The Nigerian economy is experiencing high unemployment rate, low and fragile growth worsened by insecurity, falling local currency and very high inflation. CHIMA NWOKOJI in this report examines how the monetary authorities are managing to keep the economy afloat.
Most analysts in recent times said they do not envy central bankers because this is indeed one of the most trying times for monetary policy authorities not only in Nigeria but across the globe.
Emerging from the devastating effects of COVID-19 pandemic as well as economic recession, the Nigerian economy is faced with increased vulnerabilities that are peculiar to most emerging market economies.
The peculiar nature of the domestic economy became worsened by what economists describe as “Stagflation.” The phenomenon of stagflation has made macroeconomic policy making very challenging for policy makers in Nigeria, as a Professor of Economics, Mike Idi Obadan clearly put it.
Underscoring the peculiarities of the Nigerian situation, Obadan who is Chairman, Goldmark Education Academy, and former Director-General, National Centre for Economic Management & Administration, explains that “Nigeria’s stagflationary situation is different from the experiences of the advanced countries and Emerging Markets and Developing Economies (EMDEs) during the coronavirus-induced global recession of 2020.”
For example, in most of the advanced economies, inflation remained low, below their long-term targets, generally 2.0 per cent. The economies have not experienced stagflation. And so, the policy choice of the advanced countries and EMDEs to combat the twin crisis and, specifically, exit recession was straightforward – expansionary fiscal and monetary policies.
Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva in July agreed that: “Navigating our way out of this dangerous situation requires careful choices by policy makers, including by central bankers.”
Because of the need to lift the economy out of recession in a period of weak government revenue and absence of fiscal buffers, the total public debt has increased to over N35.0 trillion as at the second quarter of 2021 the University don stated.
The phenomenon of stagflation has made macroeconomic policy making very challenging for policy makers in Nigeria. In particular, monetary policy has faced a dilemma in terms of the direction of policy and the instruments to use. Under the circumstances, the use of the instruments without proper consideration results in risks.
So, “In the last few years, monetary policy making has been a very challenging endeavour for the Central Bank of Nigeria because of the nature of economic problems that the economy has had to grapple with, most of which problems other economies did not encounter, for example, stagflation,” the professor of economics stated in a position paper seen by Nigerian Tribune.
The trinity and less cheery indicators
There have been calls in many quarters for a reduction in the rate at which people borrow money. But the rising inflation rate according to Obadan, poses a challenge to monetary policy especially in the face of the need to stimulate economic activities through a lower interest rate environment and rescue the economy from recession.
Obadan explained the difficulties encountered by central bankers with the theory of impossible trinity. According to him, it is impossible for a country (or central bank) to maintain a fixed exchange rate system, retain independence over its monetary policy decisions, and allow free movement of capital in and out of its borders all at the same time.
The Impossible or ‘unholy Trinity,’ as Economists describe it is even made harder in the new normal.
They believe that a country cannot have it all. It must choose two out of the three. The theory is that a country that attempts to get all three at once will be broken by the international markets as they force a run on the currency.
Given its relevance to monetary policy, it is sometimes called the monetary trilemma and merely states that these three cannot exist at the same time: A fixed exchange rate; free movement of capital (money) or an absence of capital controls and monetary policy independence.
If an independent central bank imposes low interest rates to stimulate the economy, capital will flow out in search of a decent return or yield, and the local currency will devalue. Most times monetary authorities will eventually have to release their currency pegs and devalue or impose strict controls to stop capital fleeing the country.
But Nigeria’s president Mohammadu Buhari has insisted that the country will not release its currency peg and will not devalue
In the face of the trilemma, the devastating effects of Covid-19 seem to have worsened the situation, bringing more headaches to central banking.
For instance, the inflation rate, though decreasing, is still high at 17.01 per cent as at August, 2021.
It is the situation of low and fragile growth worsened by insecurity and very high inflation rate at the same time that has given rise to the very challenging phenomenon of stagflation in the country. Unemployment rate is high, especially among youths. As at the end of 2020, the overall unemployment rate stood at 33 per cent while a very significant output gap exists.
The external sector of the economy is riddled with numerous challenges: current account and overall balance of payments deficits, high exchange rates, uncomfortable external reserves position in the face of low accretion to the reserves, low foreign capital inflows, among others.
According to the IMF Managing Director, central bankers in Europe have stepped up, responding swiftly to address the financial market turmoil at the onset of the pandemic, then dealing with an economy put in a standstill.
“This required nimble crisis management, massive policy stimulus, and handling complex operational challenges to keep financial systems functioning smoothly. Similarly, getting out of the pandemic will be challenging for central banks.”
These recession periods were characterised by negative economic growth and high rate of inflation at the same time giving rise to the phenomenon of stagflation.
