The Outcome Of The MPC Meeting Of May 18/19, 2015 | Independent Newspapers Limited
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The Outcome Of The MPC Meeting Of May 18/19, 2015

Posted: May 25, 2015 at 12:00 am   /   by   /   comments (0)

Dr. Boniface Chizea, an Economist, based in Lagos, in this piece reviews the recent decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) and concludes that it is a step in the right direction…

Mr. Godwin Emefiele

Mr. Godwin Emefiele

Initially my inclination, choice and preference was to go mute on the outcome of the Monetary Policy Meeting (MPC) as indicated above until I started receiving calls from some friends in the financial media indicating their eager expectation of my reaction. Of course there is always a perspective to share on such landmark matters even if not utterly profound. I recall that I granted on line media interview in anticipation of the decisions of the MPC where I second guessed the outcome of the Monetary Policy Committee meeting and would wish to commence this discussion by sharing my thoughts in this connection and to particularly highlight the rationale that underpinned the conclusions I reached.

My vote during these discussions is that a hold on key policy was to be expected. But I was mindful of the fact that at the meeting preceding this very one that a hold decision was also made. And if you are a member of such meeting you would be concerned of appearing of lacking in initiative, creativity and depth of thought if the outcome of the meeting under consideration was to be the same even if one is quick to admit that a decision to maintain the key indices was also really a decision. But one was also acutely aware of the pending inauguration of a new government whereby in as much as the Central Bank exercises instrument autonomy it must be mindful of gauging the policy thrust of the incoming administration as the expectation and what is certainly best practice is that for optimal results and in the best interest of the economy that Monetary and fiscal/structural policies should be complementary pulling the economy in the same direction.

One was also mindful of some stability, which we have gratefully attained in key monetary indices over the period, since the previous meeting. The closure of the Retail Dutch Auction System, proved a genius and absolutely prescient as it returned badly needed stability to the foreign exchange market, ending the hemorrhaging and worrisome depletion of the foreign exchange account balance while in the process checkmating the propensity to perpetrate round tripping for rent seeking purposes. As the MPC noted in its Communiqué, the country actually recorded marginal gains in the positive direction of marginal appreciation in the exchange rates and also even marginal accretion on the reserve account.

Also just before the meeting, the Bureau of Statistics released inflation statistics for the month of April, which indicated a marginal increase in the rate of inflation. With this development in mind, one thought that the Committee would be wary of reducing the Reserve positions, even as the Committee observed there is often a delicate balance in making choices underpinned by also the need for growth and the creation of badly needed employment opportunities, the maintenance of stability and the reigning of inflationary spiral.  Based on such informed critical analysis, one therefore voted for a hold decision following the MPC meeting. It was therefore a pleasant surprise to note that the Committee decided to harmonize the rates of reserves between the Private and Public sector components of deposits citing the possibility of moral hazards amongst other considerations.

A number of issues have been raised following this particular decision as should normally be expected amongst commentators. It has for instance been argued that increasing Private Sector deposits by a massive 11 per cent while reducing the public sector equivalent by 34 per cent might not achieve the intended goal of relaxation in the prevalent tight monetary policy stance. The logic is that Public Sector deposits have been depleted following the challenge arising from the softness of the oil market which has resulted in massive shortfall on accruals to the Revenue Account resulting in an unprecedented situation whereby about 21 states in the federation are currently reported as not being able to meet the obligations of the payment of monthly salaries to their workers across the Federation. But my considered take on that observation is that compatriots must learn to trust those that the country has charged with discharging critical responsibility by always giving them the benefit of doubt in such matters. If the Committee had noted that it took that decision in furtherance of its intentions to easy the monetary stance we must accept such affirmation because we can go ahead and speculate but the expectation is that the Committee has the full advantage of a panoramic view of the landscape based on the data it is charged to collect and regularly analyze.

The other important and critical consideration, which though might not have been stated is that the banks are suffering the full effect of the headwinds from the monetary authorities as it recently grappled with the challenge of stemming the slide in the value of the Naira. A perceptive monitoring of the popular press would attest to the fact that the results recently released by banks have not been rosy and upbeat. It will be unfair to cite examples here but anyone who is so inclined could quickly consult the recent editions of some financial publications particular Business World Newspaper where I am listed as a member of the Board of Analyst of the publication and therefore receive my entitlement of complimentary copies of the publication to attest to this observation. What is additionally worrisome is the report by Allan Grey Group; Africa’s largest privately owned investment Management Company to the effect that a number of Nigerian banks might go broke next year considering a combination of the full effects of the fall in oil prices, likely spike in the bad debt position, political uncertainly and the Boko Haram insurgency. Well as far as I am concerned the Central Bank is fully in charge of the situation as its recent moves would definitely confirm and it is therefore inconceivable that any of the banks will be confronted with any challenges which could not be contained and mitigated. But this is food for thought which should dispel from all concerned stakeholders a complacent mindset in this regard. And therefore we should celebrate any moves by the regulatory authorities that make the banks even more profitable to retain and grow employment opportunities and make their statutory contributions to the treasury by way of the payment of due taxes.

I listened to a friend of mine comment on television to the effect that this country has been grappling with the menace of excess liquidity for a long time and therefore the Central Bank should commission a study to establish the cause of this liquidity to terminate it once and for all. But that is a rather simplistic way of viewing the matter. For as long as you have an economy that is thriving, there will always be the problem of the ebb and flow in the liquidity situation and that is why the Central Bank operates its Open Market Operations intermittently to achieve and maintain stability. I am also quite mindful of the view held by quite important power centers in the country that the excess liquidity in the system is a creation of the Central Bank in the way and manner it converts and disburses accruals to the Federation Account amongst the various tiers of government. But I have always adopted a stand to the effect that what the Central Bank does is best practice and that such proponents should cite jurisdictions where their particular recommended approach is adopted. I hope someone before long will rise to this challenge so that the debate can continue!  Also the inflation rate in United Kingdom is at the level of -0.1% in April and the inflation rate in Nigeria as per the latest release is above 8 per cent, it is therefore illogical to expect that interest rates in the country will fall below inflation rate as that would discourage savings and prevent the financial system from achieving badly needed depth. There is no doubt that all concerned appreciate the beneficial effect of low interests for real sector activities but this rate would not be achieved overnight. We must persevere with the right policies, stay the course and hopefully begin to witness a movement in the desired direction of reduction in interest rates across board in Nigeria.