Spend or save: CBN’s confusing policy signals

The Central Bank’s monetary policy committee [MPC] ended its meeting in June last year blaming the fiscal authorities for not spending enough to propel economic recovery. The committee’s next meeting since then has just ended on 4th April 2018 with a call on the fiscal authorities to freeze growth in aggregate expenditure and revenue distributions and start saving. This is even as it expects that economic recovery would remain patchy, meaning that the economy would still be unable to deliver new jobs and lift people out of poverty.

The bank’s monetary policymakers admit that growth in the real sector continues to be constrained by low level of bank lending and that the need to enhance aggregate demand remains pressing. At the end of the meeting in June last year, they sounded a stern warning that even a modest economic recovery expected in 2017 stood the risk of being scuttled. The Central Bank’s governor, Godwin Emefiele, then said the economy could relapse into a protracted recession unless bold monetary and fiscal policies were taken as a matter of urgency to sustain the economic recovery momentum.

Responsibility for the needed actions fell on the government and the Central Bank. The bank needed to employ monetary policy to stimulate domestic economic activities in order to match action with its call for bold monetary policy. It however failed to set an example of the boldness the committee was calling for and left monetary policy rate unchanged at 14%. While users of bank credit needed a breathing space and credit widows needed to expand, the committee also retained cash reserve ratio at 22.5%.

On the path of fiscal authorities, MPC last June called for fiscal stimulus to step up economic activity and spur economic growth. The Central Bank [CBN] expected government to pursue relentlessly fiscal stimulus by fast tracking budget implementation in order to drive the growth impetus for the second half of the year. For lack of adequate fiscal space, government has engaged in external loan negotiations in order to meet the CBN’S recommended spending boost.

All of a sudden, the committee has shifted policy target from aggressive fiscal stimulus to aggressive building of external reserve buffers. The call for fiscal stimulus can be appreciated in view of the need to strengthen the productive functions of the economy towards recovery and growth. How the CBN expects the fiscal authorities to change direction midstream and pursue savings for the rainy day – while it is yet raining presents a confusing signal in policy thrust.

Federal and state governments have planned for new borrowings to finance deficit budgets. How does the committee expect its call to cut federation account allocations to affect government budgets – cut down aggregate spending or increase borrowing?

The committee seems to be making a right call to save at a wrong time. The priority at the moment is to strengthen economic recovery through improved quality spending in order to push people out of poverty. Nigeria’s emergence from economic recession doesn’t mean it has overcome the problems of unemployment and poverty.

The two social problems remain significant threats to the economy because the level of economic growth required to check their rising trends isn’t anywhere in sight yet. Even when the economy was growing reasonably, it was unable to deliver employment and improved living standard.

It is important that policymakers do not lose sight of the problem of excessive focus on the aggregated numbers. Exiting recession with growth in some industries covering up sustaining decline in other activities still leaves a big job undone. More than that, economic growth numbers mean nothing unless they deliver new jobs directly and indirectly and reduce poverty.

The extreme focus on exiting recession and GDP growth seems to turn a blind eye to the problem of unfair distribution of wealth and opportunities in the economy. Rather than preach savings at this time, MPC needs to press that government spending should have a flow-down effect in order to positively impact the millions of people that are disadvantaged and dislocated.

An effective way of fighting all sorts of crimes emerging in society is by ensuring a more even spread of resources and opportunities rather than let the few that are close to the corridors of power corner all and take all. Self propelling economic growth and massive job creation can only happen where many people have opportunities to participate in the economy.

The state of the economy lays bare the fact that monetary policy isn’t yet structured to permit the level of economic recovery and growth the nation is yearning for. This seems to make the monetary policy making job an armchair, academic routine. MPC needs to take its monetary policy making function from a classroom theory to the realities of the business on the streets. Its members need to go to the field, conduct research surveys and come back with findings that will inform policy decisions.

Mike Uzor is a financial analyst at Datatrust