Stabilising Monetary Policies For Economic Growth

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The debate on whether the Central Bank of Nigeria’s current monetary policies are producing the desired result has sharply divided economic experts along parallel views. But they are united on the agreement that time has come to put an end to thoughtless action and fanciful policies resulting in tragic consequences. It has even become more important as the consequences are on the high scale and have become unbearable.

The apex bank, in the last few months, has demonstrated through its monetary policies that economic growth through impactful policies is the right way to go. The CBN has like no other time, churned out monetary policies and guidelines of huge dose of growth prospects and maintained a strong courage in its conviction on the populism of such policies, which development experts say will increase the nation’s foreign portfolio and domestic trading activities.

The conduct of monetary policy by the CBN over the years has been designed majorly to influence the growth of money supply consistent with the required aggregate Gross Domestic Product (GDP) growth rate. Beyond that, the apex bank under the leadership of Mr. Godwin Emefiele has taken steps to ensure financial stability, maintain a stable and competitive exchange rate of the naira to the U.S Dollar and put the economy on the track of speedy recovery.

The somehow invisible impacts of the articulate policies and interventions of the CBN towards revving the African largest economy are based on some factors that requires more than the hands of the monetary authority to fix. For instance, as rightly stated by Mr. Emefiele, the size of Nigeria’s FX reserve and the value of the naira critically depend on public lifestyle and on the value and types of imports that are allowed into the country. Nigeria is unarguably an import dependent country, and any country that solely lives and depends on importation always suffers setback in its economy. Although the CBN has partially floated the naira, the exchange rate is yet, determined by the forces of demand and supply.

Investors heaved a sigh of relief recently when it was announced that the CBN has met with the leadership of licenced Bureau De Change operators in search of better ways to reduce or possibly remove the variance in the price of the dollar to the naira at the official and parallel markets. Hours to that meeting, the currency traders announced a uniform price with a focus to enabling the BDCs achieve same exchange rate for the naira. The aim is to have price stability and avoid the nation’s prolonged inflation. The joy is that with the consultations that are going on among the stakeholders, the widening price of the dollar at the parallel market that has become an albatross to the money market would soon file out.

The consensus among experts is that price stability helps to achieve high levels of economic activity and employment in many ways. There is also the general believe that monetary policy has an influence on monetary variables.

And so, in direct efforts to deepen the foreign exchange market and stabilise the financial markets generally, the central bank has deployed a number of policy instruments including an increase in the benchmark interest rate, which is one of the major attracting factors to foreign investment. Complementary administrative measures were also taken towards achieving this goal, among which was the directive to International Money Transfer Organisations (IMTOs) to sell forex directly to Bureau de Change Operators, in order to improve liquidity in that segment of the foreign exchange market.

According to the senior special assistant to President Muhammadu Buhari on foreign affairs and diaspora matters, Abike Dabiri-Erewa, a whopping $35 billion was remitted by Nigerians in diaspora in 2016 alone, a situation that was made possible by the amendment of CBN’s memorandum 21 of the foreign exchange manual to allow resident Nigerian nationals and/or companies to invest foreign currency directly in the local money market instruments, bonds and equities.

Conscious of the need to allow measures like the foreign exchange market reforms to work through fully, the Monetary Policy Committee (MPC) of the apex retained all the monetary policy instruments at their current levels: MPR at 14.00 per cent; CRR at 22.5 per cent; Liquidity Ratio at 30.00 per cent; and Asymmetric Window at +200 and -500 basis points around the MPR. The decision was in line with the fact that domestic and foreign investors seek stability in monetary policy to make investment decisions.

Obviously, the CBN is not oblivious of the fact that there is an intricate link between interest rate, exchange rate and the general price level and the challenge is to establish optimum levels of these consistent with internal and external balances. Policy choices must be made as the three variables cannot be controlled simultaneously as it appears that CBN is attempting to do at the moment.

It would be recalled that the CBN has anchored the conduct of monetary policy in 2016/2017 fiscal map on Medium-Term Framework. “The justification for such framework is based on the premise that monetary policy impacts its ultimate goal with a lag,” the bank had said in a communiqué. The framework would thus enable the Bank avoid over-reaction to temporary shocks and time inconsistency problems associated with frequent changes in policies.

The 2016/2017 Monetary, Credit, Foreign Trade and Exchange Policy Guidelines covers the period January 2016 to December 2017 and is designed to sustain the gains that the Bank has recorded with respect to price stability. This circular outlines the monetary, credit, foreign trade and exchange policy guidelines applicable to banks and other financial institutions under the supervision of the CBN in 2016/2017. The guidelines may be fine-tuned by the Bank taking account of new developments in the domestic and global economies in the period without prior.

Such amendments shall be communicated to the relevant institutions/stakeholders in supplementary circulars. This document is organized into five Sections. Following this introduction, Section Two reviews developments in the domestic economy in 2015 as a background to the policy measures in 2016/2017. Section Three outlines the monetary and credit policy measures and guidelines for the programme period. In Section Four, the applicable foreign trade and exchange policy measures are presented, while Section Five focuses on consumer protection issues. The annexure contains prudential guidelines, relevant reporting formats and referenced circulars.

Apart from its agro borrowers and youth entrepreneurship  support intervention programmes aimed at facilitating the attainment of price stability and support the economic policy of the federal government, the CBN has taken several steps to rev the financial market and by extension, the economy at large.

However, many have expressed concerns that adjusting monetary policy only without corresponding action on fiscal policy is unlikely to produce the desired effect of exchange rate stabilisation. Indeed, fiscal policy must be adjusted to shift the fundamentals of the economy in the intended direction.

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