The post-recession periods have been characterised by low and fragile growth rates. For example, positive growth resumed in the fourth quarter of 2020 but stood at 0.11 per cent. In the first quarter of 2021, growth improved marginally to 0.51 per cent but significantly in the second quarter to 5.01 per cent, year-on-years. During the trying periods, the fiscal and monetary authorities rightly prioritised growth and sought to spend the economy out of recession, thus necessitating huge injections of liquidity into the economy but with implications for monetary inflation.
The central bank has embarked on a lot of measures to ensure that the economy is kept afloat. This according to analysts means that the CBN governor, Mr Godwin Emefiele has more tasks confronting him, and he is not resting on his oars. In an attempt to attain the monetary policy mandate in a challenging environment, most critics have frowned at the Central Bank of Nigeria (CBN) has been ubiquitous in the economy.
Most critics ask how a monetary authority can intervene in the creative and entertainment industry, aviation industry, agricultural sector, health, business and so on. But the CBN’s body language echoes an Igbo proverb which says that “an elder does not sit at home and watch a tethered goat deliver.”
The CBN has maintained that given the peculiar nature of economic problems facing the country, it has to ramp up interventions but within its enabling laws.
As such, in pursuit of the above and its Developmental function provided for in Section 31 of the CBN Act (2007), the Bank has over the years intervened in critical sectors in order to safeguard the Nigerian economy.
Some stakeholders have reasoned that but for the efforts of the CBN Governor and his team, perhaps the Nigerian economy would have been neck deep into another recession by now as economies even stronger than Nigeria’s, have since buckled under the impact of the COVID-19.
The efforts being put by the CBN involves making hard policy choices that more often than not, have unintended trade-offs (trilemma). The trade-offs in turn require even more policy decisions.
For instance, when a major policy decision like the adjustment of the exchange rate, stoppage of fuel subsidy or deregulation of Nigeria’s downstream oil sector is made, its effect usually transmit to government, household, business sector, economy, financial, capital, commodity and labour markets.
The pass-through effects, especially on inflation, employment, investment and price stability, often require hard choices involving: control of a fixed and stable exchange rate; the independent monetary policy; free and open international capital flows.
CBN’s efforts
For the discerning, the CBN, in recent times has borne the burden of most ministries and played great supporting roles to other authorities. Notwithstanding efforts by the bank, some stakeholders have chosen to turn a blind eye to the progress being made in driving the economy towards growth despite harsh global economic situations.
Emefiele and his team, in spurring the effort of the Federal Government to create jobs, disclosed that has so far introduced no less than 37 intervention programmes to boost the economy of the country.
The Director Corporate Communications Department, CBN, Mr Osita Nwanisobi, said “Our mission is to speak to workers leaders on what we are doing in Central Bank and they will be able to take the message back to their people with the language they will understand so that they will be at peace with what we are doing in CBN.
“We know the issues of insurgency, insecurity, exchange pass through, issues of price adjustment in terms of power or fuel and others. All of these are parked together is what we are seeing as inflation today. That is also why CBN is doing massive intervention especially in agriculture.”
He listed some of them to include: the Anchor Borrowers’ Programme (ABP), Commodity Development Initiative (CDI), the Youth Entrepreneurship Development Programme, Agribusiness/ Small and Medium Equity Investment Scheme (AGSMEIS), the National Collateral Registry (NCR) and lately the Creative Industry Financing Initiative (CIFI).
In a bid to reduce unemployment, the CBN most recently developed the Tertiary Institutions Entrepreneurship Scheme (TIES), in partnership with Nigerian polytechnics and universities to harness the potential of graduate entrepreneurs (gradpreneurs) in Nigeria.
The estimated N500 million grants were disclosed on October 2021. Interventions by Central Bank of Nigeria that have kept the power sector from collapsing in the past seven years may have reached over N1.3 trillion, checks have shown
In the same way, former president of the All Farmers Association of Nigeria (AFAN), Mr Ibrahim Kabir, explained that: ‘‘The CBN intervention has surely helped the food system and without it, the situation would have been more uncomfortable.’’
Other small-scale farmers and agricultural economists have also harped on the importance of agricultural interventions of the CBN valued at N798.09 billion to 3.9 million small-holder farmers.
They said if such facilities had not been made available, the food crisis and inflation would have become worse as supply became low and prices rose in the last few months. Recently, the Bank also unveiled the framework for the following: Implementation of Family Homes financing initiative; National Gas Expansion Programme; and Solar Connection Facility.
Related to these, the CBN Governor had met severally with stakeholders in the value chains of not less than ten crops to discuss effective linkages and consider measures to increase domestic production of the relevant crops, in the attempt to attain self-sufficiency in the production of those crops.
