FAQs: MPR, Inflation & Economy

Source: huhuonline.com
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The Monetary Policy Committee recently raised the Monetary Policy Rate to 7.5%.   The following are answers to some of the most Frequently Asked Questions (FAQs) on the impact of the hike on the economy 1)WHAT IS THE IMPLICATION OF RAISING MPR ON THE NIGERIAN ECONOMY?  

  CBN Governors over the years have decried the incessant challenges of managing 'too much cash' in the economy.   This means that availability of cash reserves, particularly in custody of commercial banks, provides a strong platform to expand credit to their customers and further exacerbate the problem into that of 'excess cash or liquidity' in the system.   The bloated potential spending power cannot be immediately matched with commensurate volume of goods and services, and the tendency or risk of inflation becomes very high!   Of course, unbridled inflation would translate into lower purchasing power for salaries, incomes, rents, etc, that Nigerians earn with adverse impact on the general standard of living.       Personal and public budgets will also become dislocated as current incomes purchase less and less when prices of goods and services take an upward trend!   It is CBN's duty to halt or reduce adverse inflationary trends instigated by too much money floating around in the system; to this end, CBN would need to curtail the ability of banks to expand credit to their customers by reducing the cash position of banks and making cost of borrowing higher.         It is presumably for the above reasons that CBN lately raised Monetary Policy Rate (rate at which CBN lends to banks) to 7.5 from 6.5%.   However, it is pertinent to contrast the rather high MPR of 7.5% with lower 'MPRs' of less than 2% in successful economies elsewhere.   2)DOES RAISING MPR HOLD THE SOLUTION TO INFLATION?

  In focused and successful economies, rate of inflation and dynamics of the economy can be modulated with the respective equivalent of our own Monetary Policy Rate (MPR).     However, regrettably, this has not been the case in Nigeria; for example, the MPR has never fundamentally reduced inflation rate in Nigeria, as it has generally had minimal impact on both savings and lending rates.   As at today, savings and term deposits attract 2 - 3%, while lending rates exceed 20%; this huge disparity is ample evidence that our CBN's MPR has little or no control in the beneficent management of our economy.   Indeed, in our present circumstances, the increase in MPR would only help to further instigate inflation; this is because if MPR hike raises cost of CBN advances to banks to about 9.5%, the banks will be circumspect to avoid exposures that would push them to seek the shylock rates of CBN in order to balance their daily cash positions, but this would also restrict their capacity to lend to customers and induce them to similarly increase cost of lending to their customers.   In this event, prime borrowers, who are primarily corporate customers will inevitably incur higher cost structures in a market where banks are reluctant to lend.   The tighter money market and higher cost will translate to high cost of goods and services produced in the country and help to fuel inflation.   Besides, higher MPR also increases the national debt burden as it increases interest rate payable on government's treasury bills and bonds.     3)IS HIGHER MPR ANTAGONISTIC TO ECONOMIC GROWTH?   Yes, it is a strong indictment on the inappropriate monetary policy framework of government.   You see, one question that has always eluded our minds, particularly the understanding of journalists, is the question 'why CBN should endlessly be mopping up excess cash from the system for the past 30 years'!   Where does the unceasing flow of excess cash come from?   What is the source and why is it that in spite of CBN's control of MPR over the years, the problem of too much cash in the system   remains unyielding and inflation remains a debilitating and depressive abiding companion?       Furthermore, Nigerians do not also question the official contradiction in CBN's claim that banks do not lend to the real sector because they do not have sufficient liquidity.   It is odd that concurrently, the same CBN also decries the existence of too much cash or credit capacity in the hands of   same banks and consequently embarks on removing such perceived excess cash by selling billions of naira treasury bills every month with same supposedly cash strapped banks as the main patrons!    How come that banks, which do not have enough liquidity to lend to the real sector successfully advance about N200bn to CBN and Debt Management Office every month?   Nigerians also do not seem to mind the huge cost of over N500bn that CBN pays to banks every year for the joy of 'mopping up' perceived excess cash from the vaults of commercial banks.         So, you can see the contradictions and lack of focus in government monetary policies.   These same contradictions have successfully pauperized our people in the last 30 years and made a mockery of improved social welfare even when we earn increasing income as a nation.   These contradictions also stimulate an inflationary trend in the economy, as CBN's strategy for curbing inflation has become counterproductive, as it also deepens poverty in the land!!  


