Economic operators and experts have called for openness, regular communication and interaction with operators as well as setting realistic economic goals and targets for the monetary and fiscal authorities to be able to attain an appropriate inflation, exchange rate and interest rate regime for the country, Babajide Komolafe writes
The forum was a one day seminar organized by the Central Bank of Nigeria (CBN) on "The Challenges of Ensuring Appropriate Inflation Rate, Exchange Rate and Interest Rate Regimes in Nigeria", which was attended by representatives of the organized private sector, members of the National Assembly Committees on Banking and Finance, Chief Executive of banks, Accountant -General of the Federation and senior media executives.
The seminar according to the CBN governor, Professor Chukwuma Soludo, was called to brainstorm on the challenges confronting the nation on how to achieve the unholy trinity of inflation rate, exchange rate and interest rate. He noted that there is an inherent trade-off in trying to strike an appropriate balance among the three key price variables and this is the reality of the situation every economy, whether developed, emerging or developing economy has to contend with. He further said that no central bank has gotten the magic wand to control these three variables simultaneously, without resorting to direct regulation, that is, direct controlled which has proved to be a failed policy in the past.
The challenges confronting the apex bank in this regard, which were also the issues for discussion at the seminar among others, were; In what ways should the conduct of monetary policy be different in the context of the challenges of the global crisis? What should be the appropriate rates of GDP growth, inflation and exchange rate to target? (if we take the rates announced in the 2009 budget, credit to the private sector should not grow by more than 33%, implying much lower growth than the 60.1 % in 2008).
If 'high' interest rate does not ration the credit, how do we do so, and remain within the band announced by government?
If inflation concerns remains, what kind of inflation targeting (hard or light) should be consistent with growth and exchange rate stability (over a three year period?). Which inflation rate should we target (core or non core)? What mechanisms of exchange rate management would ensure appropriate but stable rates? (Should we target nominal or real exchange rate?) How do we control interest rates in the face of rising government deficits (federal and states) and growing risks facing the banks because of the business environment while ensuring banking sector soundness?
Given inflation rate of 15 per cent by December 2008, and objective of exchange rate stability, should Central Bank also be loosening monetary policy at this time? World Bank, IMF Assessment Reports caution against the "excessive" growth of credit, and the dangers it poses to the banking sector. How do we reconcile this with the cry of 'high' interest rates? To these challenges the apex bank governor called for solutions to these challenges from participants at the seminar.
Opening a panel discussion on these challenges, Group Managing Director/Chief Executive, Access Bank Plc, Mr Aigboje Aig-Imouhkuode called for a reconstitution of the Monetary Policy Committee (MPC) of the CBN to include operators. According to him how can the MPC be discussing issues and churning out policies without the input of the operators that the policies will affect. Furthermore, referring to the recent depreciation of the naira, which the CBN governor likened to a shock therapy, Aig-Imouhkuode noted that patient of such therapy need special treatment and attention to overcome the post therapy trauma which can even lead to their death. Hence he said the post therapy treatment needed in this regard is increased interaction between the apex bank and stakeholders like the seminar, adding that such gathering at a time like this should not be a one off affair but weekly affair.
He also said that the CBN should not do anything that would signal to the market it is rationing foreign exchange as such signal would cause panic in the market. He also advised the apex bank to reconsider the issue of selling dollars to Bureaux de Change in order to intervene in the parallel market. Responding, President, Association of Bureaux de Change Operators of Nigeria (ABCON), Alhaji Farouk Suleiman, noted that the intervention of the CBN in the parallel market through the BDCs helped to achieve convergence of the exchange rates, which also eliminated opportunities for round tripping. He stressed that the issue here is to what extent the country can afford a N15 gap between the official and parallel market exchange rate, or a parallel market dominated and driven by black market operators.
On the fiscal side Aig-Imouhkuode noted that while growth of the economy should be the focus, there is the challenge of fiscal federalism imposed on the country by the constitution, which itself is a challenge to long term macro economic stability. This he said requires a legislation that would ensure that the fiscal federalism does not undermine long term macro economic stability, saying this is a case of Nigeria protecting itself from itself.
On his part, the Chairman, Nigeria Economic Summit Group (NESG) Mazi Sam Ohuabunwa noted that since inflation is defined as a situation where too much money is purchasing few goods, what should be done is to increase productivity so that enough money is purchasing enough goods. He advised that the focus should be on growth and increased productivity, while allowing inflation to find its level. He however said there was the need to investigate the effect of inflation on the cost of production.
He said that the exchange rate should be market driven but opportunities for arbitrage and round tripping especially by banks should be eliminated. Furthermore, he noted that too much power is concentrated in the hands of the banks vis-à-vis determination of both lending and deposit rate, adding that that is why banks are quick to review upward their lending rate but keep the deposit rate fixed. According to him, the CBN should address the issue of the spread enjoyed by banks between the deposit and lending rate. There should be standard spread for the industry, he advocated.
