MPC meetings and economic progress

At the 260th meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria which held on April 3-4, 2018, the reconstituted MPC sadly fell into the rut left by its predecessors that bungled the country’s monetary and credit policy thereby retarding national economic progress. The extent of economic retardation is evident in IMF 2017 GDP (PPP) (at purchasing power parity) per capita which reflects cost of living and welfare. Of interest here are figures in international dollar and ranking of the following countries: Singapore (90,531 World Ranking 3), South Korea (39,387 World Ranking 30), Malaysia (28,871 World Ranking 46), and Nigeria (5,927 World Ranking 129). The above countries were Nigeria’s economic peers in 1960, when the country gained independence.

The MPC/CBN, prodded by the political leadership, has spurned the managed float system of fixing national exchange rates, which gained widespread acceptance following the discard of the Bretton Woods system of fixed exchange rates in 1971. The successive leaderships’ choice of experimentation with all manner of other exchange rate fixing methods over the past 47 years brought about the economic setback depicted above. Surely, the national interest has not been well served by the political leadership that has condemned the country to such laggardly economic performance. The economic objectives prescribed in Section 16 of the 1999 Constitution (as amended) imply that there will be in place a thinking and listening government (inclusive of the ministries, departments and agencies) that will uphold the maximization of the people’s welfare at all times. Why has the supposed thinking leadership refused to listen to unceasing campaign in highly visible sections of the print and electronic media since October 2001 calling for the adoption of fiscal and monetary policies which are in accord with international economic best practice?

Even the CBN in August 2007 confessed in its Strategic Agenda for the Naira that its handling of public sector oil receipts (do include all other forex earnings) was out of tune with practices by central banks in successful economies. Based on that belated conviction and the fact that the CBN’s principal objects include “2(e) act as banker and provide economic and financial advice to the Federal Government,” why have the supposed thinking MPC/CBN continued to apply the same wrong methods ever since while assuring Nigerians that the economic measures being taken would produce beneficial results? Is that action not insanity a la Albert Einstein? Permit copious borrowing of analogy of insanity from Einstein for the purpose of driving comprehension of the country’s fiscal and monetary tragedy.

Now, the CBN Act made provisions for the MPC “to facilitate the attainment of the objective of price stability and to support the economic policy of the Federal Government… (and) have responsibility within the Bank for formulating monetary and credit policy.” However, MPC meeting communiques portray the committee merely as a body which receives briefing on aspects of global and domestic economy and then proceeds to beg the patronizing CBN management (it is led by the in-house MPC members) for a favour of continuing to operate measures which begot the disappointing GDP (PPP) scores and which had been precooked by the latter behind the back of external MPC members.

Fortuitously, the economic solution that government has drowned in loud silence is ensconced in recent CBN data and the latest two MPC communiques. In 2017, the overall federal fiscal deficit of N2.138 trillion as shown in Table 10 of CBN (Q4) Economic Report represents 1.9 per cent of the year’s GDP. The attendant inflation expectation of 1.9 per cent compared favourably with the IMF projected 2017 inflation of 1.7 per cent in advanced countries and bettered the projected inflation of 4.2 per cent for emerging markets and developing economies (EMDEs) to which Nigeria belongs. In fact, government has consistently observed the yearly Appropriation Act’s fiscal deficit ceiling of 3 per cent of GDP with attendant inflation expectation of 0-3 per cent, the range of price stability. That confirms concretely that inflation of 15-17 per cent experienced in 2017 was induced by CBN as will be shown shortly.

Because the main determinant of the inflation rate is the actual fiscal deficit level, the noted 0-3 per cent range of inflation would hold still where Federation Account (FA) beneficiaries converted secured dollar allocations to non-inflationary naira revenue in a single forex market (SFM) provided the naira is floated in +/-3 per cent stability band with the Appropriation Act exchange rate at the centre. Under such stable conditions which would coextend the extended adherence to the fiscal deficit ceiling of 3 per cent of GDP over the years, Nigeria would have experienced accommodative monetary policy in 2017 just as the IMF recommended for EMDEs while the monetary policy rate would have hobnobbed with the attendant 1.9 per cent inflation rate. As a result internationally competitive lending rates of 4-7 percent would ordinarily be on offer as deposit money banks go ahunting for enterprises/investors to lend to. In Nigeria’s erstwhile peer economies of Malaysia and Singapore, domestic credit provided by the financial sector as a proportion of GDP tops 100 percent whereas it is a beggarly 18 percent in Nigeria. Suppose Nigeria’s indicator climbed steadily over the years to 100 percent of GDP by 2017. Then bank credit (not CBN funds that bloat government fiscal deficit) to the economy would have risen to 15 times the size of the 2017 federal budget (assumed to be constant) and a throbbing private sector-led economy would be in place. (Such outcome happens to be one of FG’s unrealised economic objectives (policy) which the MPC is specifically charged to help midwife.)

Note that the emergence of a strong private sector-led economy would not run into false clichés such as “public sector borrowing crowds out private sector borrowing from banks.” And given a well-oiled private sector-led economy, the 2014-15 low crude oil prices would have been a boon to domestic production and cheap exports and not the cause of economic recession. Similarly the newfound alibi of low tax collection as inhibitor of government budget implementation would not have had an entree. A solid private sector-led economy would generate humongous export earnings. Such is the glimpse of economic paradise with high and rising GDP (PPP) as its manifestation. However, standing in the way is the fiscal/monetary tragedy. To use 2017 as illustration, the tragedy began when, in breach of the fiscal deficit ceiling of 3 percent of GDP, the CBN shunned economic best practice, withheld FA dollar allocations and substituted apex bank funds in their place. The funds represented illegal addition of fiscal deficit of 3.0 per cent of GDP. Furthermore, by failing to float the naira within +/-3 per cent stability corridor centred on the Appropriation Act exchange rate, the CBN ultra vires devalued the naira in the multiple forex market segments thereby operating artificial exchange rates which are technically unstable whether or not the rates are choreographically unchanged. The CBN’s wrong action is the fountainhead of excess liquidity, high inflation and macroeconomic instability which have engulfed the economy over the years. These conditions set the stage for the futile contractionary monetary and tight credit policy amidst which any level of economic growth (it would of necessity be non-inclusive) is a testimony to the inherent strength of the economy.

Despite the innumerable privations, salary/pension/contractor payment arrears, dilapidated and inadequate infrastructure, the MPC which seems to be unaware of the paradox of thrift at its 260th meeting called on government to prevent FAAC from distributing part of the oil earnings in breach of the Appropriation Act in order to save forex against possible future drop in oil prices. Is dollar Nigeria’s national currency? Should crude oil exports delimit Nigeria’s economic reach? The MPC simply overlooked the self-induced economic bane and retained monetary policy rate of 14 per cent while putting the country on notice of looming “further tightening would strengthen the impact of monetary policy on inflation with complementary positive effects on capital flows and exchange rate stability”. Certainly, that is not the road to economic progress. It is akin to a hired property manager laying claims to fine management skills by filling an edifice with containers of petrol, setting it alight and proceeding to fight the fire. Such approach is exhibition of insanity.

At this juncture, it is in order to pinpoint the origin of the extant fiscal and monetary policy. Its initiator was the then military regime which, in its characteristic superpatriotism and desire to deny the states access to FA forex accruals, seized the opportunity of the demise of the Bretton Woods system to attempt to irreverently upturn and rewrite economic principles and practice. But what a self-destructive venture 47 years on! So let the present political leadership for once wear the thinking cap, put immediate end to the injurious fiscal and monetary practices and spare Nigerians continued self-induced economic retardation by directing the operation of a single foreign exchange market in the country now.