Financial experts have proffered suggestions on what the Central Bank of Nigeria (CBN) should do urgently to save the country’s economy blighted by the ravages of the coronavirus pandemic.
The Monetary Policy Committee (MPC) of the bank is scheduled to hold its second meeting for the year on Monday and Tuesday to review the monetary policy fundamentals in a bid to stabilize the troubled economy from receding into another recession.
Last January, the MPC voted to review upwards the Cash Reserve Requirement (CRR) by 500 basis points from 22.5 to 27.5 per cent, while all other policy parameters were left constant.
At the end of the meeting, the controlling monetary policy rate (MPR) was retained at 13.5 per cent, with the asymmetric corridor retained at +200/-500 basis points around the MPR, and the Liquidity Ratio retained at 30 per cent.
But, with the economy already unsettled by the jolting impact of the coronavirus pandemic on the global economy, the CBN is under pressure to tweak the monetary policy rate.
Also, the apex bank is expected to liaise with fiscal authorities to create stronger fiscal buffers to enable the country to survive the challenge as the MPC meets this week.
The financial experts who spoke with PREMIUM TIMES on the steps the CBN and MPC should take to stabilize the economy, include the former deputy governor of the CBN in charge of Financial Systems Stability, Kingsley Moghalu; Chief Executive Officer, Economic Associates (EA), Ayo Teriba; Lead Management and Financial Consultant, Pan Africa Development Corporation, Odilim Enwegbara; CEO, Global Analytics Consulting Limited, Tope Fasua, and Managing Director, Cowry Asset Management Limited, Johnson Chukwu.
Naira devaluation is long overdue
The Nigerian economy is over-exposed to China. Most of the world’s manufacturing today is happening in China. Immediately China was hit by the coronavirus, the global supply chain was massively disrupted across the world. Nigeria is one of those countries worst affected.
The demand for Nigeria’s crude oil has almost sunk completely. The price of crude oil has crashed. What this means is that economic diversification is imperative. We have talked about it for over 40 years. It has not happened. Devaluation (of the Naira) is necessary. In fact, it is long overdue. I see the Central Bank moving in that direction.
But, let me sound a note of warning. Why is it that all the devaluation we have done has not brought anything for the Nigerian economy? It is because devaluation is pursued in Nigeria as a stand-alone policy, and in reaction to events. So, we don’t benefit from it. The way, we do it simply to import inflation into the country.
It is time for us to begin to use devaluation to reposition the Nigerian economy competitively to encourage exports of manufactured goods to earn foreign exchange and discourage people from importation.
My recommendation is that the current devaluation must be accompanied by a number of policies. The Central Bank should stop the ban on foreign exchange allocation for the importation of a number of goods.
CBN should use trade policy to increase tariffs on imported luxury items and then give subsidies to local manufacturers, especially those that export. So, we will now create incentives of the economy to manufacturing locally.
Nigeria needs stronger fiscal buffers to survive the challenges created by the coronavirus pandemic on her economy. It is those kinds of buffers that can allow Nigeria to help its citizens in times like this.
CBN’s interventions are good. But, they are not enough. The CBN has to cut the monetary policy rate. The Nigerian fiscal authorities need to save much more money. They will need to raise money domestically. They should perish any thought of borrowing any $22.7 billion because from all indications the country cannot pay back such a loan.
Ease fiscal and monetary policy parameters
Nigeria, and indeed, the whole world must ease fiscal and monetary policy parameters to protect the economy from the COVID-19 inflicted slump. It will, however, be naive to continue to talk about easing monetary policy rate, its corridor, or CRR without situating the discussion in the context of the available supply of foreign reserves relative to demand.
Foreign reserve adequacy to meet trade and capital flow obligations defines the space available for CBN to ease any of its three policy levers in response to the economic and financial downturn inflicted by COVID-19.
To increase their monetary policy space, many developing countries have prioritised accumulation of reserves from a variety of sources outside of net trade inflows, foreign direct investment (FDI) and remittances being the largest and most reliable sources of external liquidity inflow. Nigeria has omitted to do this, carrying on as if it is all about policy rates.
Shore up external liquidity
The response we must now make is to seek ways of shoring up external liquidity to protect the economy from the devaluation of the Naira and recession and regain fiscal and monetary policy space. It is therefore not about the instruments available to the MPC at its meetings of Monday and Tuesday.
It is about shoring up reserves. The MPC members and all government policy bodies should be better off spending time debating how to achieve foreign reserve adequacy now to avoid the worst consequences of reserve inadequacy.
