Monetary and fiscal policies: Govt. at cross purposes?

Hardly had the Central Bank of Nigeria (CBN) began its 252nd  meeting of the Monetary Policy Committee (MPC), on Monday, 19th September, 2016,  the Minister of Finance, Mrs. Kemi  Adeosun, was on air in an interview on CNBC Africa, canvassing for rate reduction to stimulate the economy.

She expressed the wish that the Central Bank of Nigeria (CBN) lowers interest rates so that the government can borrow domestically to boost the economy without increasing its debt-servicing costs.

Adeosun said she was working with the Debt Management Office (DMO), Sovereign Wealth Fund and the pension industry to issue an infrastructure bond to raise money for road and housing projects.

She said she wanted the CBN to reconsider its July interest rate hike, which it implemented to help support the naira and attract foreign investment inflows.

“We need lower interest rates because when we are borrowing and interest rates go up, it increases our cost of debt service and it reduces the amount of money that is available to spend on capital projects,” she said in the interview.

“The attempt is to manage inflation and the trade off for the economy right now is what a bigger problem is: Is it growth or inflation? For me it is growth. I would rather seek growth. We can manage inflation. I think for us, at the moment in the Nigerian economy, growth is the most important thing.”

Barely 24 hours after minister’s plea, the Governor of the CBN, Mr Godwin Emefiele, announced the decision of the MPC at a press conference that the committee retained the Monetary Policy Rate (MPR) at 14 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio at 30 per cent. He also said the Asymmetric Window was also retained at +200 and -500 point around the MPR.

The apex bank decided to hold the lending rate in order to maintain its primary objective of price stability. He said the decision was unanimously agreed on by all the 10 members of the committee who attended the meeting.

Emefiele, who acknowledged the depressed state of the economy, stated: “The MPC reiterated the fact that monetary policy alone cannot move the economy out of stagflation.

“The MPC considered the numerous analysis and calls for rates reduction but came to the conclusion that the greatest challenge to the economy today remains incomplete fiscal reforms which raise costs, risks and uncertainty.

“The calls came mainly from the belief that reducing interest rates will spur credit growth, in the private and public sector, which will help provide liquidity to stimulate consumption and investment spending.

“The urgency of a monetary-fiscal policy retreat along with trade and budgetary policy, to design a comprehensive intervention mechanism is long overdue.” He emphasised.

The CBN governor said the apex bank had intervened to take shocks resulting from the fiscal policies on the economy since 2009, expanding its balance sheet to bail out the financial system.

While restating that the CBN would not fail to continue to intervene when needed, he explained that “the interest rate decisions of the bank are anchored on sound judgment, fundamentals and compelling arguments for such policy interventions.

“The committee also feels there is the need to continue to encourage the inflow of foreign capital into the economy by continuing to put in place incentives to gain the confidence of players in this segment of the foreign exchange market.

“Consequently the Committee considers that loosening monetary policy now is not advisable as real interest rates are negative, pressure exists on the foreign exchange market while inflation is trending upwards.”

He said there was the overall need to generate fiscal activities in the economy, while urging the states and local governments to clear salary arrears to boost demand and spending and productivity in the economy.

Emefiele said the Federal Government should toe the line of other developed countries such as the United States that adjusted its tax policy during the period of economic recession to stimulate consumer demand.

For instance, he said, the government should consider reducing the tax burden on the low and middle-income earners, while increasing the rates payable by the rich.

“In the United States and other economies, when you have situations like this, there are those who are naturally vulnerable – the weak, the low and middle-income people. What the government can do is to reduce their tax rates; and for the rich, increase their tax rates so that they can pay more, and this balances out. He said.

“In fact, you can increase more for the high-income earners so that the disposable income for the poor and vulnerable, and middle-income earners can increase so that they can pump liquidity and use it to boost consumption spending.”

The CBN boss said the MPC considered the numerous calls for rate reduction but came to the conclusion that the greatest challenge to the economy at the moment remained incomplete fiscal reforms, which raise costs, risks and uncertainty.

He explained that the committee was of the view that in the past when the rates were reduced to achieve these objectives, it was later discovered that rather than deploy the available liquidity to provide credit to agriculture and manufacturing sectors, it provided opportunities for lending to traders who deployed the same liquidity in putting pressure on the foreign exchange market.

He lamented that it resulted into limited supply of foreign exchange, thus pushing up the exchange rate, stressing that the purpose for which the funds were deployed by the banks was not in line with the objective of the CBN.

He said, “Both the monetary and fiscal authorities all have the intention to achieve growth, but the direction through which we want to achieve it may differ for as long as you still achieve the growth.

“The issues here are that when you say reduce interest rates, there are two possibilities here. Firstly, you are saying that because you want it to spur credit to the private sector at lower rate. Secondly, which I have heard the fiscal authority talk about, is that they need to be able to borrow at lower rates to spend.

