The monetary policy committee meeting which held on March 24-25 had its outcome eagerly awaited. The nervousness that surrounded the expectation of the outcome of the meeting was due to the felt need by economic agents that market expectations should be carefully managed following the sudden suspension of Governor Sanus Lamido Sanusi. And the naira came under speculative attack as the market was wary that the tight posture of policy thrust under the Sanusi regime might not survive him. Therefore, what was witnessed was a flight to safety using the dollar until the coast was cleared. The verdict across board is that the MPC rose to the challenge as could be gleaned from the decisions of the Committee as reported. One would expect that the outcome of the meeting should go a long way in assuring particularly foreign investors that at least in the near term that the devaluation of the naira is not an option and, therefore, that fear should at least for now be suspended.
The MPC kept the Monetary Policy Rate (MPR) at 12 per cent over fifteen consecutive meetings. But this in itself should not be surprising as at this rate and considering the negative consequences of high interest rate which amongst other factors had accounted for the poor level of contribution to the Gross Domestic Product by the Real Sector of the economy particularly the manufacturing sector; the only realistic direction the MPR could go is south. And questions have been asked why not tweak this rate, even notionally over this period instead of just leaving it at the same rate over such a long period. What would be of interest is to find out in the circumstances to what extent the demand for credit in the country is sensitive to slight changes in interest rates particularly the MPR.
But this particular posture of not tampering with the MPR cannot be surprising as I had it argued by someone who should know better at a public presentation that it is not the task of the Central Bank to worry about the level of interest rates in the economy. What immediately comes to mind is to ask if interest rate does not belong to the gamut of prices in the economy. And if therefore we all agree that the core mandate of the Central Bank is price and exchange rate stability, it follows logically that the Central Bank should be concerned and not feel powerless to show leadership in this connection. In fact in most other industrialized economies the ready instrument for use by the Central Bank is indicative change in the level of interest rate and this is eagerly monitored as it impacts directly the burden of mortgage repayments. And what is more is the realization that interest rates are factor costs which directly impact the level of inflation in the economy and therefore we cannot accept the mandate of price stability without worrying about the level of interest rates. We do hope that as Emefiele assumes duty that this is an area he would like to look into.
One appreciates the rationale that resulted in the decision to withdraw public sector deposits from the banks. We had the strange situation whereby public sector interests would have deposits sitting on bank accounts earning un-remunerative interest income but then resort to borrowing at the usurious rates that prevails in the economy. But due caution should be exercised if there is the intention to go beyond the existing rate of 75 per cent withdrawal of public sector funds. It will impact negatively on the prevailing rather high level of interest rates and could precipitate another round of distress among the banks.
The decision to increase the CRR on private sector deposits from 12 to 15 per cent; it has been estimated would result in the mopping up of the sum of 300 billion Naira from circulation. Well I looked at this decision and I concluded that it might not send the right message if the MPC meets for two days and no changes were made, even if one could argue that not effecting any changes is in itself a decision. But this is a route we should be very careful about following because when compatriots argue regarding jobless growth the main reason as I have argued is that the real sector of the economy is not performing and one of the key reasons for this which accounts for lack of competitiveness of this sector is the unsustainable high levels of cost of capital. And it goes without saying that continued sterilization direct impacts negatively the interest rates.
In the interim there are other measures which the Central Bank could take in its bid to continue to defend the rate of exchange. In the past the CBN attempted to position itself as one other supplier of foreign exchange in the market by encouraging the sourcing of foreign exchange from autonomous sources. Does the CBN for instance track the foreign exchange earnings from oil companies and their utilization? And as arbitrage opportunity arise following evolving parallel market premium, to what extent is the Central Bank monitoring to discourage the temptation to round trip by the banks? We allocate foreign exchange to bureau de change and there is this fear that this channel has been used in the past for money laundering. What is being done to plug any loopholes if any? The bottom line is that as a result of oil theft, vandalism and other leakages continued reliance on the reserves to maintain stability of the exchange rate might not be sustainable and therefore there is the urgent need to think outside the box.
Dr. Boniface Chizea, is the Managing Consultant, BIC Consultancy Services, Lagos.