CBN’s Pro-Growth Stance, Is The Right Decision

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The Central Bank of Nigeria’s Monetary Policy Committee’s recent decision to keep all policy rates unchanged, and to leave the MPR interest rate stable at its current rate of 11.5 % is the right decision. Their reasoning is also good. They took the option to continue their support for their pro-growth policy, pursued in the last six quarters, this they hope, will quicken the pace of economic recovery. They also hope that their pro-growth policy will deliver credit to households and economic units that will boost the economy. The elevated inflation at 18.1% notwithstanding, they want to allow time for their full monetary policy decisions in the last few quarters to play themselves out. Permeate the economy was their key word. They believe that tightening now to moderate inflation may do more harm than good. Though their policy choice may have the negative effect of price instability in the near term, I believe it will moderate eventually, as already seen in the latest figures by the National Bureau of Statistics.

They weighed the risk of higher inflation, and concluded that it was worth taking at this time. They also believe that inflation drivers in the Nigerian economy include structural factors that monetary policy alone cannot cure.

In my opinion, their decision was the right option. Growth is more important in the present circumstances. Growth will enhance the effort to create employment and drastically reduce the current unemployment disaster that we are not seriously focusing on. Unemployment is a time bomb ticking. We need to do more to address this important issue. The two structural issues pushing inflation are insecurity and poor infrastructure. Focusing attention genuinely on them will ease inflation. A push to end insecurity, particularly, will help address one of the key structural factors driving inflation upwards. Security should be seen as part of the infrastructure that is important to creating an enabling environment for the economy. Besides, a serious understanding of creating security infrastructure will reveal its potential to also create jobs. Good jobs that will cut across all sectors of the population and communities. It is obvious that our current security arrangement is undermanned and inadequate. Expanding our security architecture and employing more people will solve two problems for the economy immediately. Lower inflation and increased employment generation. It will also boost economic growth overall.

While inflation control is important, focusing  and pushing for growth are more important because a faster growth of the economy will eventually neutralise inflation.  I have always argued that inflation in any environment is a proxy for the needed growth rate for that economy. The current inflation rate of 18.1%, in this thinking, also means the desired growth rate should be 18.1% to achieve growth vs inflation equilibrium. Faster growth will ease inflation once productivity rises. We have seen this with the Asian tiger economies of the 1980s.

Our economy will not grow at the 20% plus interest rates that our banks charge on borrowed money.  It is not by accident that the more advanced economies have low interest rates and cut interest rates even lower whenever there is economic recession in their climes. For instance, the interest rates in the USA have been below 3% in last two decades. The UK has also had its prime interest rate at no more than 0.5% in the last 10 years. Singapore’s example of stable interest rate of 1% – deposit and 1.5% – lending is part of the reasons for its economic miracle we all admire.

Nigerian businesses, especially the SMES, can only grow with low interest rates. Nigeria’s peculiar situation makes low interest rates even more necessary, the structural problems in the economy like insecurity and inefficient infrastructure are also responsible mostly for the sustainability of our elevated inflation rate. These same factors affect all businesses in Nigeria.

Therefore, focusing on growth and supply side of the economy is more appropriate for the economy now. Our currency crisis will also abate once the issue of productivity is addressed in our economy. We will need to make the courageous and necessary decision on the reforms needed to move the economy forward. The decision to align foreign exchange rates with market rates has for long not been addressed, leading to the present situation of weekly devaluation that helps no one. Businesses are more interested in having a stable FX rate they can plan on, more than having a low FX rate.

The support for the naira is unnecessary. It is another subsidy that goes to those who don’t need it. The billions spent supporting the naira can be poured into infrastructure that everyone benefits from, across all segments of society. The Third Mainland Bridge in Lagos as an infrastructure, for instance, is enjoyed by everyone, the rich and the poor. Trying to support the naira is like using a basket to hold water, it is a hopeless effort and the results will always be the same. The only hope for our currency, the naira, to stabilise and eventually appreciate, will be for it to find its value in the market place on its own. A higher rate will remove inefficient industries and cut imports. Currency value is related to productivity and not wishful thinking. If the CBN gets to finally move to market rate for the naira as the only rate for everything, the demand for FX will go up temporarily and will crash subsequently. The naira will find its true value, once we curb the excessive importation of everything, as we do now. A good example is the reaction to Margret Thatcher’s policy to dismantling the exchange controls in the UK in 1979. There was massive capital flight from the UK; as soon as everyone realised the policy was not going to change, all the capital that left came back. Today, the UK is net receiver of investment into its economy. Exchange control in the age of global markets is an anomaly. We have seen how that has worked out in the UK in the last 40 years. They did not do the creeping adjustment our CBN has done in the last few years that has contributed to destroying the value of the naira.

Let the CBN announce a complete alignment with market rates and people will adjust and we will move on. The Japanese currency, the yen, exchanged for over 200 JPY to the US Dollar in 1980. That was before Japan became to top exporter of motor vehicles to the world. Today, it exchanges for about 109 JPY to the US dollar. Currency values adjust to economic situations. Our naira is N490 today for a good reason: we are an inefficient economy. If we want the value up, we have to hugely increase our productivity and exports.

There are those who criticise my insistence on market rate for our currency. They say that despite the huge devaluations we have seen in the last few years, there is no abatement. They insist the rates will go up no matter the devaluation allowed. That is exactly the point, free the naira and it will find its value, even if it goes to N1,000 today. Economics is a strange subject; because it sets its own rules, demand and supply will always work better. Economics reflects society and their activities. Sometimes defined as society’s eco-system of measuring its activities. Our insistence on wanting to control our currency is why we are where we are. It looks like a fairy tale today, the naira in 1978 exchanged for two US dollars to one naira. We had a low population then, we produced oil in vast quantities and imported very little and even exported rice. There is no way our economy will get better unless we bite the bullet of drastic reforms, there is no alternative. The CBN must focus on growth of the economy, with lower interest as its goal, because of the three rates in the marketplace, FX rate, inflation rate and interest rates, the only one they can control effectively is interest rate. They should remove the artificial controls on exchange rates and use high tariffs to discourage imports and soon, within this decade, Nigeria will become what we all dream it will become.

– Punch

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