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Urgent need to unshackle the Monetary Policy Committee 31 May 2016

The May 2016 meeting of the Monetary Policy Committee of Central Bank of Nigeria sparked the celebration of uncertainty. After months of clamouring by real sector operators and investors, the MPC finally decided to act on the vexatious foreign exchange policy of the CBN. Committee members “unanimously” decided for a “flexible” forex policy.

The euphoria that greeted this decision must have mistaken a decision to act for a substantive action. In addition, it reflected the desperation in the market for anything other than the CBN’s currency peg cum capital controls. This policy that was dictated by President Muhammadu Buhari had been perceived as roundly negative in the marketplace. Part of the reaction also hinted on the insincerity in market commentary, which suggests policymakers are intolerant of criticism.

The details of how the new forex policy will operate were not provided. The only clue given was that one tier -- of what looks set to be a multi-tiered market -- will operate discriminately. The CBN will use the official window where the naira will remain pegged to the dollar at N199/$1 to provide forex liquidity for ‘critical’ transactions in the industrial sector. Side-by-side with this official window, however, the interbank forex market might become autonomous. Therein, supply and demand is expected to fix the exchange rate. The third tier is the parallel market, with all the shenanigans that go on there.

Given this, the in-coming forex regime offers little redemptive hope. The old problem of the distortionary peg would be retained, but on a smaller scale. But then, the new policy will provide a wider canvass for the devaluation of the naira in the autonomous interbank forex market, following de facto devaluation in the parallel market. The distortion of the peg in the official market and the consequent opportunity for currency round-tripping will grow if, down the road, the CBN increases its intervention. Foreign reserves well above $30 billion and the need to scale up positive outcomes could see the intervention and the distortion significantly increase. But without accretion to the foreign reserves, the special window might even become inoperable. This shows the policy the MPC decided for is not sustainable.  

But the key issue is revealed by the delay to the operational take-off of the policy decision. One week after the decision was announced, the market continues to wait for the release of the modalities for its implementation. Ostensibly, there is the need to harmonise President Buhari’s staunch opposition to devaluation of the naira with the position of Vice President Yemi Osinbajo who, a few days to the MPC meeting, hinted at a consideration for a flexible exchange rate. In which case, not only was the decision of the MPC without independence, it has remained stuck in the contradictory positions within the Buhari administration and the politics of its one year anniversary.

The lack of policy independence by the CBN under the current leadership has been disastrous. Proponents of central bank independence want the executive arm of government to be protected from the temptation of influencing populist monetary policy decisions. Such decisions would have some salutary effects in the short-term. But over the long-term, they will produce more serious negative consequences in the economy. But even in the short-term, Buhari’s policy interference has imposed constraints on production, investment and economic growth.

Inability to take decisions as and when necessary has rendered the MPC decisions over the past twelve months ineffective. The May 2016 decision on the exchange rate is bound to prove either too little or too late. Ahead of the meeting, the Committee was confronted by a trifecta of negative GDP growth rate of -0.36 percent for Q1, 2016; 13.8 percent inflation rate in April; and rising unemployment rate. Since these are issues that were allowed to fester, the MPC could only try to stave off the looming recession. Its hazy flexible forex policy is hoped to unlock investment inflows and growth. That left the fight against rising inflation for another day.

This MPC has on several occasions collided with policy dilemmas that arose from the whittling of its policy-setting power. In March, it had to decide either to tame inflation by increasing the MPR or shift ground on its currency peg and capital controls to stimulate inward investments. Without political clearance, it decided for the former. The anchor interest rate was increased by 100 basis points to 12 percent. But this was both a negation and reversal of its penultimate decision of November 2015 that reduced the MPR and CRR to stimulate credit penetration. Given the flip flop, the objectives of the policy decisions of the last MPC meetings remained unrealised or quickly abandoned. High inflation, weakening industrial production, and growing unemployment have remained unsolved.

There is a wider context to the MPC debacle. Fiscal constraints -- arising from low oil prices – and delays in forming Buhari’s cabinet and signing the 2016 budget, have failed to deliver complementarity to monetary policy. With the hamstrings, the CBN could not help by effectively taking appropriate monetary policy decisions.

Therefore, restoration of policy autonomy to the CBN has become imperative. An independent central bank is more effective in its decision-making. That is what the market believes. The decision that is dictated to the central bank will not be accepted to be efficient, even if inherently it is. Market confidence is built by the decision-making process more than the decision itself.

But then there is the moral issue of what to do with a central bank policymaking organ that acquiesced to the erosion of its independence. Would such a collegiate body be able to convince the market that it is capable of good decisions even if the dictatorship of the executive arm of government on monetary policy decidedly recedes? This question should be raised further outside this page. But it probably wouldn’t, indicating the absence of independent, deep policy-thinking that should provide honesty to market commentary.

The early shouts of hurrah on the little-clarified new forex policy will set the stage for future victimization of the market. This is inevitable when policymakers are not put to task.