23 April 2019

Nigeria: Economy - Making the MPR Relevant

opinion

Well ahead of the last scheduled meeting of the Monetary Policy Committee next month in the first lap of the incumbent CBN governor, the Federal Government and the MPC particularly should ponder the historical evidence indicating the Monetary Policy Rate (MPR), has been rendered ineffectual.

The authorities should also decide without further delay to carry out reforms necessary for the MPR to become an effective tool for positioning the economy for inclusive growth.

Recall that at its latest meeting in March, the MPC claimed that the CBN had achieved a relatively stable exchange rate with price stability and recommended reduction of the MPR from 14.0 per cent to 13.5 per cent as a stimulus for enhancing growth, creating jobs on a mass scale and diversifying the economy in a proper direction by facilitating increased bank credit to businesses.

But alas, it was a well-rehearsed untruth because published CBN data spanning several decades show absence of macroeconomic stability as a result of which the earlier noted long-yearned-for economic objectives have remained unrealizable.

Indeed, the same objectives formed part of the Third National Development Plan, which had to be abandoned owing to unforeseen difficulties, and the similarly aborted 10-year perspective plan. Those objectives also featured in numerous but failed subsequent government programmes and rolling plans just as, 40 years later, they still remain the targets set in the moving three-year budget overview of Medium Term Expenditure Framework and Fiscal Strategy Paper.

The culprit for non-realisation of the desirable economic objectives has always been CBN's adoption of nonstandard fiscal and monetary procedures at the behest of the erstwhile military regime, which led to substantial loss by the apex bank of the ability to attain its five principal objects, which provide the requisite foundation for economic success.

Therefore, the announced reduction in the MPR was a ritual to keep the largely economics-unsavvy citizenry hoping for the tooted beneficial economic outcomes, which would only end up being dashed, no thanks to the practical nullification of the MPR as an effective monetary tool.

A little historical context is in order. The economy was characterized by single digit Prime Lending Rates (PLRs) of 7.0 percent from 1961 through 1974, 6.0 percent during 1975-1977 and 7.0-7.75 percent from 1978 through 1981.

Manufacturing capacity utilization (MCU) registered 70.1-78.7 percent from 1975 through 1981. But upon the demise of the Bretton Woods system of fixed exchange rates in 1971, the earlier cited nonstandard fiscal and monetary procedures (which are marked by withholding of Federation Account dollar allocations and simultaneously substituting prorated CBN deficit funds) began.

From 1975, oil proceeds formed over 50 percent of the budgets of the tiers of government on paper which implied that substituted CBN deficit financing raised annual fiscal deficit incurred beyond the usual safe budgeted ceiling of 3.0 percent of GDP.

The 1970-79 oil boom era petered out when the lagged insidious harm of the excessive fiscal deficits gained the upper hand. (In the decade of the 1970s, the incidence of poverty was about 35 percent.) The excessive fiscal deficits account for the permanent volatile macroeconomic environment (VME) that swirls with excess liquidity, high inflation and their accompaniments which former CBN Governor Joseph Sanusi highlighted in the address at the 2001 Development Policy Annual Lecture.

Fifteen years later, CBN and some MDAs cited the VME as justification for Nigeria Debt Management Strategy 2016-19 which has piled up huge but unutilised federal debts whose servicing cost alone would gulp 60 percent of projected 2019 federal revenue. Add the long existing multiple exchange rates and consign MPC claims of macroeconomic and exchange rate stability to the refuse bin.

Rendered irrelevant as a monetary tool, the corridor-dwelling MPR was initially set at 10.0 percent in December 2006 as replacement for the ineffectual minimum rediscount rate which stood at 14.0 percent.

Characteristically moving unevenly, the MPR fell to its lowest rate of 6.0 percent in Q3 2009 through Q2 2010 and peaked at 14.0 percent in Q3 2016 through Q1 2019.

Yet, throughout the 12 years, firstly, the prime lending rate ranged from 14.77 percent in September 2008 to 19.19 percent in March 2009.

