For a while now, I have been regularly blind-sided by the policy choices preferred by the Buhari administration: an aversion to market solutions in tackling the supply/demand imbalance weighing on the foreign exchange market; a commitment to resuscitating the Ajaokuta Steel Complex; and labour policies that appear bent on raising the cost of domestic economic units’ adjustment to the slowing economy, are but a few of these. Now when you set this perspective against the fact that I was viscerally opposed to the Jonathan administration — I thought it was (and still think it) the most incompetent government that has ever been honoured to preside over the affairs of the Nigerian state — you can understand the trauma that I have suffered from.
Last week, I found succour, of sorts. Analogous in several respects to Saul’s damascene experience, a Bloomberg account of a February 8 interview with the minister of solid minerals development, Dr. Kayode Fayemi helped remove the scales from my eyes. Bloomberg reports the minister as arguing that “‘We have an independent central bank and the central bank should do its job to convince the stakeholders’ if a change in policy is needed.”
Much of my initial angst was worsened by the injuries being inflicted on the economy by a government that had promised to alter the conditions of our lived experiences in its campaign for office. Now, though, like Saul’s “Who are you Lord”, it is clear that this government’s failings are not of a wicked vintage. Its key personnel simply understand matters differently.
Nowhere is this conceptual difference strongest than in the Buhari administration’s appreciation of the relationship between fiscal and monetary policy. First, the difference between these two. A Wikipedia entry on this subject describes fiscal policy as “the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy”. Monetary policy, on the other hand, “is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency”.
Up to this point, there is no problem. Both these policies ought to work to the advantage of an economy. However, once you move both into a democracy with regular election cycles, the goals change. Incumbent governments, with an eye on the next general elections, increase spending towards the end of their electoral cycle in a bid to shore up votes. Money supply is distorted. The general price level rises. And interest rates come under pressure.
After developed economies battle with inflation in the 1970s, a consensus gradually emerged in favour of stable prices. At the level of the larger economy, inflation hurts output growth, while at the enterprise and individual levels, large changes in aggregate prices distort the signaling that changes in relative prices ought to provide to economic planners. Accordingly, there is also a social cost to rapidly falling or rising prices: it reallocates wealth from the poor and the vulnerable towards resource rich segments of society.
So most economies, today, have welcomed independent monetary policy management as a way out of the tendency for the fiscal side to pursue cyclical spending. In an April 2014 Staff Discussion Note on “Monetary Policy in the New Normal”, IMF staff contend that “The main theoretical argument for independence is that it can be beneficial for governments to tie their hands to resist short-term temptations to use inflation to relax fiscal constraints…. In practice, things are more complicated. Relinquishing a significant amount of sovereign power to an agency run by unelected officials takes substantial confidence…. The public and government officials need to have faith in the central bank’s ability to carry out its mandate, and in the resulting welfare gains.”
Arguments like these underpinned the decision in 2007 to grant the Central Bank of Nigeria (CBN), both goal and instrument independence. And under both Chukwuma Soludo, and Sanusi Lamido Sanusi, we did enjoy the benefits of a central bank acting in its understanding of the monetary interests of the economy ― especially through the instrument of the monetary policy committee. Conversely, Ben Bernanke’s discussion of how an independent central bank (the US Federal Reserve) acted to contain the fallouts from the Great Recession (“Courage to Act”) is a useful primer for grappling with the notion of central bank independence.
All of these, the Buhari administration clearly does not understand (or evidently is not persuaded by). The danger is not just that we are then unable to use the CBN to prevent governments from driving inflation up in order to make its fiscal worries go away. Though this is a real big worry. It is also that the solid minerals minister’s description of the new relationship between the fiscal side and the monetary side broadens the entities that now exercise a veto on monetary policy.
There is, incidentally, the small question (asked of me, last week, by a friend) of “why an ‘independent’ central bank needs to convince anyone but itself”? To ask that the CBN convince its “stakeholders” (the whole economy, if you ask me) of the desirability of any policy change before it may embark on such courses of action, is not a plan for going anywhere or doing anything. It is a recipe for paralysis.