The call by the finance minister on the Central Bank of Nigeria (CBN) for the latter to reduce its benchmark rates was always going to make the CBN’s management of monetary policy difficult. The whole point of the Central Bank of Nigeria Act 2007, and the elaborate institutions (including the apex bank’s main policy arm — the Monetary Policy Committee, MPC) it put in place for the management of domestic monetary policy, is to insulate the central bank from interference of a political sort. Until not too long ago, this arrangement was considered optimal in pursuit of price stability. On account of this, in our present circumstance, it was no less helpful that the minister chose to make her call as the MPC’s penultimate meeting for this year went into session.
But then, the MPC had far bigger worries than an enthusiastic, if ultimately meddlesome, apparatchik from the fiscal side. Only two months previously, it moved rates up by 200 basis points, largely to improve the yield on naira-denominated assets. A key part of the arguments in favour of liberalising the interbank foreign exchange market was that allowing the naira’s exchange rate move closer to the market clearing rate would invite autonomous sources of foreign exchange into the market. However, with inflation running ahead of just about every other economic index, there was sufficient concern about keeping savings in the local currency. Inflation too was a worry. Although much of current price rises is supply-side driven, the CBN’s rate increase was also a barely concealed nod to inflation’s salience in monetary policy considerations.
By its September meeting, none of the variables that fed into the July decision had changed. No. All of the variables that fed into the MPC’s July decisions had worsened. Were the MPC to have admitted a rate drop at its last meeting, it would have reinforced worries about the apex bank’s independence and competence, as well as invited new worries about the coherence of its members thought processes.
All of which point to the possibility that the policy mix necessary to move the economy out of the rut in which it is stuck at present may not be of a monetary vintage. Arguably, the central bank has borne the burden of supporting economic growth in the country over the last decade, including through its quasi-fiscal interventions. It did so while the Jonathan administration twiddled its thumbs. And it’s being called to continue doing so as the Buhari administration contemplates its navel.
Still, if the CBN’s policy dilemma teaches that the apex bank has run out of wiggle room, then the current economic crisis simply reminds us of how the fiscal side of our economy long used up its room for manoeuvre. By spending less than was needed to boost domestic productivity, and failing to bank elevated oil prices, the Jonathan administration pushed us down this cul-de-sac. Extremely low oil prices mean we will be here for a while yet.
Technically, confronted by falling revenue, our options include finding new revenue sources, cutting costs, and asset sales. All of which, especially reforms to the tax collection infrastructure, reducing the size of government, and deciding which of our heirloom to put under the auctioneer’s cosh, would take some time and require more political cojones than this administration has put on show, thus far.
Whatever fiscal policy mix we settle on, at bottom the character of the problem at this level is financial. As a country, we need money. And because we are not generating much by way of traditional revenue sources, our best hope is to attract foreign capital. One could, then, argue that the federal government has not done much by way of ensuring that the domestic environment conduces to entrepreneurial activity; and that the CBN, more than it ought to, has been trying hard to lay out the welcome mat for foreign portfolio investors. But it is hard to ignore the fact that uncertainty over how soon the Federal Reserve will move to tighten monetary conditions in the United States, and the recent downgrade of the economy by Standard & Poor’s are major downside risks to the outlook for importing capital.
Whatever the CBN governor may say, the worst is yet to come.