The Central Bank of Nigeria increased the monetary policy rate in 2015 from 12 to 14% because it concluded that the high inflationary rate in the country needed to be curbed and an increased interest rate was the tool they wielded to achieve that objective.
In its defense, any attempt to reduce the rate would only result in letting loose a pile of money in the hands of consumers who would channel all that financial energy into fuelling aggregate demand which will in turn worsen inflationary pressures. But we are already having increased prices – a sustained one at that. So, the eventuality which the monetary authority seemed to be fighting against is what we are actually witnessing.
There is little evidence that any economy’s real sector has been kick-started off the back of increased interest rates in financial institutions (I do stand to be corrected if it were not so). All that the hawkish stance, regarding interest rates, has done is provide avenues for profiteering among financial institutions. As Wale Smith opined in an enthralling piece published on Nairametrics:
“…while CBN hiked MPR to 14%, which implied that it would lend money to banks at 16% given the 200bps spread charged on its standing lending facility to banks, it went about issuing OMO bills at effective yields of between 18% to 22% . This scenario created an obvious arbitrage on the MPR, as a clever bank could, in theory, borrow from the CBN at 16% and wait to lend that money back to the CBN at its OMO auctions at 18 to 22% completely risk free.”
Because it is the monetary authority’s duty to be wary of price instability, its inflation-targeting monetary tightening, which is intended to curb naira liquidity relative to dollar demand, may be understood, but this hasn’t allowed for real sector growth. This is because average prices in actual sense have been ‘highly’ stable.
The real sector requires lower costs of production for any attempt at producing to be worth a dime, especially in an economy where so many government policy failures are fighting to impose greater shrinking power on the producer’s profit margin. A little less borrowing cost would have provided some relief.
CBN monetary policy rate and its fixed income market practice also affect the rate at which the federal government borrows money. Government’s borrowing at high costs might not look harmful on the surface, but when you consider how much it has diverted commercial banking operations to gunning for government debt because of high returns, thereby taking away their activities from the real sector, it begins to become clearer – as could be seen in average growth of 37.6% in banks’ interest income as at H1’17 largely buoyed by the high yield environment.
The CBN appears bent on monetary tightening as demonstrated by the decision to retain its key rates last week. The negative growth witnessed in the non-oil sector’s GDP may have to sort itself out as it appears that no monetary policy intervention will be directed towards that end of the spectrum.
If the CBN increased rates to stave off inflation, it should tell us how well that has worked for it. How far can the common man’s income spread to cover his cost of living? The average Nigerian cannot be bothered about a meager percentage point deduction in inflation rate when the price at which he buy his necessities still scrape off his income just as much as it did when inflation was 18%. If there is any hope in a self-correcting economy, why can rates not be reduced? The economy would boost production as a result, hence meeting the new increased demand with increased supply. Even if the CBN wants to err, let it err on the side of a monetary policy that would increase productivity and not on the side that stifles it.
Kachi Okemiri writes from Lagos.