What are we to expect of today’s (it should continue into tomorrow) meeting of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC)?
The economy may not have gotten worse. Indeed consumer price numbers are better than they were when last the MPC met, with the headline index for July down to 12.8% from 12.9% in June. Output numbers appear to be firming too. Estimates for GDP growth in the third quarter of this year are for 6.71%, up 11 basis points on the 6.6% recorded in the second quarter.
Despite these numbers, a closer look at the finer print reveals a troubled economy. Unemployment remains stuck at close to 25% (it is worse for youths, who sadly make up one half of the population), and along with the security situation behind the spike in commercial motorcyclists in our urban locations, it threatens soon to become a major social problem. The tale told by the data on inflation, on the other hand, is slightly more nuanced than the narrative from simply comparing the headline numbers for June and July. For one, core inflation has been stuck stubbornly around 15% since March, and the volatility in the headline numbers since the beginning of the year make it difficult to spin a workable storyline out of this.
Perhaps for this reason, the CBN’s policy committee rose from its last meeting in July only to shock analysts with its choice of policy tools. It held the policy rate unchanged at 12%, opting instead to tinker with a slew of prudential tools designed to address what then looked like a liquidity surfeit in the banking industry. This choice of weapons seemed to follow from a change in the committee’s understanding of the monetary issues.
Of course, no one (not even the august members of the MPC) knows how (if at all) the monetary transmission mechanism works in this economy. By how much, for instance, must the CBN move its policy rate in order to have a certain effect on domestic prices, unemployment, and output growth? Then, there is the slight difficulty from acknowledging that (and this again is one of the several supposition that underlines policy here) due to structural constraints (including increases in tariff that have come with governments’ efforts to increase the economy’s efficiency) core inflation no longer appears to be swayed by the monetary policy rate (MPR). And so there was little use tinkering with the MPR.
Again, since we all seem to know that because of the “import-dependent” nature of the economy, the exchange rate of the naira matters a lot for the direction and pace of change of domestic prices, it made sense for a central bank pursuing a “do no evil” policy to concentrate its diminished arsenal on the bit of the economy that it still has a firm purchase on. Thus, it sought at its last meeting to pare bank liquidity, convinced that with smaller war chests the banks will no longer be in a position to bid down the naira at the various foreign exchange markets.
This is the context within which today’s meeting should be taking place. Unfortunately, the silver lining from the MPC’s last meeting turned out to harbour a tsunami. The nation’s banks are not as liquid as the CBN had assumed. Once banks’ liquidity numbers are adjusted for their holdings of federal government gilt the central bank ought to confront a worrisome and wearying (because it has been down this road before) spectacle.
First, since a portion of the banking industry’s portfolio of federal government bonds are held to maturity, these cannot be considered technically liquid instruments. Second, and this is the nub of the new problem, of the 23 (or so) tenor buckets of the portion of the industry’s bond holding that is available for sale, only about 6 are tradable. The rest are simply illiquid. Upon reflection, therefore, the MPC at its last meeting found itself shooting in the dark at (what it imagined was) a moving target, only to discover upon emerging from the room that the target long ago left the confines.
What to do today? The facts. The economy remains poised precariously at the edge of a ravine. The CBN may no longer have a direct handle on consumer prices. The exchange rate might, anyway, matter in the current environment more than inflation numbers. On account of the CBN’s current policy direction, foreign reserves are up since July. But the CBN’s room for further action is constrained by the fact that banks (the main channel for communicating central bank policy direction in the economy) may be more straitened than there roseate financials suggest. I therefore do not expect the apex to do much at this meeting.