At the last MPC, the Central Bank of Nigeria left all policy parameters unchanged electing to ignore a wave of articles calling for a naira devaluation despite clear signals from President Muhammadu Buhari about maintaining the status quo on the currency. As usual my favourite MPC member had a lot to say. Please enjoy his musings below.


Context and Decision

My position at this first MPC meeting of 2016 is the same as it was in the last MPC of 2015. The foundations for my positions were summarized in the personal statement of September 2015. My analysis based on available facts, lessons of history and the outlook is that the core policy issues are not simply that of moving financial metrics (quantities and prices) one way or another or from one “static equilibrium” to another where a new round of contestation begins. Rather the core policy issues are far more fundamental and, a piecemeal magic bullet approach leads inevitably to fundamental policy errors that tend to lead to lasting damages.

Indeed, there is emerging consensus on three key points: the challenges facing Nigeria are multifaceted, a piecemeal approach to policy is ineffective and consistency between monetary, prudential and fiscal policies is necessary to the effectiveness of the policies and, to the realization of the Constitutional mandate of the MPC. When I voted to hold at the last MPC, I re-emphasized two points I have made consistently and repeatedly. First, the strategic choice is between altering financial metrics in response to greed, fear or worry or ‘’harnessing and directing all available intellectual and political resources to engage the fiscal authorities to develop a strategic macroeconomic management framework for Nigeria.’’ Second, a vote to hold is not a vote to maintain a status quo.

Rather it is a vote for ’harnessing and directing all available intellectual and political resources to engage the fiscal authorities to develop a strategic macroeconomic management framework for Nigeria. I remain convinced that macroeconomic policy in Nigeria at this historical epoch must be centered on a comprehensive and consistent medium to long term strategy that is anchored in sound ‘‘institutions, incentives, strategy, coordination and a forward looking (perspective).’ This remains my position as I vote to hold. My vote still is, for “harnessing and directing all available intellectual and political resources to engage the fiscal authorities to develop a strategic macroeconomic management framework for Nigeria” for the medium to long term. I am not unaware of the view canvassed by key players that moving the price metrics of the forex market ought to be the primary issue of monetary policy in Nigeria. In my considered perspective the view exemplifies the type of piecemeal approach to policy that tends to create hysteresis – adverse permanent effects. Historically, the view of moving price metrics without fundamental and comprehensive analysis of causes and effects has helped to move prices in ways that profit short position takers, forces policy makers into perpetual defensive positions and that drive the key metrics into the path of self-fulfilling prophecies. In a matter of cause and effect, a bias towards effects does not help to understand underlying strategic and policy problems without which it is impossible to fulfill the primary and secondary mandates of the MPC. Based on what we know about the nature of cause and effect of financial market processes and the dynamics of their metrics (quantities and prices) and the evolutions of the structures (allocation and gains) and the psychological instabilities as well as the opportunities they offer rational (that is, greed-fear-worry driven) actors, simply moving the level of a metric from a lower to a higher one simply will simply shift the defense line to a higher level. There is thirty years of concrete data and policy experience on this including the experience of the last two years. Existing work on currencies in emerging markets and globally makes it clear that movements in the metrics of the forex market are due to many cross-currents that mere movements of the price metric cannot resolve. We also know from settlements after the global financial crises that key attacking players in the global financial markets rig markets and their metrics to bias “market payoff” in their favour. Therefore, considerable care must be exercised in assuming that one price is “efficient” and another “inefficient” because the former is higher than the latter. It is simple economics that in segmented markets; neither the lowest nor the highest price is efficient. The efficient price if it exists; will lie between the two prices provided that the prices are not manipulated prices. Not much can be gained in the short to medium terms if the underlying structural deficiencies in allocations and in gains; the deficiencies in institutions and incentives and, the vulnerabilities as well as the administrative actions or inactions that cause spreads and resource misallocations are not comprehensively, consistently and dynamically understood and addressed. Policy without strategy is doomed to fail.

Worse, it tends to be followed by long term damages. This is exemplified by how the decision in 1978 to borrow from the international money market opened the door into a debt crisis that was only partly resolved in 2005-2006 before it transitioned into a malignant tumor shortly after. In my view, improving administrative actions, institutions and incentives as well as reducing the scope and strength of vulnerabilities are key prerequisites of an effective monetary policy framework. These issues ought to take precedence over movements of metrics which are never sufficient to guarantee the goals of monetary policy. The problem of malfunctioning markets cannot be solved by mere changes in metrics. Policy effectiveness requires policies to be appropriate but also, that markets function efficiently and effectively. The problem is that players who react to and influence the greed-fear-worry index exploit vulnerabilities to make markets and policies work perversely. No one concerned about the primary and secondary goals of the monetary policy could afford to be complacent about and blind to the true cause effect nexuses. Otherwise, policy could not serve the interests of the majority. It is clear that policy effectiveness is relative because every policy generates winners and losers. This is why there would always be a contest of positions by rational players whose arguments reveal their interests. The contest is good. But policy must follow the facts and its mandate. Otherwise, it loses its essence and relevance. The key issue always for policy must be what best serves the medium to long term interests of the majority which includes the 50 million unemployed and underemployed. For the majority, improving the efficiency and effectiveness in the allocation of credit, forex and securities and strengthening the transmission mechanisms of monetary policy are urgent. Also key is the urgency of reducing the structural vulnerabilities of small open economy like Nigeria in a greed-fear-worry driven global financial and economic system washed with the liquidity unleashed by the episodes of quantitative easing of the last decade.

