I have great respect for Gov. Emefiele the Central Bank Governor and some of us actually supported his appointment but today given all his fire brigade approaches and quick fixes with various unilateral policies bedeviling the struggling Nigeria economy on his watch has questioned curious school of macroeconomic minds and this has amounted to simply call it - a waste of Nigeria meager resources and show of professional incompetency. Gov.Emefiele latest decision on MPR is hogwash and asymmetrical.
The point of implementing policy through raising or lowering interest rate is to affect people's and company's demand for goods and services and this policy actions ultimately affects real interest rates, which in turn affect demand and output, teeming unemployment and most worst of it all inflation.
As a development economist, the last straw for me was his unthinkable suspension of foreign currency cash deposits and the retention of Monetary Policy Rate(MPR) pegged 13% to revamp liquidity in the system whereas, basis of MPR reliance for good economy is sordid not to talk about weak fiscal approach. This approach is detrimental to our economy especially to versed masses who are already in abject poverty, it will raise the cost of living of the verse population
Here are the reasons why the pegging of Monetary Policy Rate (MPR) at 13% rate will do to Nigeria economy:
- It will lead to hyper inflation, much of which we have been witnessed, already happening 1$ exchange rate to Naira is 245 ($1.00 Vs N 245) compared to six months ago of N 190 to $1
- It will lead to further increase in prices of goods and services in the country i.e. Gari and petrol prices etc
- It will affect the real sectors (housing, manufacturing & agricultural etc) as cost of borrowing would remain high and skyrocketing which ultimately detrimental to our bottom line and it can affect the projected growth i.e most of the huge factories are relocating to Ghana, Benin republic and elsewhere......
Fundamentally, one would expect our most revere Gov. Emefiele to understand the economic impacts of his decision that it will affect tremendously the movement of funds from capital market to the money market due to high interest rate.
There is no doubt, that if MPR is not lowered and reversed, the wages and prices will begin to rise at faster rates because monetary policy stimulates aggregate demand which is enough to push labor and Nigeria stock markets beyond their long-run capacities. In fact, a monetary policy that persistently attempts to keep short-term real rate low will lead eventually to higher inflation and higher nominal interest rates, with no permanent increases in the growth of output or weigh down deadly unemployment rate .
And I do understand, that there must be a trade -off between higher inflation and lower unemployment rate in the short run, which besides hardly measured in Nigeria, but I can tell Gov. that the trade -off disappears in the long run if pursued aggressively with acute monitoring.
Gov. should also know that perception plays a strong role, MPR policy affects inflation directly through people's expectation about future inflation in the country, petrol staggering prices could alert as driving forces for higher liquidity. If Nigeria workers, consumers and even the corporate businesses figure that higher inflation in the future is realistic, they'll ask for bigger increases in wages and prices and that in itself will raise inflation even without big changes in output.
Gov. Emefiele should be thankful as blessing in disguise, for back dropped wages in some states lagging year and months, curbing the cash liquidity to some extent. Its unfortunate but its econometric and its a reality
Just for example, in a simple terms, and hypothetically speaking here, a borrower (a Nigerian vulcanizer or a barber) is likely to feel a lot happier about a micro finance loan at 18% when inflation rate is lower than when it is higher . In any case, the value of the money that the borrower would pay back would actually be lower than the real value of the money when it was borrowed. Borrowers, of course would love this situation, while lenders would be disinclined to make any loans. So Mr. Gov. riding on inflation can be detrimental to economy, there are better ways to revamp liquidity
I'd expect Gov. to understand that lowering the rate will help to reduce cost of funds in the economy than his aggressive approach and choice that will inadvertently accelerate it.And to curb inflation, Gov. can easily add a risk premium to long term rates, which will make them higher anyway, in other words, the markets' expectations about monetary policy tomorrow have a substantial impact on long-term interest rate today.
And I strongly believe, he can inform markets about future values of the funds rate in a number of ways. For instance, CBN could follow a policy of moving gradually once it starts changing interest rates. Or, the CBN could issue statements about what kinds of developments the CBN or MPRC is likely to focus on in the foreseeable future; the CBN even could make more explicit statements about the future stance of policy
The current Nigeria economy situation will not experience the desire growth without proper funding of the real sectors(manufacturing, Agricultural etc) to boost our export to rejuvenate economic activities..... we had enough of bank reform in 2009 in finance industries besides needed now, moderate regulatory and I strongly believe, there is no need to put cog in the wheel of economic progress.
The retention of MPR at 13% and suspension of foreign deposit without clear strategy lacks economic blueprint and shallow.
The increase in interest rates can make domestic financial assets more attractive to investors than foreign financial assets. This situation can trigger an appreciation of the nominal exchange rate, thus reallocating expenditure in the economy. The latter takes place because this exchange rate adjustment tends to diminish the price of imports and raise the price of exports, which tends to slow aggregate demand and eventually reduce inflation. When the exchange rate appreciates, the cost of imported inputs declines, and thus firms' costs in general.
These developments have a favorable effect on inflation.
An interest rate increase tends to make bonds more attractive for investors
and reduces the demand for equity, making the value of these and other assets decrease. In a situation where the market value of firms decreases, these firms can face lower capacity to access financing, therefore hindering the consolidation of new investment projects. The latter also slows aggregate demand and therefore reduces in inflation
The current situation of the economy called for cautions and not unthinkable hasty decisions with doomed reverie.