Dr. Doyin Salami of Lagos Business School advised that there is the need to ascertain what the priorities are and who or what agency these priorities are assigned to. He noted that while growth is a priority, it is an executive function but the CBN needs to suggest to the executive where there are inconsistency or impossibilities in the goals set by executives. He also called the attention of the CBN to the challenge of information asymmetry, advising it to borrow a leaf from the model of central banking used by Bank of England in the management of information asymmetry. He harped on the problem of uncertainties especially relating actions of the authorities stressing that the government as represented by the CBN should try to manage uncertainties in the economy.
While agreeing with the apex bank on the recent depreciation of the naira, he however said the manner in which the depreciation was done was not proper arguing that it should have been done earlier and done gradually.
On appropriate interest rate in the country, he noted that given the fact that the interest rate should be above the inflation rate and with inflation at 15 per cent neither the lending rate or deposit rate should be below 15 per cent.
He however noted the contradiction between the Monetary Policy Rate (MPR), and other interest rate in the economy. According to him it is wrong for the CBN to use the MPR which is basically for management of interbank rate volatility which is short term in nature to signal the direction for other interest rate in the economy. He recommended introduction of a Liquidity Rate for the inter-bank, while the MPR should be aligned to reflect other interest rate like the interest rate on federal government bonds which is tending towards 15 per cent.
He also frowned at the practice of the CBN keeping government funds arguing that this should be made available to the banks on an auction basis to increase the pool of funds in the system especially for lending to the real sector.
In his contribution, Managing Director/Chief Executive, Financial Derivatives Limited, Mr. Bismarck Rewane said the challenge is that of reducing uncertainties. He said while there are known unknowns which are the subjective unknown, there are unknown unknowns which are the objective unknowns. The real challenge, he noted, are the unknown unknowns. One of the unknown unknown which needed to be addressed is the level of risk asset that has gone bad in the banking system.
On the issue of interest rate, he said what is necessary is rate determination mechanisms, adding this would remove unknowns in the foreign exchange market. In addition to this, he stressed that the channel of communicating the foreign exchange policy should be clear and crisp.
Rewane faulted the augment of defending the nation's external reserves which was the basis of the recent depreciation the naira, saying that there is nothing wrong in defending the currency in the short run to deter panic and fear in the foreign exchange market. This he said can be done till when situation gets to a level that is uncomfortable for the authorities.
On the issue of inflation, he noted that inflation is an outcome, and that given the goal of 8.9 per cent GDP growth for 2009, the goal of 8.2 per cent for inflation is unrealistic. According to him, given a reduction in GDP growth from 13 per cent to 8.9 per cent which implies contraction of the economy, and deficit financing by the government which might include ways and means, the inflation rate of 8.2 per cent, he said is very unrealistic, saying of what use is it to set goals that can not be achieved.
Corroborating his submission, Mrs. Yvonne of J.P Morgan noted that the GDP growth of 8.9 per cent is very unrealistic in the light of recent development in the global economy. She disclosed that J.P Morgan's projection for Nigeria's GDP growth for 2009 is between five and six per cent adding that the authorities need to be more realistic in their goal setting.
Mr. Ray Echebiri of Business World Newspaper noted that there is need to channel more resources to the Agricultural sector. He noted that though the sector contributes 33 per cent to the nation's GDP, its share of total banking credit is very insignificant. According to him, since 63.76 per cent of inflation in the country is from food and energy prices, channeling more resources to the agricultural sector will go a long way to combat the problem of inflation.
President, Lagos Chamber of Commerce and Industry, Dr. Solomon Onafowokan, in his comments agreed with calls for increased interaction between the authorities and the stakeholders saying the seminar should be made regular. According to him the steep and sharp depreciation of the naira in recent times would not have been necessary if the CBN had acted timely. He said what the apex bank did in January by suspending Wholesale Dutch Auction (WDAS) for Retail DAS, should have been done in October, and that the chamber expected the CBN to begin a gradual depreciation of the naira immediately crude oil prices started going down. He said by not acting promptly the apex bank gave opportunity for speculators, who read the trend of events and knew depreciation was inevitable. He also called for a band for the spread between the lending and deposit rate of banks.
President, National Association of Small Scale industrialists (NASSI), Alhaji Sanusi Maijamaa noted that inflation is the issue which should be tackled given its negative effect on the poor and the rich. He wondered what kind of communication exists between the CBN and the federal government if the government is setting GDP growth and inflation goals that are not realistic. He advised the CBN to find a way to integrate the budget of the states government into its monetary policy actions so as to strengthen their effectiveness.