“Our own view at the MPC, which was exhaustively discussed, is that in the past, there was a time when the MPC took the decision to reduce the policy rate and the cash reserves. These were intended to lower rate and encourage spending to the private sector. After we did that, the following meeting we said because we did not see the impact of credit to the private sector that we needed to further reduce the CRR.”

Responding to a question that the decision to hold the benchmark interest rate was against the call by Adeosun to reduce it, the governor said that borrowing at lower rates to spend on consumption in an economy not backed by industrial capacity would further fuel inflation.

He said while the committee agreed that it was expected to stimulate growth through aggressive spending, doing so without corresponding efforts to boost industrial output by taking actions to deepen foreign exchange supply for raw materials would not help reduce unemployment.

Emefiele said, “The second part of it is that when you lower the interest rate, it will make it possible for the fiscal authorities to borrow at lower rates.

“But we are saying fine. If you borrow at lower rates to stimulate spending, what that does is that it simulate demand for goods, but when you stimulate demand for goods by providing cash or money to be spent without taking action to boost industrial capacity, manufacturing capacity and output, what happens is that you will see a situation where too much money will be chasing too few goods, which will worsen the inflationary conditions that we have now.

“And that is why we are saying that the option that we would like to adopt is while the fiscal authority is going ahead to spend, what we want to do is to retain the rates where they are so that that will again encourage the inflow of capital, because between July and now, we have seen the inflow of above $1bn.”

The governor also said that the CBN would continue to monitor the sale of forex to the BDCs, adding that any bank undermining the integrity of the foreign exchange market would be sanctioned in line with current guidelines.

Even economic and financial experts are not in agreement on the decision of MPC. Some see it as the best others believe it is not.

The Chief Executive Officer, Financial Derivatives Limited, Mr. Bismarck Rewane, said, “They could have increased the interest rates, but they did not. So, they decided to adopt a wait-and-see attitude, which won’t help the recession. But it may forestall imbalances.

“However, there is an assumption that foreign funds will come in. Foreign funds are not going to come in if the external imbalances persist. If you think that people are going to bring in money and that will help the naira, which is a bit of a very ambitious assumption. So, it is going to be a very slow and painful recovery.”

The Head, Research and Investment Advisory, SCM Capital, Mr. Sewa Wusu, said if the CBN had toed  the line of Finance Minister, the credibility of its monetary policy stand would be at risk given that it was at the last meeting that it raised the MPR by 200 basis points.

“So, I think that is the reason why they had to balance the optimism by retaining the interest rate with the view that maintaining the status quo will most likely attract foreign inflows and then look at the fiscal side – aggressive fiscal policy in terms of spending – to boost domestic growth. I think the onus now lies on the government to ensure that they release more funds.”

The Director-General, Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, said it underlined the imperative of proper coordination between the monetary and fiscal authorities in the economy.

According to him, “What is desirable at this time is to stimulate growth and create jobs. My view is that lower interest rates will benefit the economy more than it will hurt it. The truth is that the economy is afflicted by challenges of a multidimensional nature, rooted in structural weaknesses, tight monetary conditions, forex policy shortcomings, weak institutions and floundering investors’ confidence.

“Fixing the problems requires proper strategic responses from the fiscal, monetary and political governance fronts. And these response actions are not necessarily mutually exclusive. Indeed, they should be taken together. The economy surely has profound issues with infrastructure; but high cost of funds is also one of the major problems, which investors are worried about.

“There is a need at this point to agree on what the national economic objective should be. This is why I will agree with the proposition to have a retreat among the key actors in the fiscal, monetary and political governance space to agree on a common direction and strategy to rescue the economy.”

What played out between the Minister of Finance and the Governor of the Central Bank of Nigeria on this issue of interest rate fixing gives credence to the claims, in some quarters, that there is no cohesion in the management of the nation’s economy. The managers of the monetary and fiscal policies are not working in agreement aimed at achieving a singular purpose of advancing the economy.

The economy cannot be fixed through either of the monetary policy of fiscal policy, but by combination of the two with unity of purpose amongst their managers. That the Minister of Finance could come on air in an interview expressing the desire for the reduction in interest rate when the MPC meeting was ongoing says a lot regarding how the economy is being managed. Rather than come on air, could that not have been better handled by both?

Equally, the advice given by the CBN governor in the course of responding to journalists’ questions at the presentation of the outcome of the MPC meeting as to what the fiscal policy managers should do to arrest  the deceleration in the nation’s economy could have been given to the managers not in the press conference since the CBN is part of the government. The governor made some vital suggestions which if well implemented would complement monetary policy and help buoy the economy.

It will not be in the interest of the nation and the hapless masses if the managers of our economy continue to play politics with it. The time is now for all to work together for the singular purpose of putting the economy back on its feet.