The Central Bank Monetary Policy Committee has been in the center of some of the most vilified monetary policies in recent years, that many blame for contributing to the massive depreciation of the Naira and sending the economy into a recession. However, it will be wrong to apportion the blame to all members of the committee. The MPC is democratic in its decision making process even though the outcome of the decisions are somewhat autocratic. 100% of the time, MPC decisions are always in line with the decision of the CBN governor. As such, the minority group who often vote against him hardly have a chance to push their opinions through.
One of the members of the minority is renowned economist, Dr. Doyin Salami. In the recently released Personal Statements of the members of the MPC at the meeting of July 25, 2016, he penned a scathing statement castigating the CBN and what he referred to as “ineffectual policy responses”.
As if he knew what was to come, he opined that the increase in the monetary policy rates voted in favour by most members will not halt the continuing “naira weakness” and neither will it bring down inflation. He also opined that it will not spur borrowing to the private sector. The exchange rate has weakened by a further N30 since the MPC increased MPR.
The CBN MPC meets again on Monday and Tuesday, September 19th and 20th respectively and one hopes that this time they will listen to Dr. Salami and his band of outliers.
Here is an excerpt of his comments.
In my judgment, raising the MPR is inappropriate at this time. To begin with, the primary causes of rising prices are not driven from the demand-side – indeed, credit conditions are quite tight. Year-to-date has seen credit increase by just 1.3percent. This compares with price rise of almost 12percent between December 2015 and June 2016. It is clear that rising inflation is the result of reform in Energy Costs and the Naira’s weakness.
Whilst it is tempting to conclude that at the very least the Naira’s weakness might be halted by raising the MPR, I am not convinced this will happen. The fundamental challenge facing the Naira is the negative shock in Nigeria’s Terms of Trade caused by sharply lower oil prices. This has been worsened by ineffectual policy responses, leading to a loss of policy credibility with the resultant inability to provide supply stimuli needed to revive the economy.
In my view it is unduly optimistic to expect international investors to be attracted to Nigeria until policy credibility and consistency is not only restored but also successfully maintained. Indeed, initial implementation of the supposed flexibility in exchange rate determination simply saw movement from a ‘hard’ peg at N197/US$1 to a “soft” peg in the range N282-284/US$. This, in my view, sent a needlessly negative signal from which we now appear to be belatedly back-tracking The ‘market’ rates for Naira are in my view an over-adjustment given the fundamentals of the economy.
I have seen estimates that suggest a Purchasing Power Parity (PPP) rate of N315/US$ at the time of this meeting. In all markets, the Naira has weakened beyond this level and shows no sign of appreciation anytime soon. The difference within markets is what can only be described as the cost of FOREX Market illiquidity with a further premium for policy uncertainty. At this point, it may be that the most credible option open to the Central Bank for improving FOREX liquidity is to specifically borrow USD for the purpose.
If, as I contend, upward movement in the Policy rate fails to attract the size of FOREX flows immediately required, the case for raising rates also fails. In my view higher interest rates also worsen the financial stability problems already evident in the banking sector. Data provided by Bank Staff for June 2016, show Non-Performing Loans (NPL) amounting to 10.71percent of the Banking Industry Loan Book, which is well above its regulator’s mandate. My hope remains that the data reflects full disclosure of NPLs
You can download the full MPC Personal Statement Here