Monetary, Fiscal Mismatch May Hinder Recovery From Recession | Independent Newspapers Limited
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Monetary, Fiscal Mismatch May Hinder Recovery From Recession

Sokoto, CBN; Collateral
Posted: Sep 30, 2016 at 4:25 am   /   by   /   comments (0)

Bamidele Ogunwusi

Divergent stance of the country’s fiscal and monetary authorities may hinder recovery efforts from the current economic recession, according analysts and market watchers.

The seeming divergent views came to the fore a week ago when monetary and fiscal policymakers had different views on how to lift the economy out of its worst slump in more than two decades.

Specifically, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) last week ignored calls by Kemi Adeosun, Finance Minister, to cut borrowing costs as it kept the key interest rate unchanged at 14 percent. Hours after the MPC verdict, Adeosun in a television interview still proffered a loose policy as the basic antidote to stimulate the economy.

Adeosun said the nature of inflation is not being driven by consumer demand as it is “cost-push” and won’t respond to interest-rate increases, while Emefiele, governor of the CBN, said the tightening stance has helped to lure more than $1 billion in net portfolio inflows.

According to him, cheaper borrowing would fuel demand for goods the economy can’t produce due to a lack of action to boost industrial output and increase price growth.

Emefiele has openly cited government’s inadequate efforts to boost growth, saying monetary policy alone can’t get the economy out of stagflation and that “complementary fiscal policies” are needed to resuscitate output and consumption.

It would also be recalled that President Muhammadu Buhari opposed the devaluation of the naira for more than a year, saying it would fuel inflation and hurt ordinary Nigerians. Shortage of foreign currency, which led to rapid price growth and a slump in output, eventually forced the central bank to move to a free float.

This sort of divergence between fiscal and monetary authorities “tend to be pronounced when there are no clear best options available to policy makers,” ManjiCheto, senior vice president at Teneo Intelligence in London, said via an email response.

“Ultimately, the fiscal authority will have to realise that the heavy lifting will have to come from its own end,” he said.

The difference in policy approaches between the government and the central bank is not new in Nigeria.

Muhammad Sanusi II, former governor of the CBN and current Emir of Kano, at the launch of the 2016 Afrinvest Banking Sector Report on September 21, said the decision of the MPC to retain monetary rates at its last meeting was good for the country and it confirmed the autonomy of the CBN.

“I was extremely happy that the MPC took its decision without been influenced and this is good for us and the CBN. It is now we can say that the CBN has demonstrated its autonomy,” he noted, adding that lowering the monetary policy rate “will further fuel inflation and would reduce the yield on fixed income at a time the country wants to attract foreign exchange.”

He pointed out: “The immediate oxygen that this economy needs is foreign exchange coming into the economy and foreign investors are responsible for that.”

Matthew Ogagavworia, a financial analyst, said there should be a clear demarcation between monetary and fiscal policy and that the leadership in the country needs to respect that, but stressed that the country needs both to work together for the good of the people.

“We need to harmonise both monetary and fiscal policy framework for the good of our country,” he said.

“The misalignment between monetary and fiscal policy will remain in the short term,” Pabina Yinkere, Lagos-based head of research at Vetiva Capital Management Ltd., said by phone. “By March, when inflationary pressures reduce, the central bank will have room to reduce interest rates and we will see monetary and fiscal policy get aligned.”

“The problem is that neither the government nor the central bank has a ‘grand strategy’ to fix Nigeria’s economic woes,” Malte Liewerscheidt, an Africa analyst at consultant Verisk Maplecroft, said in an e-mailed response to questions.

“What we have seen over the past 18 months are mostly short-sighted tactical responses to ever more pressing problems.”

GDP contracted in the first half of the year as the effects of a 15-month currency peg, fuel and power shortages and lower oil prices and production weighed on output. The economy is forecast to shrink this year for the first time since 1991.

According to Adeosun in an interview on CNBC Africa on September 19, government will spend its way out of a recession, noting that half of the planned N1.9 trillion debt to help fund the fiscal gap, which widened by 30 percent this year, would come from the domestic debt market and the remainder from external sources, according to budget documents.

Independent, however, gathered from Budget and National Planning Ministry’s documents that higher borrowing costs and the loss of almost half of the revenue projected for this year could push Nigeria’s debt service-to-revenue ratio above the projected 35 percent of GDP.

The nation is expected to finalise a $1 billion loan from the African Development Bank next month and may borrow more than $4 billion over the next two years to shore up its budget.

Some analysts believe that the delayed approval of a N6.1 trillion budget has stalled the government’s efforts to stimulate economic activity and the naira’ s slump since the removal of the N197-N199 per dollar peg on June 20 has fuelled inflation to the highest in more than a decade, extending the decline in consumer spending.