closely intertwined connections between its otherwise discrete-looking components. Consequently, if the return to tighter monetary conditions, through higher interest rates, is to have any meaning in the fight against inflation and in the restoration of relative prices across the economy as signals of the supply and demand (im)balance across sectors, it must be part of a complete overhaul of domestic monetary policy.
Banks, then, would be the first point of reforms to monetary policy. And here, the immediate deliverable is an easy one. Banks currently struggle to hold on to their deposits because of the central bank’s asymmetric cash reserve ratio (CRR) policy. For most banks in the country today, their effective CRR is far higher than the official target ― and none is the wiser how this is calculated.
Up until recently, banks were the main transmission vehicle for monetary policy. The central bank raised rates, and the cost of banks’ borrowing from the central bank went up. In turn banks raised the rates on their assets and liabilities. Immediate effect? Deposits moved into banks’ vaults. And marginal borrowers fell off banks’ asset portfolios. Net effect, the pressure on prices from cash in circulation eased.
Banks, then, would be the first point of reforms to monetary policy. And here, the immediate deliverable is an easy one. Banks currently struggle to hold on to their deposits because of the central bank’s asymmetric cash reserve ratio (CRR) policy. For most banks in the country today, their effective CRR is far higher than the official target ― and none is the wiser how this is calculated. Thus, banks parlay additions to deposits into low-yielding money market instruments, rather than have the central bank debit them for such. To the extent that the central bank’s increase in its CRR debits to bank was compensation for its easy money policies, the decision to tighten monetary conditions by increasing the benchmark rate will require for its success the regularisation of the CRR regime. The aim here must be to return policy to the official rate, and to restore transparency to policy.
A more effective (talk less of a transparent) monetary policy regime is, however, a huge ask if the central bank continues its bank-biased policy. Just as central banks across the world are trialling digital currencies in a bid to keep the cryptocurrency experiment reined in, there is a growing need to modernise the monetary transmission mechanism. Some commentators even argue that the increasing roles of Fintechs and mobile phone companies in the national payments architecture make this an urgent need. Irrespective of how the need is described, the primacy of banks in the transmission of monetary policy is likely to suffer a dent. Institutionally this will call for a firmer handshake between the central bank’s Banking Supervision Department and its Other Financial Institution’s Department. Procedurally, it should see the apex bank play a diminished role in the activities of the Bankers’ Committee.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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