The conversation ahead of last week’s meeting of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) was taken up by speculation around the direction of movement in the committee’s benchmark rate — the Monetary Policy Rate (MPR). The consensus was (and remains) that the next movement in the MPR would be by way of a reduction. Partly, this is justified by inflation having fallen for seven months back-to-back (to August, this year). Partly, lower rates are justified by the evidence of baby steps towards recovery made by the economy. More accommodative monetary conditions, in this reading of the problem, are advertised as necessary to support fledgling growth across the economy’s many sectors.
For the most part, however, the federal government’s desire to see domestic rates go down, is the strongest argument for those who forecast a rate cut when the MPC next meets in November. Part of the federal government’s argument for lower rates revolves round its need to manage the cost of servicing its huge domestic debt portfolio. One aspect of this need has seen it pursue a restructuring of its debt, including through swapping the local portion of the debt for much cheaper foreign currency-denominated borrowing. In addition, in the run-up to general elections, lower domestic costs of borrowing would play well for an incumbent political party seeking re-election.
A case then, of “fiscal dominance”? Basically, this happens when a central bank is unable to use interest rates to control domestic terms of trade, because upward movements in its benchmark rate may trigger a debt crisis for the (highly-leveraged) sovereign. Given the size of the federal government’s domestic debt, and the extent (recently revealed) to which the central bank has gone to finance the federal government’s budget deficit, there is no doubt that “fiscal dominance” is no longer a “possibility”. It is a real and present description of the current state of the monetary side of our economy.
While it is obvious why rates struggled to go up even when the threat of inflation was high (it would have hurt the federal government’s finances), it is not as clear (even with fiscal dominance a part of the new conversation) why rates should go down, now.
Two related arguments are important here. First is that when we look at the central bank’s activities in the whole (and not just movements in its benchmark rate) domestic monetary policy has been ultra-lax over the last 18 months. Okay, the central bank has then tried to sterilise the naira liquidity that it supports by lending hand-over-heels to the federal government, through hovering up banks’ deposits. But, what this has done, besides resulting in too much naira chasing after increasingly scarce dollars, is to deny banks the deposits needed to grow their lending to the private sector. This is apart from the high lending rates that would-be borrowers would have to contend with even as a shrinking economy has forced down returns on investment across businesses’ value chains.
In this sense, monetary policy has provided more than enough support for the financing needs of an economy in recession. The question left unanswered by the ensuing debates around this issue is whether the apex bank’s preferred route is the optimal one. Which takes us back to the current estimates for output growth in the second quarter of the year. In the euphoria generated by numbers showing the economy was “technically” out of recession, few paused to dimension the fact that output growth in the first quarter of this year which had initially turned in at negative 0.52% was revised downwards to negative 0.91% as soon as the actual numbers came in. The 0.55% second quarter growth, which has boosters of the incumbent administration in a funk, it should be remembered, are but estimates. By the time the full picture is ready (along with estimates of output performance in the third quarter) we may see revisions to this number.
Numbers on the economy, thus, matter for our understanding of how well it is run, and its likely outlook.
Back, then, to the second argument around rate reductions. The MPR is one of many numbers in the economy that does not speak to any reality. Ideally, it should be the anchor rate for prices across the economy. But it has been kept too low (for far too long) to have a “pull” or “push” effect on retail rates across the financial services sector. It is, in this sense, nought but a favourite token of the central bank. Still useful because, while unable to force matters any which way, it is still able to point the markets in the direction favoured by the apex bank.
Accordingly, were the MPC to hike its benchmark rate at its November meeting, the signals from this would not matter as much as how its policies have affected money supply in the intervening period.