We could have done it ahead of the 2016 devaluation and recession, but we didn’t. We could have done it since then, but we didn’t. We must do it now. Although it would have been easier in the past than now that the whole world suffers the crunch of the COVID-19 slump. But, there is no alternative path out of the current mess.
Cut interest rate to stimulate lending
My first point is for the Central Bank to adjust the interest rate to stimulate lending. The CBN has set aside N1.1 trillion so far for concessionary loans at 5 per cent to small and medium-scale enterprises. That may not be enough to resolve the current problem. We need more.
The problem is that economic growth will slow down drastically. And businesses may not be able to meet their obligations to their lenders. This has made the CBN to come in with the financial stability initiative, to ensure that banks do not have a buildup of bad loans to slow down economic activities.
The economy today is not facing a shortage of credit. People are not concerned about where to go and borrow. It is time to rebuild the monetary policy rate so that people can begin to borrow.
Admit local investors to OMO market
Then second point is for government to consider admitting local investors to the open market operation (OMO) market to moderate the sharp increase in foreign portfolio investors in OMO market. Local investors should also be encouraged to invest in the local instruments instead of looking for foreign currency assets like Eurobonds.
They should allow treasury bills to reflect the current economic reality in the country. They must do everything to stabilize or close down the rate at which foreign investors are given. Given the severity of the economic challenges at this time, the government must look at the traditional channels of liquidity rate and cash reserve ratio.
With the cash reserve ratio already at 27.5 per cent, there is no room for further increment. Same as the liquidity ratio at 30 per cent.
The threat of economic recession is not only in Nigeria. It is happening everywhere. When economic activities have slowed down to almost a near halt, and if the inflation becomes excessive, we should expect people to go into a lockdown till the situation improves. Productivity will suffer and the natural expectation will be recess, particularly in a country with very fragile growth rate like Nigeria.
Cut interest rates to stall stagflation
I believe the monetary authorities should take the cue and cut interest rates like every other country is doing. The world is heading into another prolonged recession as things stand today with coronavirus pandemic. Economies have already stalled. Dropping rates may help stall stagflation which means a stagnant economy also facing inflation at double digits. Increasing interest rate levels will naturally cause manufacturers down to retailers to increase prices of everything. Leaving rates as is may be termed as indecision.
I personally cannot see how Nigeria can escape recession at this rate, especially as we are also on the verge of closing the economy. I would have advised against such, and in favour of trying to position this country as a safe haven. I don’t see how coronavirus cannot be tamed with intelligence and our understanding of local pharmacology. An economy that is projected to grow at 2 per cent this year intends to lockdown. The only way to head is a recession. However, we still have an opportunity to course-correct.
CBN must act quickly, decisively
We all know the global economy is technically in recession. We all know with the grounding of the global supply chain, an historic shortage of consumer goods is looming. We all know as a result this, there will be severe global inflation. But for it to be as short as possible, we will need the coronavirus pandemic to be quickly brought under control.
It is for these reasons that the CBN must act quickly and decisively. The CBN must do the unthinkable now, starting with the lowering its monetary policy rate (MPR) to a historic rate of 5 per cent.
That’s the only way to neutralise the impending crisis in the stock/debt markets due to inevitable selloffs in a rush to exit, before the eventual collapse, which if allowed to happen, could trigger market value plunge with a flood of unprecedented non-performing loans.
It is this calming down effect policy of the CBN that the economy needs right now more so because it will discourage investors from engaging in stock such an all dumping effort. This is the policy game-changing effect that the CBN must undertake because of its recession lowering effects.
By lowering the policy rate to such a historic level of 5 per cent, and combining it with such massive quantitative easing, using liquidity frontloading, the CBN will be keeping recessionary forces enough distance from the economy.
But for this mid-single-digit interest rate and high liquidity ratio to fully calm down the markets, besides pumping liquidity into the stock/debt markets using buyback policy, the CBN should go further by making more naira available to the real sector economy, possibly and unconventionally turning itself into the lender of first resort.
It is this effort of the apex bank that will eventually block liquidity crunch along with blocking the potential plunging of the economy into a recession.
This uncommon monetary policy approach as debatable as it is, remains our most sophisticated and quickest way to make the country’s economy rebound in the shortest possible time.
Should the CBN fail to quickly follow this policy line with such decisiveness, certainly, the chances of the economy going into a recession are high, which if allowed, the recession this time around will be a steeper recession. This more so because such a recession will be happening at a time the global economy is in steeper recession.