Nigeria’s problem is never about formulating good policies, rules or guidelines. The country boasts of the finest of policies on all major issues, but the Nigeria factor sets in at the point of implementation.
Since after the CBN Monetary Policy Committee voted to maintain the status quo amidst the currency crisis which has pushed up inflation and battered the people’s confidence in the government’s ability to manage the economy, the question is, what next for the naira?
Will the MPIC saddled with the implementation of MPC’s recommendation implement the policies effectively to halt the depreciation of the naira and restore the people’s confidence or will it falter and widen the credibility gap?
The Monetary Policy Committee of the Central Bank of Nigeria or MPC is a ten-man committee chaired by the CBN Governor. The committee was established by the CBN Act 2007 and saddled with the responsibility of formulating monetary and credit policy as well as assisting the CBN in facilitating the attainment of the objective of price stability and to support the economic policy of the Federal Government.
Members of the committee are drawn from within the bank and other diverse economic backgrounds. All members of the committee are experts in their own right. The committee meets quarterly except otherwise in the event of an emergency. The Monetary Policy Committee recently concluded its two-day meeting in November 2021, which is its last meeting for the year ending 2021.
The committee considered the global output growth, which has remained upbeat as economic agents defy the threat posed by the sharp rise in infection rates associated with the COVID-19 virus. With an uneven pace of vaccinations across the globe, and the rise of infection by new strain of the virus, the forecast of a robust rebound of global economy is rather delayed.
The committee further took notice of the fact that the real gross domestic product (GDP) grew by 4.03% in the third quarter of 2021 compared to 5.01 and 3.62% in Q2 2021 and Q3 2020 respectively. The growth trajectory has thus been positive in the last four quarters following the exit from recession in 2020. Quarter on quarter real GDP grew by 11.07% in Q3 2021compared with -0.79 per cent in the preceding quarter. This improvement in real GDP is driven by growth in both the oil and non-oil sectors by 12.05%and 10.09% respectively
It was in the light of the above that the MPC, at the end of its November 2021 meeting, resolved to maintain the monetary policy rate and all other policy parameters constant rather than begin a hiking cycle in order to reap full benefits of lower interest rates on economic growth. The MPC was conscious of the currency crisis and is doing everything to avoid a total collapse of the naira.
Key decisions reached are as follows:
•The retention of the interest rate benchmark at 11.50%
•Holding the asymmetric corridor at +100/-700 bps around the MPR
•Retaining the cash reserve ratio at 27.50% and
•The liquidity ratio retained at 30.00%
There are other reasons that informed the committee’s decision: inconsistency and constant policy changes have been the bane of past monetary policies. Understandably, the current monetary and credit policy require time and consistency in implementation to bear full and desired result.
Nigeria, like most global economies, faces economic turmoil associated with; climbing poverty, rising inflation, dwindling oil revenue, depreciation of the value of the naira, strained forex reserves, ballooning external debts, resultant shrink in purchasing power and economic uncertainty, all of which have dominated economic conversations. In response to our myriads of economic problems and in an attempt to boost forex and encourage capital inflows, the CBN had in three consecutive times in the year devalued the naira, driving up import prices- a measure that should ordinarily discourage the patronage of foreign goods. However, the limited supply of substitute products to feed domestic demand and improve increased exports potential defeated the gains of devaluation. Nothing suggests that further devaluation of the naira, as being promoted in some quarters, will make the naira stronger. Already, many Nigerians are fleeing from the naira and converting their savings to the dollar. They are not comfortable with the rapid slide of the naira.
The demand for dollar to satisfy import needs remain constant and meets a shortage of forex revenue, which mainly comes from oil and gas. The pandemic and closure of major energy consumers came with the decrease in the demand for oil. NNPC, on her part and for some period, didn’t remit foreign exchange to the federation account as required by law, thus hampering CBN’s effort to stabilise the naira in the face of soaring inflation. It’s only a question of common sense that the CBN monetary policy must be backed by executive action of the Federal Government. A situation whereby government economic policies work at cross purposes with the CBN monetary policy does not encourage individual and corporate confidence in the economy.
According to Prof Femi Saibu, ‘the CBN exchange rate adjustment through devaluation follows with the naira falling from N155 /$ in 2014 to N411/$ in 2021. The imbalance in forex demand and supply keeps devaluation in sight despite its harsh effect on the local economy.
“As the naira exchange for 414/$ in October as against N550 in the parallel market, the arguments in favour of devaluation resurfaced. However, any attempt to escalate Nigeria’s currency crisis may herald an economic catastrophe.” It’s on this basis that the CBN policy intervention to defend the naira makes sense and should be supported. The CBN Monetary Policy Committee also took this into consideration in reaching a decision to maintain the status quo. It is expected that the CBN will continue to implement unconventional measures to control system liquidity in the economy so as to cool down the demand for dollar.
Already the economy is volatile. Any significant change in the status quo may send a shock wave that the economy may not easily absorb, hence the need to consolidate on the gains that have been made. Devaluation cannot solve our current problem because we are not producing. No matter how expensive commodities are in the foreign country, we still will import to satisfy local consumption. So, devaluation has not been able to induce lesser import or induce greater export either. It is in our national interest to ensure we do not do anything that will aggravate the exchange rate situation. The last three devaluations only succeeded in shooting up local prices (causing inflation), which is more than the exchange rate increase.
The MPC’s decision to retain the interest rate benchmark at 11.50% and the liquidity ratio at 60% is commendable as we need to seriously focus on our production capacity.
There is need to have our policy interventions to be based on needs. The copy and paste approach of what worked in developed countries may not necessarily work in our clime, hence we must look inwards and fashion a home-based solution to realise an economy that will depend much on our local resources.
The locals know what they need. Evidently, they don’t want solutions applied in the western world. We don’t need to apply sophisticated interventions for locals who don’t need the luxury, but require basic necessities to put food on the table, provide quality education and healthcare, give good roads and put children in schools that will focus on life saving skills and acquisition of critical thinking education.
Whatever is the argument, devaluation is not good for a country like Nigeria. It is unwise to import policies from a country that has the enabling environment and conditions that make such policies work for them. What we need to do is to support the CBN to keep the exchange rate low, no matter the cost. We currently don’t have the import alternative and we are not producing enough for export so that we can respond to the increased demand that comes with devaluing.
We have to strike a balance between over-valued currency and the welfare benefits of citizens by keeping our local currency strong. There will be need for government to focus on expanding our production capacity to meet local demands and potential export. We need to support SMEs that are into production as against trading. We can create large scale SMEs that the small businesses can render services to rather than mushrooming SMEs, all of which are doing the same thing. We need to encourage start-ups, innovations and value creation as against value added. The Federal Government through the CBN needs to fund people coming up with new ideas. If we do this, our production level will increase and the exchange rate will naturally adjust.
The Federal Government needs to fund researches and development. There must be room to fund new businesses, not just support for existing ones. No country develops by trading other people’s goods, hence the need to extend credit to SMEs involved in production.