It Is Time to Resolve Nigeria’s Monetary Policy Conundrums

Abstract

In the last six years, Monetary Policy Committee (MPC) decisions have included easing the monetary policy rate (MPR) just once, November 2015, and the cash reserve requirement (CRR) has been eased just twice, July and November 2015. In contrast, the MPR has been tightened ten times, including twice during the recession in 2016, and the CRR has also been tightened ten times, including once in 2016. It is very puzzling that MPC finds extraneous reasons, typically about banks or foreign exchange supply, to tighten monetary policy, even when the economy is contracting and can do with some liquidity boost. This paper demonstrates how MPC decisions have become disconnected from economic realities, and suggests the urgent steps that must be taken to ensure a reconnect. We compare the patterns in historical monetary policy decisions across Soludo, Lamido, and Emefiele regimes to trace the emergence of the disconnect and establish the best strategies for reconnecting. We also clarify the numerous misconceptions about the nominal MPR, positive real interest rate, foreign portfolio inflows that are often expressed in the MPC communiques. The economy is bigger and more important than the banks, but MPC statements continue to dwell on banks’ conditions, rather than on economic conditions, indicative of lapses in banking supervision. Failures of micro/macro-prudential policies are spilling over into the monetary policy space, inflicting high growth and employment costs on the economy. What the UK government has done in reforming the Bank of England over the last two decades, especially in functionally separating responsibilities for monetary policy and micro/macro-prudential policies, is an example of the reforms required in Nigeria. Apart from banks’ conditions, MPC statements have also had a lot to say about the need to keep the policy rate high enough to attract foreign portfolio inflows, rather than ease rates to stimulate growth and investment, betraying another spill-over into the monetary policy space from weaknesses in the foreign exchange policies of the Central Bank of Nigeria (CBN). Nigeria’s foreign investment policy must be recalibrated away from preoccupation with volatile and easily reversible portfolio inflows towards greater reliance on harder to reverse diaspora and foreign direct investment inflows. We argue strongly for immediate reforms in Nigeria’s monetary policy processes, Nigeria’s banking supervision arrangements, and Nigeria’s foreign investment policies. Those reforms are needed to ensure an orderly transition to a low MPR/low CRR regime that is urgently needed to boost growth and investment.