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Monday, March 27, 2023

When Central Bankers Become Worried

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Central Bankers are often known to be calm and not rock the markets too much with statements that could be interpreted one way or the other as being negative or showing that they have lost control of the macro situation.

Nigerian Central Bankers are however very candid in their statements, often expressing worry over their inability to move the macroeconomic space in whatever direction they seek, whether It be lower interest rates or lower inflation and sometimes pointedly push the problem off to the fiscal authorities.

With the 280th meeting of the Monetary Policy Committee (MPC) scheduled to begin today (lasting for 2 days), the members of the committee face many conundrums with regards to their approach to monetary policy.

The MPC noted at its last meeting that economic growth could be hampered in an environment of unstable prices.

To this end, the choice (before them then) was between loosening the stance of policy to ease credit further or tighten to moderate price development or maintain a hold stance in order to allow previous policy measures continue to permeate the economy while observing global and domestic developments.

In the end a majority of the members chose to hold, which in itself was probably the safest thing to do.

However, many MPC members expressed concerns in their personal statements.

Adenikinju Adeola Festus, an economist and MPC member notes that: “The economic recovery rate is still very weak and fragile. Poverty and unemployment rates are still quite high. There are many headwinds assailing the domestic economy. Domestic inflation is still unacceptably high and is putting pressures on domestic interest rates. It is also affecting the standard of living of Nigerians. Exchange rate speculations are fueling depreciation of the naira in all the exchange rate windows. External reserves declined from US$34.29 billion 20 in April 2021 to US$34.13 billion in May 2021. We also continue to experience dual deficits in the BOP. There is a need for a major boost to Government revenue to reduce the rising fiscal deficit and narrowing of fiscal space. The subsidy on petroleum products and the poor performance of refineries are issues that need immediate attention. As a country, our excessive dependence on oil for revenue and foreign exchange sustenance is no longer tenable in the medium and long term. We need to diversify the economic and revenue base of the economy to reduce our exposure to external shocks as well as prepare the economy for the global shift from fossil fuel to green economy. It should not be business as usual for our economic managers. The economy also needs a strong buffer to mitigate external volatility.”

The conundrum in the statement above is that if the ‘economic recovery rate is still very weak’ then more stimulus in the form of monetary easing should be applicable. But as noted by Adenikinju the ‘domestic inflation rate is still unacceptably high.’ Which should ordinarily necessitate a rate hike or tightening.

To make matters worse things like boosting Government revenues, removing petrol subsidies and fixing the refineries are outside the purview of the Central Bank.

To be fair to the Government at the center it has attempted some market reforms although they are largely seen by analysts as too little to move the needle on growth.

The Federal Government needs to then in conjunction with the CBN move those levers it is able to jumpstart private sector investments, portfolio inflows and job creation.

It often bodes ill for the rest of the citizens of a country when Central Bankers begin to openly express worries!

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