  In the light of government's misguided efforts, inflation rate has hardly fallen to single digit over the years, compare this with inflation rate of 1 - 3% in more successful economies; so we can deduce that the record of performance of government experts in their battle against inflation has so far been a dismal failure!   In spite of this glaring truth, it is inexplicable that government has never bothered to identify the main instigator to the ever-present inflationary trend and endless scourge of too much, yet not enough cash for banks to lend to the real sector.   In reality, even a casual observation of the operation of monetary policy, shows that the drive for lower single digit inflation and interest rates, with   industrial expansion, increasing employment and increased purchasing power for income earners must start with identification and removal of the perennial cause of excess liquidity or the ever-present challenge of excess cash in the system.       You will note that MPR increase, according to CBN, is to reduce the potential of inflation, which can be triggered by the ability of banks to expand credit based on availability of too much cash in the system.   So, the first question is where does the endless stream of excess cash come from?   The answer to this basic question, is quite simple; excess cash in the system manifests monthly when budget allocations are made to the three tiers of government!       The CBN and government's monetary team are wont to blame these monthly allocations as the instigator of inflation and high interest rates!   To this end, they blame governments' capacity to spend whenever they receive monthly allocations; thus the greater the allocations, the greater the propensity for rising inflation!   In other words, inflation would be kept at bay when government's allocations are smaller!   But, pardon me, how can smaller allocations be a blessing when the huge gaps in our educational, medical, transportation and power infrastructures can only be adequately addressed with increased spending by government?       The truth of the matter, of course, is that XXit is not increased government spending that is the villain, but the greater capacity of banks to extend credit whenever the three tiers of government lodge their monthly allocations with commercial banks!   The recognition of this distinction is critical to any attempt to tame inflation!XX   In our current condition of social deprivation, the problem is not increased spending by government, but the opportunity for inordinate credit expansion that could be multiple times the nominal size of the actual cash allocations deposited with the banks in one month; thus, N400bn allocations for example could translate to over N3000bn credit expansion by banks!!   Herein lies the poison in the system!       However, the challenges of omnipresent excess liquidity can be successfully resolved by nullifying the capacity of banks to leverage on monthly cash allocations to three tiers of government.   This objective can be safely realized XXby paying the dollar component of monthly allocations with the instrument of dollar certificatesXX strictly not cash).   Beneficiaries would then be expected to approach their banks to exchange part or as much of their dollar certificates, as required to naira!   Since over 80% of monthly allocations are derived from dollar export revenue, actual naira component of monthly allocations is minimal and its lodgement in government accounts with banks will not unduly inflate the capacity of banks to expand credit.   Under this arrangement, dollar certificates will chase grossly reduced naira balances, which do not provide a liberal platform for excessive bank credit expansion that could fuel inflation.       In this manner, there will be minimal excess liquidity to mop up from the system; CBN and DMO do not have to compete against the real sector for funds in the system; there will also be no need for high CBN's MPRs to contract banks' credit.   Consequently, interest rates will fall drastically to possibly lower single digit and expectedly induce significant reduction in cost of borrowing; this in turn will stimulate the investment climate and lead to creation of more jobs.   The increasing base of employed Nigerians will earn income and create further demand in the consumer market, and this in turn will stimulate additional investment; so the cycle goes on and on.   At the same time, the modest quantum naira sums in the system are chased by relatively more dollar certificates, thus improving naira value and purchasing power of all income earners with the attendant improvement on the standard of living of Nigerians.   Fuel prices will also fall drastically with a beneficial impact on inflation rate and also generate significant annual savings of over N600bn from foregone erstwhile fuel subsidies!     Indeed, government can also earn additional revenue from a sales tax of 10 - 20% on the 30 million litres of petrol sold daily within Nigeria.   Such additional revenue will support further infrastructural enhancement.  

5)What is the way forward for the Nigerian economy?

  There is definitely no magic that will stem the hemorrhage in the Nigerian economy until the perennial ghost of excess liquidity is exorcised!   To be frank, there is no better alternative, so far, to jumpstart the economy, so our people can be rescued from the jaws of abject poverty, than the proposal for dollar certificates!   Indeed, over the last ten years, I have laboured to acquaint our monetary authorities with our observations, but they pretend not to hear, preferring to amble aimlessly on, while blaming everyone but themselves for the failure of our economy, even in times of abundant reserves!     SAVE THE NAIRA, SAVE NIGERIANS!