MPR: CBN caught between the devil and the deep blue sea
WITH general elections barely six months away, the alarm sounded by the apex bank on the threat posed by unbridled election spending is not entirely surprising. Indeed, it merely re-tells the all-too familiar story of an economy whose real sector is perennially starved of cash yet retains enough for the indulgent political class to draw upon.
At the side-line of a conference in Sharm El-Sheikh, Egypt, last week, the Central Bank of Nigeria (CBN) Deputy Governor, Joseph Nnanna, reportedly gave indication that the Monetary Policy Committee had endorsed the idea that “the Monetary Policy Rate should increase if inflationary pressures build up”. He alluded to an earlier warning by CBN governor, Godwin Emefiele, on the implication of the delayed passage of the N9.12tn ($25bn) 2018 budget and pre-election spending, both of which the apex bank chief had pointed out would pose grave risks to macro-economic management in the second half of the year.
He agreed that “these factors would warrant a rate increase to send the right signal to the public, that the central bank will tighten policy to respond to higher inflation”. He added: “the apex bank is in the mood for tightening. How fast are we going to tighten is what members haven’t agreed upon”.
To be sure, nothing in the planned monetary tightening can be said to run counter to the prevailing orthodoxy underpinning the apex bank’s monetary management framework. So predictable has been that path by now as to constitute a defining feature of the apex bank’s monetary policies.
We understand the imperative as indeed the peculiarities which make the measure necessary. Ordinarily, for an economy where money supply tends to run riot – far ahead of the wheel of production and other parameters undergirding the real economy, routine monetary tightening would seem inescapable. And this is aside the additional free-flowing cash from the monthly federation account allocation committee meetings; cash injections neither linked to domestic economic activities nor derivable from them – all of which make monetary management by the apex bank daunting enough. It seems therefore understandable that the potential havoc to be wreaked by the cyclic addition of the trove routinely unleashed during electioneering seasons would call for tough, proactive measures.
The big question is what this means for the economy. With inflation on a steady decline, the expectation before now is that the PMC rate will begin to head southwards. Current indication is that this will not happen. Considering that the MPR has remained at14 percent since July 2016, this must be somewhat disappointing. Most certainly, the planned hike in MPR will further drive up the cost of funds for businesses, and in most probability, potentially increase non-performing loans for banks, most of which are likely to re-price their assets. The alternative, unfortunately, is a galloping inflation – something that nobody wants.
There are understandably, no easy choices for the apex bank. While the question of whether the real sector can continue to pay for the delinquency of the political class seems a fairly straight one to answer, in presentation, it is something of a Catch – 22 situation: either to go after the inflation monster by constricting access to credit, or leave money supply to go haywire. Either way, there is a steep price to pay.
It bears stating that the current fixation with inflation targeting will not do any more than the perennially hiking of the MPR will cure the problem of excess liquidity. Both must be seen as symptoms of problems that are profoundly structural in nature. Invariably, the choice before the country comes basically to boosting employment and productivity while keeping an eye on inflation. This is certainly a far cry from the current orthodoxy.