The result of a Reuters poll of analysts of Nigeria’s central bank released last week adverted attention to the current pain points in the management of the nation’s monetary policy. The relevant clauses in the Central Bank of Nigeria’s (CBN) enabling statutes mean that it is important for the outlook of monetary policy that the National Assembly has finally acceded to calls to screen the eight members of the monetary policy committee, whose absence has denied this body the quorum it needs to manage monetary policy conditions in the country.

In those corridors where these things matter, by far the more important of the polls’ findings is its respondents’ expectations of a 200 basis points rate cut this year — in other words, those polled by Reuters believe that by the end of the year, the CBN’s benchmark rate would be at 12 percent. The strongest argument in favour of looser monetary policy this year is that domestic prices support it. Headline inflation (as measured by the Nigeria Bureau of Statistics — NBS) has fallen every month since January last year. Consequently, what the NBS calls the “All Items Consumer Price Index” closed February 2018 at 14.33 percent (year-on-year), from 18.72 percent in January 2017.

As with most discussions on economies, the views on current monetary policy conditions are more nuanced than these numbers suggest. Earlier this month, staff of the International Monetary Fund (IMF), in their main annual report on the economy, agreed that monetary policy has been “significantly tighter” of late, leading to a miserly 1.6 percent increase in broad money last year. However, much of this tightness was the result of unconventional polices implemented by the apex bank. There was the “Special Open Market Operations”, which according to the Fund were “unannounced and not conducted through auctions, (and) in part at below market rates”.

Then, there is the “asymmetric reserve requirements”. At 22.5 percent, the central bank’s cash reserve requirement (CRR) means that for every naira of new bank deposits, the bank in question must deposit 22.5 kobo with the central bank. These deposits, useful in managing bank liquidity, do not earn any interest for the banks. Of late, though, they have acquired a curious attribute: the central bank debits banks when their deposits increase but does not return the relevant portion of their CRR when banks’ deposits drop. The IMF estimates the combined effect of these “liquidity draining operations” as responsible for the decline in excess liquidity in the economy “by 50% over the past year”.

…there is the further problem that much of the numbers by which we adjudge the efficacy of current monetary policy are lagging indicators. As with the numbers for inflation, they simply tell us what happened in the past. True, one could extrapolate linearly and conclude that the domestic price trend will be downwards this year.

Clearly, then, the CBN’s benchmark rate is increasingly fictional. But does not mean that it is useless. Manufacturers will tell you that it is responsible for the high interest rates that they face on their borrowing, as does a federal government with a bulimia for borrowing. Yet, to ask that we lower the benchmark rate is to fail to understand that on its own, it could not have achieved any of the improvements in monetary conditions, including the much-advertised drop in inflation numbers that we boast of. When, therefore, the IMF asks for the implementation of “a more transparent policy explicitly anchored on a higher monetary policy rate”, it is simply requesting (1) that open market operations by the CBN are announced ahead of their being conducted, and conducted through auctions that as much as possible capture market rates; and (2) that if the CRR is to be efficient as a policy tool, it must be symmetrical in its implementation, and where the policy consensus is that an asymmetrical CRR is desirable for achieving policy goals, then the nature of this asymmetry must be one with which the markets are familiar upfront.

These changes would remove much of the current opacity in the apex bank’s operations, while requiring a strengthening of the policy rate.

Were these the only arguments in favour of tighter monetary policy conditions, they would be weighty enough. But there is the further problem that much of the numbers by which we adjudge the efficacy of current monetary policy are lagging indicators. As with the numbers for inflation, they simply tell us what happened in the past. True, one could extrapolate linearly and conclude that the domestic price trend will be downwards this year. However, there are few phenomena more non-linear than an economy. Which is why forward-looking indicators should matter more in the monetary policy conversation.
A cursory look at the NBS’ food inflation measure reveals that food prices have not been on the general downward slope described by the headline inflation numbers. We are told that food is a major component of the all-in costs of the average Nigerian. Thus, this measure matters a lot.

Two of these are current sources of great concern: food prices, and the potentially inflationary impact of pre-election spending. A cursory look at the NBS’ food inflation measure reveals that food prices have not been on the general downward slope described by the headline inflation numbers. We are told that food is a major component of the all-in costs of the average Nigerian. Thus, this measure matters a lot. It matters even more, when you add the fact that the ongoing tension between pastoralists and farmers in the country is dislocating farming communities across the nation’s breadbasket. Put differently, in the absence of a solution to the crisis, the harvest for this year might be adversely affected. Rising food prices later this year will then go hand-in-glove with a rise in the spending of politicians as they prep their electors to vote in their favour in next year’s general elections.

If prices will rise later, or remain sticky where they currently are, and if there is a lag between when the policy rate is moved and when retail rates begin to respond, it would be inappropriate now to loosen monetary conditions until we have more clarity on these outcomes.

Source PremiumTimes