Ifeanyi Uddin
The strongest case for second-guessing the Monetary Policy Committee’s (the MPC is the Central Bank of Nigeria’s rate-setting arm) likely decision(s) when it meets Monday, next week, was made almost a month ago. Most serious watchers of the economy expected a lower inflation count for January this year, simply because the federal government’s half-successful attempt at removing the “subsidy” on the pump-station price of petrol last year had bumped January, 2012’s inflation numbers up. Against resulting high inflation figures for January 2012, a year-on-year measure for January this year was always going to give a softer count.
The 9% that the National Bureau of Statistics returned for inflation did, however, surprise on the downside. It appeared too low, and again, it grated against anecdotal evidence. Still, it was welcome addition to the storehouse of an increasingly raucous movement for an easing of monetary policy. Other munitions deployed in support of this argument include the need to reinforce an economy that has begun to decelerate in the last two years. It helps in this regard that the central bank has been able over the last three years to reach a semblance of stability with those indicators that it controls. The exchange rate, for one, has eschewed the volatility that the markets have come to associate with it, and has either lost or gained value at a stately pace. Besides, shouldn’t we be looking to drive growth in the real sectors of the economy, by reducing banks’ lending rates?
Taken together, these arguments make a strong case. Each, nevertheless, is flawed in several respects. Lower lending rates are a compelling need, only if we are clear that it is the biggest let to the creation of domestic credit. However, we all know that identity problems are a much more difficult hurdle to cross. How is a bank to guarantee that Tunde, Okoro, and Mohammed are whom they claim to be? Or, when it turns out that these folk have obtained loans across the industry with just one set of documents, how do banks redeem collateral? The stronger need, then, if we are serious about improving the environment for creating credits, is to strengthen the national identification infrastructure, and address shortcomings in the criminal justice system.
At this point, it is clear that we confront a situation where the larger body of arguments for the likely direction of the MPC’s next meeting comprises historical data. The MPC unfortunately, is required to take decisions “looking ahead”. True, it ought to leverage all available data up to the point at which it starts to meet. But I would be surprised if MPC members did not look to understand sources of possible shocks to the system over the next twelve months, and to take their decisions accordingly.
From our current vantage, what are the likely shocks to which monetary policy should advert its attention over the current budget cycle? The headline concern is for the crude oil outlook. Bloomberg reported last week that “Brent for April settlement decreased as much as US$2.01 a barrel to US$109.1 on the London-based ICE Futures exchange”. Over the last two months, we have had to re-appraise the optimistic numbers for the oil price with which the year opened. Supply of crude oil (new sources coming to the market) threatens to run ahead of demand (slower than expected growth in China, amongst other big consumers), with obvious consequences for prices. The untold story is that the equilibrium price for our oil exports that ensures a balance in government spending is closer to the mid-US$90/barrel mark than to the budget benchmark (US$79/bbl). As oil prices drift below the US$100/bbl mark, therefore, we should look to policies that make our economy better able to withstand this shock. Easy money does not come into the latter definition.
At the core of monetary policy management in the country over the last three decades has been inefficient fiscal policies. Government has failed to spend in a way that increases the economy’s ability to create wealth. Yet it manages at the end of each political cycle to spend itself out of pocket. One could dwell endlessly on the perverse correlations in the management of our fiscal policy, but the more pressing housekeeping chore is to note that the current political cycle is nearing an early end. From the roughhousing in the governors’ forum through to the renewed attempts at uniting the opposition, it is clear that our political class is not waiting until next year to begin bidding for the general elections in 2015.
If we are all agreed that looser fiscal measures accompany such politicking, it is difficult to advise a complimentary easing of monetary policy at this point. Add to this, the possible effects of the recent raft of tariff increases, and the metrological agencies warning on the chances of the flooding this year rivaling last year’s, and the better decision might be for the MPC to raise rates by 25 basis points.