Global Outlook and the Urgency of Coordination

The January 2016 MPC held amidst global structural problems (slowdown in China, policy conflicts among large economies, slowing global demand, declining commodity prices and the consequences of medium and small economies) and psychological instabilities (exemplified by the observed shift from high greed to high fear and worry on the fear-greed index and on the worry board at the 2016 Davos meeting). Because of the pre-eminence of “investors” and the growing dominance of “financial markets” in the global economy, much focus is given to the psychological shift from high greed to high fear and worry. However, no serious policy making body could make effective medium term compatible policies on the basis of greed, fear and worry. At the very least, the leading central bankers anchor policy choices on medium term outlooks generated from forecasts of the medium term paths of a set of key financial variables (interest rate and prices) and economic variables (GDP, unemployment, demand). This explains why key policy organs of Central Banks that met in January 2016 did not react to the volatilities in financial and commodity markets in January. For Nigeria which is a small open economy, the global structural problems have caused the current account balance to turn negative while the combination of global structural problems and the plague of psychological instabilities have combined to drain financial flows from Nigeria. Did we see these coming? If yes, did we prepare for them? Could we have prepared for them? My answer to the first and third questions is the same: yes we saw it coming and yes we could have been better prepared. Understanding why we did not prepare despite the Fiscal Responsibility Act of 2007 and associated economic laws is in my view, the crux of the strategic and policy discourse. We must understand our vulnerabilities in a world ruled by greed, fear and worry otherwise, we will keep repeating the same mistakes at growing economic, social and political costs. There is enough historical data and advice incidentally, from former leading officers of the International Monetary Fund against the idea of small open economies opening the barn doors only to close them when the horses have bolted or opening the barn door when they lack the prerequisites for managing what goes in, what comes out and what they take away and what they leave behind.

A Consistent Medium Term Monetary-Prudential-Fiscal Strategy

Connecting monetary, prudential and fiscal policies within a comprehensive and consistent framework is critical. It is important to agree on this and then, follow up immediately to make it happen. A sufficiently comprehensive framework would make it easier to understand why raising fiscal deficit when the current account deficit is growing will worsen a precarious twin deficit problem. The implications of a planned increase in public debt by over N2.2 trillion will become obvious: increase in debt from N10.5 Trillion to N12.7 Trillion, crowding-out of private borrowers including the small and medium scale firms that have higher growth and employment elasticities, a rise in interest rates, adverse effects on investment hence, employment and growth and the likelihood that debt service in the 2017 budget would significantly exceed the 22% of the proposed 2016 budget. It will thus become clear that fiscal choices can constrain monetary choices also, that neither the goals of fiscal or monetary policy could be achieved without efficient and effective coordination. It is worth noting that after Nigeria exited the Paris Club in 2006, the total federal debt was N2.1 Trillion which is well below the borrowing plan for 2016. The borrowing plan will continue a trend that picked up in 2009 during which total federal debt almost quadrupled from N2.8 Trillion to N10.5 Trillion. Raising the debt by another N2.2 Trillion clearly needs much more detailed analysis of the implications for policy effectiveness. An ongoing study has shown that had domestic debt risen along the 1981-2006 trend, government expenditure, total debt service and budget deficit would most likely have been significantly lower while private sector investments, credit to private sector and real GDP growth would have been significantly higher than they were. The results imply that excessive public borrowing was harming private investment, employment and real growth while creating and worsening a fiscal problem. A more comprehensive framework would also make it easier to see that with lower domestic borrowing and a more effective management of petro-dollars, liquidity would not need to be mopped up frequently after each round of fiscal injections which often tend to raise interest rates, “kill money” and reduce opportunities for viable real private sector activities that have relatively high growth and employment elasticities. In addition, high interest rates tend to worsen the performance of loans and therefore, a threat to financial system stability. Clearly, harmonizing monetary, prudential and fiscal strategies and policies are indispensable to the credibility of macroeconomic strategy and policy in Nigeria. The harmony has legal foundations in the CBN Act of 2007 which specifies the primary mandate of the CBN to be price stability and its secondary mandate to be, supporting the economic policies of the government. Without coordination, neither the primary nor secondary mandate can be efficiently and effectively actualized. Available information indicates that the Treasury Single Account has a balance of over N2.2 Trillion. If supplemented by recoveries either from voluntary returns or legal successes on the “war on corruption” and more effectiveness in the budget design and implementation following strictly provisions of the Fiscal Responsibility Act, 2007, there is a great likelihood that the problem of fiscal deficit should be significantly reduced in 2016. If cash management were to significantly improve even to the levels of household budget management, it should be possible for the spending programmes for 2016 to support a more efficient and more effective monetary and prudential strategy and policy. The short to medium term gains will include: lower interest rates, lower crowding-out of private sector credit, enhanced intermediation and significantly lower crowding out of resources for social and economic infrastructures. In the 2016 spending plan, the planned debt service of N1.36 Trillion is 76% of planned capital spendings, 62% of planned deficit, 22% of total expenditure and exceeds the sum of the recurrent allocation to the top five MDAs (Education, Defense, Police Formations, Health and Interior) by about N46 billion! The idea that we are below a threshold and should continue to borrow led Nigeria to a debt overhang problem that took more than half a century (1982-2006) to resolve at very high economic, social and political costs. To rely on the same idea to worsen the triple problems (fiscal deficit, current account deficit and a growing debt problem) is to fail to learn from history and to worsen the likelihood of efficient and effective policies. I am still convinced that “the 2016-2020 planning and budgeting cycle offers opportunities that the monetary and the fiscal authorities should use to have continuing purposeful and thorough strategic sessions, working out and agreeing on a continually adjustable strategic macroeconomic management framework at least, for 2016-2020.” It is important that fundamental errors are avoided and key vulnerabilities are positively addressed otherwise, the policy environment will remain challenged by structural problems, psychological instabilities (greed-fear-worry) and by avoidable strategic and policy errors whose effects are systematic and long termed.

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