Against the backdrop of unrelenting global and domestic economic uncertainties, the Central Bank of Nigeria (CBN) last week raised the Monetary Policy Rate (MPR), otherwise known as interest rate, by 200 basis points to 14 percent. The previous MPR of 12 percent had been in place since June.
The increase in the MPR is one of the monetary policy measures announced by the Monetary Policy Committee (MPC) of the CBN at the end of its last monthly meeting. The measure is expected to achieve price stability, tame inflation and increase foreign investments. But, whether these measures will stimulate the economy that is under threat of imminent recession remains unclear.
However, the MPC left the Cash Reserve Ratio (CRR) and the Liquidity Ratio unchanged at 22.50 percent and 30 percent, respectively. Five members of the MPC voted to raise the MPR to 14 percent, while three other members reportedly voted to retain the rate at 12 percent.
Nonetheless, CBN Governor, Godwin Emefiele, defended the outcome of the voting exercise which led to the increase in the MPR. He argued that to maximise the benefits of global investors’ search for higher yields in emerging markets like Nigeria, the country has little or no option but to attract investors with positive interest rates amid the country’s rising inflationary environment. Inflation in the country has reached a new height of 16.5 percent.
According to Emefiele, the MPC in its assessment of the relevant risk profiles, came to the conclusion that although the balance of risk remains tilted against growth, its previous decision required some time to crystalize. As a result, he said the nation’s “policy options are very limited”. The MPC, which is the highest decision-making organ of the CBN, therefore, decided to take “the least risky option”, so as not to complicate the present negative situation of the country. ”
Besides, the Committee expressed deep concern about the sustained pressure in the forex market and the need to implement reforms to engender greater flexibility of rate and transparency in the operation of the inter-bank forex market. It also noted the need to introduce greater flexibility to the management of the forex market.
These are indisputably hard times for Nigeria. Understandably, the latest monetary initiative of the CBN is a bold response designed to rev up the economy and bolster its recovery. However, the recent monetary policies of the apex bank are yet to trigger any noticeable recovery. The immediate implication of the hike in MPR will be higher interest rates on all outstanding loans by bank customers. This will not be good for the economy. The CBN needs to be mindful of its primary mandate as the financial powerhouse responsible for monetary policies and the stability of the financial system. Sadly, the bank has in recent months been sounding as if the nation’s economic recovery is beyond its control. Its statement that it lacked the instruments required to directly jumpstart growth and that it was being mindful not to calibrate its instruments in such a manner as to undermine its primary mandate and financial system stability in assessment of the relevant issues, could convey a wrong signal to both local and foreign investors in the economy.
However, we agree with the MPC that the Federal Government, which is the fiscal authority, needs to fast-track growth. One of the ways to do this is to ensure effective implementation of the 2016 budget. This is necessary to stimulate economic activity, bridge the output gap and create employment.
The National Assembly delayed the passage of the budget, and economic recovery has been painfully slow due to inactivity in the critical sectors that should stimulate growth. This is largely due to delays in releasing necessary funds to sectors like power, manufacturing, education and infrastructure, among others. Meanwhile, the increase in interest rate is a blow to the manufacturing sector. It is unfortunate that critical areas that should support local production of goods are not receiving maximum support.
It is, however, heartening that in spite of the hike in Monetary Policy Rate, CBN has assured it will continue with its interventions in agriculture, mineral resources and manufacturing. At least, the Anchor-Borrower Programme, which is targeted at boosting local production of food items, has reportedly recorded significant success in rice and wheat production. But, it is necessary to boost confidence in the economy in order to attract foreign investment.
Moving forward, our economy needs all hands on deck to achieve substantial recovery and growth. Nigerians and the international community need to see genuine progress in the management of the economy.
Given the rising inflation in the country and other uncertainties arising from the shortage of forex and falling crude oil prices, the CBN has no choice but to take the hard decisions it took last week.
All the same, the bank has to design more policies that can attract greater inflow of investments. The bottom line is that our economy needs pragmatic policies that can improve its performance and boost the confidence of the people.