Review of the key issues in Monetary Policy Committee Communique No.96 of July 2014.

Undertaken by Centre for Social Justice (CSJ)

(1) Introduction

The Monetary Policy Committee after its meeting of July 21- 22 2014 issued a Communique with the following major highlights:

• Retain the MPR at 12 per cent with a corridor of +/- 200 basis points around the midpoint;
• Retain the Liquidity Ratio at 30 per cent;
• Retain the public sector Cash Reserve Requirement at 75.0 per cent; and
• Retain the private sector Cash Reserve Requirement at 15.0 per cent.

This was evidently a confirmation that extant monetary policy rates, ratios and requirements were good enough to deal with the challenges facing the economy. This is coming within some hours of the World Bank’s announcement that poverty has reduced in Nigeria and only 55.9 million persons, being 33.1% of Nigerians were living in absolute poverty which is a steep reduction from the 112.519 million being 62.6% of Nigerian recorded to have been living in poverty by the National Bureau of Statistics last year. But whether the new World Bank statistics takes cognizance of the living realities in the life of the average Nigerian is different matter entirely. The real GDP growth in the first quarter of 2014 was reported at 6.21% with the non-oil sector as the main driver of growth while the oil sector continued to record improvements.

In terms of prices, the year on year headline inflation moved from 7.9 per cent in April 2014 to 8.0 per cent in May and further to 8.2 per cent in June 2014 while core inflation rested at 8.1 per cent in June 2014. The foreign exchange market witnessed a degree of stability; and when annualized, net domestic credit rose by 1.77 per cent compared with the growth benchmark of 28.5 per cent for the 2014 fiscal year.

This Review examines the key issues informing the decisions of the MPC while making some recommendations on them.

(2) Translation of Macroeconomic Stability to gains in employment and access to finance by medium and small scale enterprises

It is welcomed that the Committee took a holistic view of monetary and fiscal policy and development by reiterating that key issues of employment level, wealth creation and growth of business should be central goals of monetary policy. Very good macroeconomic indicators although fundamental for economic growth and wealth creation do not put food on the table but are the means of ensuring improvements in livelihoods. However, the Committee did not go further to articulate the mechanism for ensuring that macroeconomic stability transmits and facilitates employment, wealth creation and business growth. The CBN needs to get back to the earlier promise of its governor to reduce the lending rate and make credit more available to medium and small scale enterprises. Therefore, the CBN must empirically examine the cause of the persistent excess liquidity which seems to have defied all solutions devised to contain it and seek to tackle the challenge rather than its current approach which is to attack the symptoms of a disease and offer mere palliatives. The MPC should start considering steps which would be implemented immediately after the elections to ensure that sound macroeconomic fundamentals are transmitted to improvements in the economy- production, jobs and improved livelihoods.

(3) Potentials of the Power Sector to facilitate Job Creation

“The Committee noted the potential of the power sector to stimulate output growth through enhanced investment and the spill-over effect in employment generation if the challenges confronting the sector are effectively and appropriately addressed. Specifically, it noted that gas-to-power has remained a binding constraint in reaping the benefits of the recently-concluded power sector reforms; urging for the collective efforts of government, private investors and the banks to resolve”.

Nigeria has become a country of perpetual potentials – potentiality in perpetuity. Essentially, potentials are not developed or mature to become growth drivers. The story line of availability and access to gas being a binding constraint on increasing power delivery has been public knowledge since the Obasanjo days. Gas fired plants were constructed without thinking through how they will access gas to become operational. Seven years down the line, the challenge remains largely unaddressed. Yes, there has been publicity around policy action taken on paper by government and Nigerians have been informed about funds being channeled to the challenge. However, progress remains snail slow and at the level of stories. Official reaction will be that it takes time and years to construct gas pipelines but no one can claim that it takes forever. At least, incremental improvements are needed to convince Nigerians of the efficacy of the action being taken.

If the resources to fix the gas challenge are not available, the federal government should not hesitate to specifically borrow to finance the scheme. The debt should be secured through a good business plan with detailed cost benefit analysis. Alternatively, public private partnerships should be used to fund the gas projects. In the second alternative, clear opportunities should be given not only to institutional investors but all Nigerians to invest and be part of solving the gas challenge. If Nigerians oversubscribed bank public offerings some years ago and some of them had to return subscriptions to subscribers, Nigerians will definitely oversubscribe any public offers for investments in the gas sector. If the funds are available, there is no reason that will hold back verifiable, progressive, incremental solutions in 12-18 months. Further, the implementation of the Renewable Energy Master Plan will move our potentials into actuals in a few years.

