Expectations are high about the steps that the Central Bank of Nigeria’s Monetary Policy Committee will take at its meeting, which holds today and tomorrow, following the declaration by the Finance minister that the economy is now in recession amid rising inflation and massive job losses,
Financial analysts have called on the Monetary Policy Committee of the Central Bank of Nigeria not to increase the Monetary Policy Rate, which currently stands at 12 per cent, ahead of the committee’s meeting scheduled for today (Monday) and Tuesday.
The Monetary Policy Rate is the anchor rate at which the CBN, in performing its role as a lender of last resort, lends to Deposit Money Banks to boost the level of liquidity in the banking system.
If the apex bank intends to increase the level of liquidity in the economy, it reduces the MPR, but increases it when it intends to tighten money supply.
The President, Institute of Fiscal Studies of Nigeria, Mr. Godwin Ighedosa, said that since the economy was struggling with high inflation rate and unemployment, raising the interest rate now would not achieve the desired result.
He said the level of inflation in the country was caused by factors outside the control of the monetary policy, noting that rather than tightening the level of liquidity in the economy, the CBN should either hold the rate at 12 per cent or reduce it to stimulate productive activities.
Ighedosa stated, “There is a general tendency to want to raise interest when there is a general rise in price level as the fundamental job of the central bank is price stability.
“The stabilisation of prices is vital for investment decisions, but again, monetary policy is a short to medium-term measure, and so one of the problems in Nigeria is the disconnect between the monetary policy, industrial policy and fiscal policy issues.
“Now, there is temptation to raise interest rate when you have inflation, but the problem now is that we have inflation with unemployment rising at the same time; and so, the idea of wanting to raise interest rate with the hope of reducing the price level will not necessarily deal with the problem.
“And so, if you want to stimulate the economy, then the rate should be left unchanged, because what is evident in our economic situation now is that the inflationary pressure is import-induced and whatever traditional policy measures you want to use now by raising the interest rate will not solve the problem.”
He added that the best policy response that could be adopted by the monetary and fiscal authorities was to begin to build productive capacity and also invest in areas where the country had domestic capacity in terms of demand.
“This is the wrong time to move the interest rate up; rather, we should invest massively in terms of building industrial capacity locally and then try to consume locally the things that we produce,” he noted.
Head, Department of Banking and Finance, Nasarawa State University, Keffi, Uche Uwaleke, said the fact that inflationary pressure had remained in spite of the CBN’s efforts to control money supply underscored the fact that in reality, dealing with double-digit inflation was more complex, particularly in a period of declining output and unemployment.
He said, “What is needed now is a combination of monetary and fiscal measures aimed at removing supply side constraints.
“The CBN left its benchmark rate unchanged at 12 per cent in May and is expected to announce its next decision after its meeting later in July. Without prejudice to the outcome of that meeting, the MPC will be well advised not to jerk up the MPR in a bid to subdue the inflationary pressure as doing so will further hurt output and employment.
“Rather, the committee should consider easing the monetary policy with a view to stimulating economic growth and reducing unemployment.”
The economy has been badly hit by rising inflation, which peaked at 16.5 per cent in June, the highest in 11 years, in addition to forecast by the International Monetary Fund that the nation is heading into a recession.
The Minister of Finance, Mrs. Kemi Adeosun, had while appearing before the Senate on Thursday, said the current indices had shown that the country was technically in a recession.
She had said, “Technically, in economic terms, if you have two periods of negative growth, you are in a recession. I don’t think we should spend too much time on this. The issue is we are in a tough place, whether we call it recession or not, we are in a tough place.
“But most importantly, we are going to get out of it. What we are doing is moving us out of it.”
A recession is defined as a significant decline in activities across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale retail trade.
The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s Gross Domestic Product.
Nigeria’s GDP growth contracted to -0.36 per cent in the first quarter of this year compared to 2.11 per cent in the fourth quarter of 2015.
The National Bureau of Statistics is due to release the GDP figure for the second quarter any time from now.
Financial analysts said without adequate coordination of monetary and fiscal policies, it would be difficult for the government to stimulate the economy.
A former Acting Managing Director, Unity Bank Plc, Mr. Muhammed Rislanudeen, said that while the Nigerian economy had been badly hit by rising inflation and weak growth, the government could have reduced the negative impact if it had an effective economic management team made up of representatives of both the public and private sectors.
He said, “The economy is challenged from two fronts, inflation and weak growth. Now, for inflation, which is at 16.5 per cent, the challenge for the MPC is to either allow it to go up unchallenged or raise interest rate above the rate of inflation.
“But from what is on the ground, I will suggest that the CBN should still hold the rates and then challenge the government to address the structural challenges causing inflationary pressures.”
Asked what could be done by the government to reposition the economy on the path of growth, Rislanudeen said, “In terms of the slow economic growth, there is a need for synchronisation between the monetary and fiscal policies.
“Currently, there is no synchronisation of policies and that is why the economy is facing challenges. So, this is the time for both the CBN and the Ministry of Finance to work together to fashion out policies that will help to address the challenges facing the economy.”
A former Managing Director, Nigeria Deposit Insurance Corporation, Mr. Ganiyu Ogunleye, said the country had so much depended on revenue from oil, which had made the economy to become volatile and unable to withstand external shocks.
He explained that there were no quick fixes to the structural challenges facing the economy, noting that even if the country was to have all the money in the world, there was no way it could build projects such as roads, power plants and refineries before the end of the year.
These, according to him, are needed to stimulate economic activities and attract the much needed investments to create jobs and reduce the level of poverty.
Ogunleye stated, “The country’s over-dependence on oil revenue has been a problem to the economy, and if the government is to bridge this kind of gap, it will take some time.
“There are no quick fixes to the economic challenges. The government needs to clearly indicate its policy direction. There is no quick fix and as such, all of us have to adjust our expectations and consumption pattern.
“The inconsistent policies of government is one of the reasons why investors are not coming and this has to be addressed, because it appears that we are doing some kind of experimentation with our foreign exchange. We have been trying various approaches at managing the foreign exchange and I am not sure we are there yet.”
He added, “We started with capital control; now, we have gone to a liberalised system and for the liberalised system to even work efficiently, there is an underlying assumption that the supply will be adequate and investors are still having problems finding foreign exchange.
“The government can look at privatising some of our major entities if that will increase the level of foreign investors in the economy.”
On his part, the Executive Director, Corporate Finance, BGL Capital Limited, Mr. Femi Ademola, called on the Federal Government to scale up spending on critical infrastructure projects, noting that the time for talk shows was over.
He said, “This is not time for talk shows. The government should start implementing its programmes if it has any. They should let people go back to work. It’s not bad to fight corruption, but it appears that this government is spending a lot of its time fighting corruption and seems to be neglecting the economy.
“Inflation has risen to 16.5 per cent and it is high not because of excess liquidity, but because of structural issues that have made it difficult for people to produce.
“There is no money in the economy to produce and those that could produce did so with a lot of difficulties. Things have become so expensive now and this is the time for this government to start massive implementation of its programmes.”
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