Appraising the thrust of Nigeria’s monetary policy

[Mirror]

Recent deliberations of and reasons for policy actions of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) have been too much about fiscal stance and liquidity of banks to the exclusion of considerations of the dynamics of real output growth, employment, consumer spending, household sector balance sheet, business spending and corporate sector balance sheet, which ought to be the real reasons we need to manage monetary policy.

Discussing and acting on fiscal and banking developments in isolation of output, employment, household and business spending growth is not the right way to do monetary policy.

Providing optimal liquidity support for aggregate, sectoral, regional real output and employment growth, and household and business spending, is the motivation for monetary policy.

Fiscal stability, financial stability, financial regulation, and financial supervision all make sense only if they contribute to the attainment of growth and employment. The focus is lost when the Committee's discussions and interventions can proceed without reference to the more vital growth and employment aspects of the economy.

Regaining that focus is a pressing policy challenge for Nigeria. Of course, many of the issues that currently distract the MPC from dwelling on core economic issues at its meetings are legitimate issues that must be addressed, but they are best left to other entities.

Most of the concerns expressed on fiscal stance should ideally preoccupy some other committee outside of the CBN. A lot of the issues discussed about banks by the MPC should also be dealt with outside of the MPC, but within the Central Bank. It is important to ensure that the MPC is primarily preoccupied with growth and employment issues in coming to decisions about interest rates. Contemporary experience of the United Kingdom offers key lessons in these regards.

The UK MPC is freed from paying too much attention to what banks are or are not doing because a different entity, the Financial Policy Committee (FPC), another independent subsidiary of the Bank of England, also chaired by its Governor, deals with concerns about banks and financial stability.

Similarly there, the MPC is freed from paying too much attention to the fiscal stance because the House of Commons' Treasury Committee works very actively to ensure fiscal stability. Nigeria needs to learn urgently from the UK example by moving towards a situation in which her MPC is not the only one striving to manage all aspects of macroeconomic stability.

Parallel arrangements for managing fiscal and financial stability in an open and forward-looking way are therefore, needed here. The UK MPC concentrates on growth and employment issues, knowing that other arrangements are in place to optimize fiscal and banking activities.

Members dwell primarily on the role that monetary policy can play in promoting real growth, employment, household and business spending, and regularly visit various regions of the country to speak to different audiences, explaining the MPC's policy decisions and thinking.

The regional visits also give members of this committee a chance to gather first-hand intelligence about the economic situation from businesses and other organizations. In its August 2013 statement on Monetary Policy Trade-offs and Forward Guidance, the UK MPC says it currently strives to 'explore the scope for economic expansion without putting price stability and financial stability at risk.', and that, 'The MPC intends at a minimum to maintain the present highly stimulative stance of monetary policy until economic slack has been substantially reduced, provided this does not entail material risks to price stability or financial stability.' This goes to show that price and financial stability concerns ought not to be pursued to the neglect of real growth and employment concerns.

The Nigerian MPC communiqués have a tendency to passively note the latest real GDP growth figures from the National Bureau of Statistics (NBS) in a single paragraph without attempting to link subsequent deliberations and policy decisions to them.

The committee ought to make more explicit statements about observable, periodically measurable and easily understood indicators of real economic conditions that its deliberations and actions will impact, and then hold itself accountable to demonstrate the extent to which such impact is being attained from one meeting to the next.

Growth in nominal GDP, consumption, investment, real GDP growth, employment are some of the variables that the public cares about and the MPC needs to say a lot more about how its actions impact them at each of its meetings.

It also does have a lot to say about consumer price inflation, which is the key target and indicator variable its deliberations and actions revolve around, but almost never has anything to say about consumer spending, making it difficult to situate the committee's views on the outlook of consumer price movements within the context of the overall outlook of developments in real consumer spending. To be continued... Dr. Teriba, ayo.teriba@econassociates. com, is CEO, Economic Associates, Lagos.

National Mirror