(4) Likelihood of Increasing Aggregate Spending in the Run Up to the 2015 Elections

….and the risks that could emanate from the likely increase in aggregate spending in the run up to the 2015 general elections

This risk factor has been resurfacing since the last one year and the decibels coming from the drums of the damage it can do to the economy keeps increasing as the elections draw near. This brings to the fore the need for effective regulation of political and campaign finance as stipulated in the Electoral Act 2010 as amended. There is also the need for further and tightened regulations by the Independent National Electoral Commission (INEC) to ensure that campaign finance limits are respected and any candidate or party violating the rules is sanctioned in accordance with the law. The law should be no respecter of persons. It is within this context that we urge INEC to call the ruling party at the federal level and its potential candidate to order over their commencement of campaigns before INEC’s declaration of the notice of poll.

The threat will manifest in purported spending of monies for capital expenditure which cannot be accounted for in real life; diminished value for money for procurements and essentially, expenditures that give no benefit to the economy or not in accordance with stated rules are bound to increase. The run up to 2015 will witness increased corruption and stealing of public funds – increased expenditures for frivolities that add no value. This is a wake up from sleep call to the anti-corruption agencies including Economic and Financial Crimes Commission, Independent Corrupt Practices and other Offences Commission. The non partisan oversight role of the legislature across the tiers of government should also be activated while civil society including the media must intensify citizens’ oversight over the allocation and management of public resources.

(5) Increase in Official Reserves

Gross official reserves rose to US$40.20 billion by 18 July from US$37.31 billion at end-June 2014. The increase in reserves was mainly due to increased accretion and moderation in the rate of depletion. The Committee welcomed the moderation in the rate of depletion in external reserves in recent months, noting that reserves accretion needed to improve much faster to provide a strong and more resilient buffer to fiscal operations. The Committee, however, noted that a gradual reduction in the country’s import bills through domestic production of some of the major food imports should be a key element in the overall reserves accretion strategy.

Two critical issues are embedded here. The first is the increase in external reserves. This is expected in a time like this when oil is selling above $100 per barrel compared with the official benchmark price of $77.5per barrel. Indeed, if we properly manage our resources, our official reserves should be in excess of $80billion by now. More reserves will accrue if we meet and exceed the 2014 production target of 2.388million barrels of crude oil per day. This will imply checking oil theft and ramping up production. This also brings to the fore the need for the National Assembly to expedite action on the passage of the Petroleum Industry Bill.

The second component of this sub-topic is the gradual reduction in import bills through domestic production of some major food imports. It is our recommendation that the implementation of the Federal Government’s Agriculture agenda should be intensified. More support should be channeled to agriculture and current policy positions in favour of local production should be sustained in the coming years. This should not be restricted to agriculture alone as we need clear policy positions in sectors such as petroleum refining, manufacturing, etc to guarantee local investments that will reduce importation while increasing the value of local production. In this direction, FGN should insist on the full implementation of the new automobile policy while providing buffers that will reduce the hardship that it may engender in the short run.

(6) Expected Poor Harvest over the Insurgency

Other pressure points include the underlying pressure from food/core inflation…. The Committee further expressed concern about the liquidity level and the trending uptick in inflation which may not be unconnected with the poor harvest in some agricultural producing areas, particularly in the north eastern and central states of the country. It however, noted that other reform measures could dampen food prices in the short to medium term…

Food inflation is noted as an underlying pressure point and the poor harvest from the North East and Central States is seen as contributing to this. This raises the vital point that the economy, politics and the insurgency are all interwoven and inseparable. There is as such the need for the political class led by the President and the ruling party to do all within their power to end the insurgency through a multiplicity of strategic action points. This should include dialogue, upping the armed reaction against the insurgents, collaboration with the international community and a combination of carrot and stick approaches.

(7) Conclusions

Against the background of the foregoing, the CBN must establish strong collaboration with the fiscal policy authorities to ensure a coordinated approach to national development which will guarantee greater investments in selected critical sectors of infrastructure especially in the power sector; agriculture and manufacturing. Special policy incentives that facilitate greater credit to the chosen sectors will spur economic growth, activate the growth drivers and create more jobs. The critical issue of greater accretion to the external reserves through the proper management of the petroleum industry including the stoppage of oil theft is crucial for revamping and stabilising the economy. This would lead to a stronger naira and better exchange rate. An empirical study of the causes of excess liquidity in the Nigerian system is imperative to tackle the challenge instead of perpetually reacting to its symptoms and offering palliatives. The MPC and indeed the CBN have the opportunity to redirect the cause of economic growth and development in Nigeria. This opportunity must be grasped with both hands.