The monetary policy committee’s decision last week to leave benchmark
interest rate unchanged provided a helpful platform for the turmoil in
the financial markets to ease. Yet the policy making team of the
Central Bank of Nigeria isn’t moving in the direction that will
address the fundamental questions that are keeping the markets and the
economy unsettled. Applying short-term measures to address structural
issues in the economy leaves us with the risk of greater instability
in the future.
Ours is an economy with one of the highest interest rates in the world
and economists and financial experts agree that no nation can develop
with high interest rates. Though the monetary policy committee managed
to keep interest rates unchanged last week, a significant statement
has been made by four out of nine members voting for interest rates to
be raised further. High interest rates may help us achieve temporary
stability in the financial markets but will no doubt complicate
serious long-term issues facing the economy.
We need to take a serious look at the structure of the economy that
makes us keep raising interest rates to meet short-term interests at
the expense of building long-term economic capacity. If monetary
policy continues to ignore the strain it poses to domestic output, the
economy will continue to drift from employment generating productive
activity towards short-term trading in the money market.
If the long-term interest of the economy is given the priority it
deserves, what we should be pursuing now are domestic and foreign
direct investments instead of the homeless portfolio investments that
keep floating around the world. No matter how we try to provide home
to portfolio investments, they remain the hot money they are, ready to
flee anytime the risk-return relationship that drives them are altered
anywhere around the world. This means that significant portfolio flow
is in itself a destabilising force to our domestic financial markets.
As long as monetary policy remains shaped to attract foreign portfolio
investors, our domestic economic environment will be an unfertile
ground for both local and foreign direct investments. What we really
need in an economy that has the level of job crisis we are facing at
the moment are direct investments that increase real sector output,
create employment and increase the level of aggregate savings and
We call on the monetary policy committee of the Central Bank of
Nigeria to try to achieve a policy balance between securing temporary
reliefs in the financial markets and encouraging long-term capacity
building in the economy. The short-term disturbances that are
presently getting priority in policymaking are after all the
consequences of structural imbalances in the economy.
We expect that monetary policy should be shaped towards realising our
central objectives at this time, which are strong growth in domestic
output, employment creation, long-term stability of the financial
markets and the economy. These objectives require a strong growth in
direct investments and therefore need a low interest rate environment
to be accomplished. The high interest rate policy we have in place
will therefore worsen the state of the economy in the medium-term.
Long-term capacity building in the economy cannot happen where returns
on shot-term engagements in the financial markets are high and rising.
We expect to see a more pragmatic monetary policy regime that will
apply a fundamental approach to the current challenges we are facing
in the economy.
We are concerned that monetary policy is getting overstretched and the
limit it can go to ensure a fair balance between the real economy and
the financial markets has been reached. Inability to secure fiscal
retrenchment is a major draw back in the pursuit of a stable exchange
We should therefore not continue to apply monetary policy alone in
seeking to achieve a stable exchange rate when the source of pressure
on the local currency, which is fiscal, remains unaddressed. The
current policy thrust is being sustained at the expense of long-term
domestic economic capacity.
Our economy that has been subjected to much liquidity strain actually
needs considerable monetary policy stimulus through low interest
rates. Sustainable growth and stability cannot be attained with
portfolio investment inflow for which we are driving interest rates to
the sky. What we need are investors who want to take advantage of our
cheap labour and large internal market to set up locally, employ men
and materials here to increase domestic production and consumption and
in the process, stimulate the multiplier effects in the economy.
This is the class of investors we really need to secure the future of
our nation. Such investors are out looking for low interest rate
economies. They represent the gold our monetary policy is presently
sacrificing for the bronze of unstable portfolio investments. The
danger is that we are insidiously undermining our long-term domestic
By so doing, we expose our economy to greater risks in the future. The
risks include economic depression, business closures, rising
unemployment, declining output, falling aggregate consumption and so
on. Monetary policy is supposed to be tool with which these risks are
mitigated and not extended.