Going by the level of work put in by the CBN in ensuring the stability of the economy, many industry watchers are persuaded to give their trust to them as it relates to monetary policy.
Tackling the negative effects of COVID-19 on the economy will require unconventional monetary policy, said Uche Uwaleke, professor of finance and capital markets at the Nasarawa State University Keffi.
Listing the possible impact of these measures while speaking at the media presentation of its report, Head of Research, FSDH Merchant Bank, Mr Ayo Akinwunmi, said: “With the implementation of these priorities, more funds will be available to finance non-oil export-led sectors. This should create new businesses, reduce import dependency, grow foreign exchange earnings, ensure stable exchange rate and possibly cause the value of the currency to remain stable or appreciate.
He, however, stressed that CBN policy trust requires complementary fiscal policies to produce the expected impact. These, he said, include: improving the transportation network in the country so that goods can be moved easily from farmland to the market. This will reduce wastages.
Way forward
A Nigerian businessman, economist and writer, Mr Tope Kolade Fasua believes that the CBN should understand that any market will have end users, speculators, day-traders, hedgers, arbitrageurs and long-and-short-term investors and that there is no point fighting arbitrageurs and speculators openly.
According to the founder, and CEO of the Abuja based Global Analytics Consulting Limited, an international consulting firm, the CBN should act as if they don’t exist, while devising ways of clipping their wings underneath.
He supported CBN’s measures at defending the naira in a recent article by saying that no one jokes with their currency, stressing that Margaret Thatcher in 1990 once addressed a bunch of British businessmen, and echoed Stalin by saying, “to destroy a country, first debauch their currency”. No one could be more liberal than Thatcher, he added. So, should the apex bank sit back and watch the naira debauched?
Therefore, faced with this trilemma and with the exchange rate fixed and the CBN retaining its monetary policy autonomy, it has been forced to enact capital controls to stop a mass exodus from the naira to the dollar. The consequence of this is the drastic reduction in the inflow of foreign investments into the economy in the past eighteen months, and the downward slide of the naira in the parallel market as dollar supply dries up.
Some analysts have agreed that a more flexible exchange rate system would ease devaluation pressure and encourage greater market liquidity. Moreover, the country badly needs foreign investment while the CBN must retain control over interest rates to regulate domestic borrowing costs. The use of capital controls is costly and unsustainable, and has created significant room for arbitrage or ‘round-tripping’ in an economy like Nigeria’s.
As the CBN thinker with other variable, Professor Obadan agrees with Fasua that the apex bank cannot sit back and watch the naira messed up. According to him, if the monetary authority considers the quantity of money in the economy to be too much in relation to the growth of national output, and hence causing the inflation rate to rise, a decision will be made to reduce the money supply by tightening monetary policy through the use of various monetary policy instruments such as the monetary policy rate (MPR) (increase by the CBN), cash reserve requirements (CRR) (increase by the CBN), open market operations (Central Bank sells securities in the open money market or to the public to reduce money in circulation), among others.
His words:“On the other hand, if the volume of money supply is considered to be low or not enough to drive national production, then the above policy instruments will be used in a reverse manner, that is, monetary policy will be relaxed or eased in order to put more money into circulation.”
“This means reducing the MPR and CRR, both of which should, other things being equal, encourage the commercial banks to lower lending rates, create more money/ lend more money to investors and the public to finance more investment and consumption demand.
“Both of these are major determinants of national output. The Central Bank could also have put more money into circulation by buying securities from the public or open market. Out of the monetary policy instruments, the Monetary Policy Rate has tended to attract more attention from the enlightened public to the extent of being speculated upon by some analysts before every CBN Monetary Policy Committee Meeting as to its direction in terms of if it would be increased or reduced.”
Increases or decreases in the policy rate are meant to signal the deposit money banks as to the desired direction of monetary policy by the CBN and hence the commercial banks should accordingly adjust their interest rates upwards or downwards.
The monetary and financial conditions and nature of problems in the economy such as high inflation rate, sluggish growth, high unemployment and external imbalances elicit changes in the MPR and other monetary policy instruments.
In other words, the Monetary Policy Rate is not arbitrarily determined as some economic agents probably think. Rather, the state of the economy is an important consideration and specific factors such as the volume of money and credit in the economy, rate of inflation, economic growth rate, balance of international payments position, among others, are important influencers of the direction of MPR Obadan further explained.
When the CBN reduces the MPR, it desires to expand bank credit and money supply while an increase in the rate signals its desire to control the expansion of liquidity in the economy. In such situations, monetary policy makers are confronted with a balancing act, that is, the task of ensuring that expansion in domestic liquidity or a reduction of it is consistent with the authorities’ objectives for economic growth, inflation and the balance of payments.
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