Bridging the fiscal and monetary policy divide By Ifeanyi Uddin

Ifeanyi Uddin

The easiest recourse in the Central Bank of Nigeria’s (CBN) toolkit for addressing the monetary policy consequences of the tumultuous events that marked the first two weeks of the New Year was the decision to postpone until month-end, the meeting of its rate-setting committee (the monetary policy committee – MPC) originally scheduled for today and tomorrow. Hopefully, the added days will help MPC members reach a measured understanding (of the much-changed circumstances of the economy since the protests) needed to agree a new policy outlook. They will need this new understanding copiously, going forward, giving the new challenges that they will need to square up to.

In pole position, amongst the new tasks, is the believability challenge. Over the last three years, the CBN has significantly improved the predictability of its interest rate decisions, allowing participants in the market to factor in such decisions into their respective plans in a non-disruptive fashion. In consequence, the apex bank has lowered volatility in the domestic financial markets. The MPR, has played an important part in this process. It has held meetings on schedule, communicated the basis for its decision-making more clearly, and regularly.

Nonetheless, the moment the CBN governor crossed the fiscalmonetary policy divide, as part of his contribution to the debate over the propriety of government removing the “subsidy” on petrol, this much worked for transparency was jeopardised. Key question from this blurring of the policy divide? How independent of the fiscal side of macroeconomic policy is the CBN? Or better still, would the sense that the central bank is tied to government’s apron strings not hurt its ability to make good monetary policy decisions? The answer to this question will matter much later (and I do hope I have enough space here to address it).

Inflation, though, is the other policy worry. Despite all the fancy talk to the effect that petrol is not the fuel of choice in this economy, and so a rise in its price would not have knock-on effects on other prices, the immediate aftermath of the new pump-gate price has been to push prices up across every sector of the economy. Moreover, anecdotal evidence suggests that prices, incidentally, have risen far more for goods at the lower end of the purchase spectrum. Essentially, these price rises will eat more into disposable income at the bottom of the pyramid, without significantly boosting aggregate demand. Parenthetically, this prospect turns the spotlight on to the National Bureau of Statistics (NBS). The latter has always maintained that its inflation numbers reflect the all-in costs of the man on Main Street. These costs have undoubtedly risen, and by much. So, where will the inflation rate be, first for January, and then by mid-year?

The CBN governor, again pre-empting so much, estimates the (year-on-year, I guess) rise in the consumer price index at around 15% by mid-year. Now, this cannot be because he knows the NBS’ numbers a priori. Rather the best reading of this is that aware of the unhelpful nature of rapidly rising prices in an economy such as ours, the apex bank will do all in its power to maintain price stability. Thus, although it may not be able to hold rates from moving (indeed, rates should move), it appears to have pledged to keep such movement at no more than 500 basis points higher than the 2011 closing numbers. Accordingly, it is safe to assume that the monetary policy rate – MPR – will head northward, and aggressively too.

It is at this point that the CBN governor’s independence of the fiscal side of the economy will begin to matter. In advertisements in the wake of the fuel “subsidy” troubles, the federal government changed the parameters of the country’s economic discourse. Providing infrastructure, either directly, or through the private sector, and improving the citizens’ welfare have dropped off the radar. Instead, these have been replaced by a concern with keeping the country’s debt low.

Obviously, this goal is inconsistent with a rising MPR. As was evident with the central bank’s non-accommodative monetary policy stance last year, as soon as the policy rate began to set the tone for cost of funds in the economy, each tightening by the apex bank pushed the cost of treasury bills up, increasing the cost of government debt. With inflation set to rise seriously this year, there are few options available to the apex bank besides raising the MPR. It could tighten monetary policy by withdrawing public sector deposits from the banks. But not only would this move us back into administrative instruments. It would hurt the recent attempts to build market signaling into the policy toolkit.

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