Inflation rate at 12.9%, Central Bank of Nigeria (CBN) retains interest rate at 12 percent. But economic activities are becoming unpredictable.
The two-day meeting of Central Bank of Nigeria's Monetary Policy Committee (MPC) ended with a lukewarm outlook, projection and pronouncement on the state of the economy by the Governor Sanusi, the head of the country's apex bank. Sanusi noted that national economic growth may encounter some hiccups in the absence of "structural reforms". The head of the country's Reserve institute buttresseed his comment by pointing to the slight reduction of the economic growth from 7.45 percent in 2011 to the projected 6.5 percent for 2012.
It may not be fair to the monetary policy committee to ascribe the two-day summit as futile and ineffective but that may be the case. Before the meeting there were already standing facts that remained unchanged. At a whopping 12 percent interest rate, even at the face of the surging inflation rate at 12.9 percent, Central Bank of Nigeria (CBN) cannot afford to jack-up the interest rate.
The tightened of monetary policy to mop up liquidity in the monetary base may have become unresponsive and waned. Therefore monetary policy committee retained the monetary interest rate at 12 percent. The further hiking of the interest rate may result into unintended consequences. A higher interest rate may probably appreciate capital market, but at same time, it will constrict credit and liquidity in the hands of business community. And such a scenario and development comes with the slow down of economic growth. It is beginning to look like, that the interest rate at 12 percent is gradually slowing down economic growth.
Moreover the further intensification of liquidity mopping can result in the slowing down of the economy. The only alternative left to the monetary policy committee is to look beyond tighten of monetary policy. The executive arm of the government should inject fiscal policy to complement the actions of the monetary policy committee. Sanusi was underlining the forthcoming weakness of the economy, emphasizing the needed structural reform of the economy. Sanusi was probably alluding to fiscal policy application.
When Asia was experiencing higher inflationary rate in 2011, at a point monetary policy tightening was becoming waned, HSBC Global Research advised Asia to tighten fiscal policy. HSBC Global Research stated that:
“Monetary policy, in its usual form, no longer works. Raising rates simply draws in more capital, leaving financial conditions highly stimulative. Currency appreciation, of the size needed to cut off those funds, would be too disruptive. Capital controls could square the circle, but these are never watertight. Meanwhile, to some, regulatory tightening has become a valid alternative, yet this is difficult to calibrate and best serves as a complementary, rather than primary, tool to tackle inflation. In short, the hands of central bankers are tied.”
INFLATION RISING ABOVE 15 PERCENT
The slowing down of the economy may be partially attributed to lack of structural reforms as was enunciated by Sanusi. But the crust of the matter was the partial removal of the fuel subsidy that brought about the increase of cost of living and production. The country's economy is run on fossil energy and by removing the subsidy it triggered higher inflation rate which now stood at 12.9 percent. Sanui's Central Bank of Nigeria (CBN) anticipated inflation rate to rise and hover between 14-15 percent in 2012 but that will not be so. With the economic trends and the way things are going inflation rate will accelerate over 15 even up to 16 percent by the end of the year. And if the fuel adjustment program continues and the total removal of fuel subsidy becomes imminent the inflation rate may rise above 16 percent. With such an increase in the inflation rate, the country's economy will definitely slow down even below the projected 6.5 percent for 2012.
Nigeria has not yet appreciated how fickle the economic growth and inflation can become. The targeted mission of the policy makers both at CBN and presidency should be to maintain a healthy balance between monetary and fiscal policy in order to checkmate inflation and safeguard economic growth. There is so much CBN can do with the tinkering of the interest rate and with quantitative easing. These monetary tools are limited in action when faced with an accelerating inflation trends and undiversified economy like that of Nigeria.
The state of the country is becoming un-conducive for a sustainable economic growth apart from oil sector of the economy. The growth in agriculture is expected to "declined to 4.15 per cent compared with 5.54 per cent in Q1 of 2011 and 5.74 in fourth quarter 2011," as CBN governor said at the end of the two-day meeting. And “crude oil production was estimated to have declined by 2.32 per cent in quarter one 2012 compared with the decline of 2.41 per cent in the corresponding period of 2011. Non oil real GDP growth estimated at 7.93 per cent in Q1 of 2012 was much lower than 8.73 per cent recorded in Q1 of 2011.”
This is not good news for Nigeria. The social unrest and political turbulences are making investors anxious and their comfort level and commitment on Nigeria's economy is diminishing. This will encourage capital flight and fear for investing in Nigeria, moreover indigenous capitalists may even recoil their commitment for further capital investments in the economy.
The only good news coming from Sanusi's CBN is the Nigeria’s external reserves which increased from $36.66 billion in April to $38.72 billion in May. The buildup of the reserve is a good thing. Reserve can become a war chest against currency speculators and Naira appreciation can be enhanced with an increasing foreign reserve. But it is important that some of the resources coming from the sale of oil should be diverted to Nigerian sovereign wealth fund and provision of infrastructures. Nigerian sovereign wealth fund should be investing in a well tested market where risk is at lowest minimum for a good return to the country.
The legislature move to remove the autonomy of the Central Bank of Nigeria (CBN) is a bad news. The country needs an independent monetary policy institute that does its job without control from the executive and legislature. Look around the world there is no advance and developed economies without independent Central Banks. When the power of Central Bank is compromise and weakens by outside interference, investors trust on the economy will virtually dissipate and disappear. The decisions and monetary policy coming from Central Banks will not be acceptable as real when Central Bank depends on the whims of the executive and legislature arms of the government. The quest to remove CBN's autonomy is "no go area". A bastardized and compromise CBN is good for nothing institute, that is why that it is intrinsic that the autonomy of CBN must remained in tact.
The government must rekindle its effort to reassure investors, capitalists and citizens that protection of life and property is its utmost duty by the country's leadership. The upgrades of electricity infrastructures must be speed up for Nigerians are sick and tired of living in darkness at the dawn of 21st century. The provision of social infrastructures, political stability and quantifiable peace must be in place for sustainability of economic growth. The heavy lifting of structural reforms should come into play but the rudimentary steps to the reforms are to provide and build on the basic tools that are needed for a growing economy.