In his seminal book titled The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse, Mohamed El-Erian, Economist and former chairman of the US Global Development Council (famous for coining the now-ubiquitous phrase ‘the new normal’) examines the changing role of central banks in national economies, explains how apex monetary institutions saved the financial system from collapse in 2008 as well as why central banks have become critical policy actors in today’s global economy beset by low growth and rising inequality.
By the same token, the narrative on Nigeria’s journey out of a U-shaped economic recession that lasted five consecutive quarters since the first quarter of 2016 would be incomplete without mentioning the crucial role played by the Central Bank of Nigeria. Following a significant decline in foreign exchange earnings, which triggered the economic recession in the first instance (Nigeria is dependent on crude oil sales for over 90 percent of foreign exchange earnings),the CBN had to ban several items of import from access to the official foreign exchange market in order to halt the sustained depreciation of the naira. This demand management strategy not only helped to conserve dwindling foreign reserves, it also promoted the import substitution strategy of the government.
Amidst forex management challenges, the CBN courageously resisted calls by the Bretton Woods Institutions to free-float the local currency which would have rendered worthless the value of the naira (given the huge supply-demand mismatch at the time), driven commodity prices to the roof tops as well as prolonged the journey out of recession bearing in mind that real Gross Domestic Product is an inflation-adjusted measure that reflects the value of final goods and services produced by an economy in a given year.
Gradual accretion to foreign reserves on the back of uptick in crude oil price and output enabled sustained interventions by the CBN in the foreign exchange market. The result was improved liquidity and reduced speculative attacks on the naira. The introduction of a foreign exchange window for investors and exporters (NAFEX) sometime in April 2017 led to significant stability in the naira exchange rate across all segments of the foreign exchange market and improved foreign investment inflows.
Indeed, the multiplier effects of these measures have been remarkable. Data from the National Bureau of Statistics indicate that the month of May recorded the highest amount of capital importation (USD 616.5 million) in the second quarter of 2017 apparently on account of NAFEX introduced by the CBN the previous month. Similarly, the Purchasing Managers’ Index, published by the CBN, has been above the 50 index points threshold for several months this year which is an indication of expansion in manufacturing activity, while the stock market performance has gained traction posting positive real returns since May 2017, a reflection of growing investor confidence in the wake of improved liquidity in the foreign exchange market.
The CBN has maintained tight monetary policy stance since the onset of a recession, complicated by rising inflation. In March 2016, the Monetary Policy Committee of the CBN increased the monetary policy rate from 11 percent to 12 percent in response to the spike in headline inflation from 9.6 percent in January to 11.4 percent in February 2016. In an apparent move to support the naira, the policy rate was further increased to 14 percent in July 2016 after the central bank had discarded the currency peg to the dollar the previous month.
Regarding monetary policy stance, it is not difficult to see why the ‘hawks’ have held sway ever since. For sure, the reality of sustained pressures on prices could not have been ignored by the CBN given its primary mandate of price stability. Consequently, loosening would have exacerbated inflationary pressures, worsened the exchange rate and further pulled the real interest rate into negative territory. The Bank has always taken the view that since empirical studies have shown that interest rates are sticky downwards, loosening may not necessarily transmit into lower retail lending rates.
Well, there is evidence now to suggest that this contractionary stance eventually succeeded in easing elevated inflationary pressure that peaked in January 2017 when inflation rate stood at 18.72 percent. Latest Consumer Price Index data from the NBS show that headline inflation (year-on-year) moderated for the 6th consecutive month since February 2017, falling to 16.05 per cent in July, effectively reversing the monthly upward momentum witnessed between January 2016 and January 2017. This positive development is attributed in part to the gains in the naira exchange rate made possible by the Bank’s interventions in the foreign exchange market and the resulting downward price adjustments on imported items.
To help restart growth, the CBN was equally supportive of critical sectors of the economy through several intervention initiatives such as the Agricultural Credit Guarantee Scheme, Micro Small and Medium Enterprise (MSME) Development Fund, Youth Entrepreneurship Development Programme, Commercial Agriculture Credit Scheme, SMEs Refinancing and Restructuring Facility among others. While some of these intervention schemes are yet to have any significant positive outcomes owing to low public awareness, the Anchor Borrowers programme, which allows participants in the agricultural value chain to access credit at single digit rates of interest, has proved to be a huge success explaining, in part, the positive growth witnessed in the agriculture sector even during the peak of the recession in the third quarter of 2016.
Going forward, the CBN can help to sustain this growth trajectory in the agriculture sector (taming the stubborn rising food index in the process) by quickly extending the Anchor Borrowers Programme to all the 36 States and capturing other imported food crops that take up a huge chunk of scarce foreign exchange. The Bank should equally intensify current efforts aimed at de-risking agricultural lending by expanding the scope of the NIRSAL (Nigeria Incentive-Based Risk Sharing System for Agricultural Lending) through adequate and timely funding. Without a doubt, the Bank’s Nigeria Housing Finance Programme (‘My Own Home’), launched in Lagos recently will rub-off positively on the housing sector. Now that the worst seems over for the economy, arguments for loosening monetary policy have become persuasive. Any reduction in interest rate at this timewill reduce cost of capital for firms. It will also bring down the cost of debt servicing, which has been crowding out government spending needed to ramp up enabling infrastructure for strong and inclusive growth.
In The Only Game in Town, Mohamed El-Erian argues that there is a limit to what central banks can do to rev up countries’ growth engines not least because they lack the tools to bring about strong inclusive growth. The CBN seems not oblivious of this fact which is why it has consistently called for complementary fiscal policies. In the MPC communiqué no 114 issued after its meeting of July 25 2017, the Committee ‘’expressed concern about the slow implementation of the 2017 Budget and called on the relevant authorities to ensure timely implementation, especially of the capital portion’’. It equally felt disturbed by ‘’the increasing fiscal deficit estimated at N2.51 trillion in the first half of 2017 and the crowding out effect of high government borrowing’’. Earlier in its meeting of May 23 2017, the Committee had decried ‘’the continued influence of structural factors such as high energy and transportation costs, production bottlenecks on prices and hoped that the ongoing reforms by the government would address some of these constraints’’. These concerns are well placed.
It is a no brainer that an economy facing weak growth and rising inequality requires large-scale investments in the real economy which in the submission of El-Erian, only a President and Congress can bring about. The good news is that the country now has a medium-term roadmap for inclusive economic growth. What is yet to be seenhowever is the sense of urgency in the implementation of the Economic Recovery and Growth Plan beginning with the 2017 capital budget.