There are 2 reasons why the meeting (today and tomorrow) of the Central Bank of Nigeria’s (CBN) rate-setting committee (the Monetary Policy Committee – MPC) may leave the policy rate at 11%.
The first is a familiar cause: the need to keep the real sector of the economy supplied with low-cost bank loans. All the arguments in support of these have been wrong since as far as I can remember.
There is anecdotal evidence against the utility of an easy money programme for corporate Nigeria, including the failure of the CBN’s many sector-based intervention programmes to achieve any of their lending targets. There is the conceptual worry over the national preference for bank lending as the main source of private sector financing. If we all agree that banks’ funding sources are of a near-term nature, and corporate Nigeria’s borrowing needs are longer term, ought we to be worried that the resulting mismatch may hurt our banks? Isn’t it also the case that in uncertain times, such as we are in, this mismatch is the one reason why banks would be loth to lend to all but the most creditworthy? A third argument against the apex bank’s current policy thrust is the fact that much of the new aggregate lending on the back of the current soft money policy it has pursued has ended up financing the federal government.
This leads us to the second reason why the MPC might be loth to tinker with the policy rate: no one wants to be charged at this point with raising the public sector’s borrowing cost, or, through a premature tightening of monetary conditions, throttling off any signs of output growth. The former charge is, arguably the weightier, as falling global oil prices push the federal government’s 2016 fiscal deficit into increasingly unsustainable territory.
In theory, were the central bank to raise rates, after this week’s meeting of its rate-setting committee, in a way that hurts the government’s ability to meet its debt obligations, holders of government debt will begin offloading their holdings. In consequence of this, the naira would come under pressure, and inflation would trend up. However, two other conditions are, apparently, required for this process to be fulfilled: large public government borrowing; and falling market confidence.
Official numbers put government debt in the run up to the current crisis in manageable territory. Uncontrolled outflows from the public expenditure management framework, and an inefficient budget mix both suggest that timely reforms could nudge the fiscal space into more comfortable regions. What is left over were such reforms to succeed, is “market confidence”.
In the last 12 months, the apex bank, more than any other institution, has done the most to hurt both business and consumer confidence. Incidentally, it is not the unorthodoxy of its response to the foreign exchange markets crisis that has hurt. After all, no response was more unconventional than Malaysia’s in 1998, when sailing against the doctrinal wind it imposed capital controls to help it manage the 1997/98 Asian financial crisis.
What the CBN has lacked, to date, has been a coherence in its response function. And given that the fears around fiscal dominance are, in our present circumstances, overwrought, there is ample space for it to revalidate its credentials. If the public sector’s borrowing needs are not an immediate worry, inflation is. Not just because it hurts the poor and vulnerable the most. But because, today, it is the next big threat to the naira’s usefulness as a store of value.
Yet, the CBN may only deflect the pressure on the naira’s exchange rate by persuading (as the failure of its many recent fiat arrangements show, it cannot compel) Nigerians to keep as much of their wealth in naira as they can. This will require that the inflation-adjusted yield on the vehicles for this be positive. Rates must necessarily go up, therefore, if this is to happen. As indeed they ought to, if current inflation pressures are to be contained.
Strengthen the naira’s value proposition, therefore, and we can be sure that the market will call the demand-supply balance properly. A devaluation, though, will always be a half-way station: significant movement away from the fiat policies of the recent past. Still, it will always fall short of the market’s expectations. And that will not do for bolstering confidence.