These rates were a far cry from the pre-1981 single digit PLRs and the even lower rates in focused economies. (For the sake of completeness, during 1982 through 2006, the PLR ranged from 9.25 percent to 13.54 percent during six years and registered between 16.54 percent and 29.80 percent in 18 years.

The MCU dropped to 29.29 percent in 1995 and has till date moved unevenly below 59.9 percent, the level recorded in 2015.) Clearly, the high lending rates associated with the MPR affirm its irrelevance as a tool for promoting economic expansion.

Secondly, the inflation rate ranged from 6.6 percent in 2007 to 18.5 percent in 2016 with eight out of the 12 years recording double digit inflation. Conventionally, macroeconomic conditions are deemed unstable when inflation exceeds 3.0 percent.

So, again, the entire period till date has been statistically established to be price and macroeconomically unstable in spite of CBN/MPC claims to the contrary.

Thirdly, credit to the core private sector as a proportion of GDP rose from 13.7 percent in 2006 to 39.2 percent in 2009 only to more than halve to 17.1 percent in 2010 and then zigzag from 21.5 percent in 2011 to about 17.0 percent in 2018.

Incidentally, private depositors' funds in banks would have supported a much higher lending proportion under the right conditions. It is instructive that this indicator exceeds 100 percent for Malaysia, Nigeria's quondam economic peer. Doubtless, the MPR smothers investment and economic growth.

Fourthly, during the period, real GDP growth rate ranged from -1.61 percent in 2016 to 8.0 percent in 2010. However, growth was non-inclusive throughout with the incidence of poverty rising to 72.0 percent in 2012 before the recorded level of the indicator was discontinued to conceal the worsening poverty condition. But an international institution revealed that Nigeria as at end-May 2018 became the world's poverty capital and that six Nigerians currently slip into the ranks of people living in extreme poverty every minute.

Such is the woeful destination of the forced march against economic best practice on the command of the ex-military regime, a misstep, which continues till date.

In serious climes, the glaring signs of steady economic decline noted above would have led the MPC to recommend a policy change much earlier instead of watching the country suffer for 40 years before being engulfed ultimately in stark poverty.

Despite the lost long years, in conformity to the constitutionally mandated economic objectives, the CBN Act and the Appropriation Act, which by intendment only envisage positive action and outcomes, the rational economic choice is to move the economy from the unintended distressful destination of poverty.

To that end, the needed reforms, so to speak, should be correct implementation of the fiscal and monetary aspects of the Appropriation Act strictly as legislated and assented to as a matter of course in place of proposing new laws for enforcement at a future date or tenure lap.

Accordingly, President Muhammadu Buhari along with the National Assembly exercising its oversight function should end the military regime-initiated poverty-breeding substitution of apex bank deficit funds for withheld Federation Account dollar allocations by directing that Nigeria's public and private sector foreign exchange earnings (upon being transferred to the country) be correctly transacted henceforth in a single forex market (SFM), where the naira exchange rate should be floated in a stability band centred on the Appropriation Act exchange rate.

Only that step will take the economy across the doors to (i) controlling demand for foreign goods and services by levying graduated tariffs and variable forex access tax on the gamut of importable goods and services with an eye to not only collecting humongous revenue but also protecting and boosting diversified domestic agricultural and industrial production; (ii) generating budget surpluses out of the huge resources being currently channelled to interlopers; (iii) accumulating robust genuine external reserves; (iv) crashing interest rates to internationally competitive level and thereby rationalize interest payments on domestic debts as well as conserve revenue; (v) funding adequately hitherto neglected socio-economic programmes and unmet commitments to the tertiary education sector; (vi) even contemplating sole financing of inter-basin water transfer to Lake Chad; and so on.

As regards the CBN, through the operation of the SFM the apex bank would achieve and/or exercise great control over its five principal objects while the MPR would be restored to an effective monetary tool for steering the economy in any desired direction.

Also the elimination of the CBN-induced VME would keep inflation within the range of 0-3 percent while conducive production environment would set in along with low MPR-based accommodative monetary policy stance thereby facilitating credit expansion and enhanced prospects of attaining double digit inclusive GDP growth rate all of which constitute the firm foundation for self-sustained rapid development.

To manage the Nigerian economy correctly is a task that must be done.

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