Why I don't envy members of the MPC By Uddin Ifeanyi

As the central bank’s rate setting committee meets this morning, the consensus amongst watchers of the economy is that there is too much in the (macroeconomic) mix (and all of this in flux) for anyone to hazard a guess as to likely policy direction. If therefore, today’s meeting of the Monetary Policy Committee (MPC) is to do no harm to the economy, its best bet is to keep the policy rate unchanged.

Ahead of today’s meeting, January’s inflation numbers had moved 230 basis points over the end-December 2011 figure. For obvious reasons. The federal government’s efforts at deregulating downstream operations in the oil and gas sector had driven up pump-station prices for petrol. Nonetheless, even the January numbers did not tell a consistent story. For example, month-on-month, the food index rose from 128.1 in December 2011 to 129.3 in January (November 2009, at 100, is the base period for estimating these numbers). According to someone who should know, given that some harvest did take place in November, it is odd that the food index was up in January.

How much of this was because of the increase in the petrol price? One would have imagined that transportation costs are the main channel for the pass through of higher fuel prices into food prices. (Petrol price go up, transportation costs reflect this increase, as do the cost of food items trucked out of the farms to consumers at their various locations.) Still, if the National Bureau of Statistics’ (NBS) is to be believed, on a month-on-month basis, the transport index was down to 127.8 in January, from 128.7 as at December last year. Now, this is even stranger than the fact that the food index was up when it should have trended down. The NBS’ commentary on the January inflation numbers provides one possible explanation for this unbalanced narrative.

According to the NBS, “while the impact of the subsidy removal on the CPI was visible and significant, this was tempered by several demand side factors which kept a downward pressure on price increases and prevented them from rising much higher than would have been expected.” One of these demand side factors was the unrest, which gripped the nation as consumers resisted government’s attempt to put fuel prices up. Companies did not work, public services were shut down, and the strikes meant that consumers did not buy as much as they would ordinarily have. In other words, the January inflation numbers might not have told all there is to tell about where inflation is headed in response to the fuel price hike early this year.

As if this is not enough worry, my banker friends tell of a much different concern: one that they are persuaded should be “hot and sizzling” on the MPC’s plate this morning. I was originally convinced that the adoption by the federal government of the treasury single account (TSA) was a major positive for the economy. If nothing else, it would permit everyone a better view of the public finance, allowing government to get more value for its naira spend, and better coordinate the borrowing requirements of its ministries, departments, and agencies.

However, I apparently had ignored the possible impact on commercial banks of the transfer of public sector deposits from them to the central bank. Sterilising this large supply of deposits would ordinarily drive up banks’ cost of funds. The difficulty is that this tightening would happen as depositors at the retail end of the financial services market are expected to begin pushing for higher yields on their deposits this year. Tighter supply conditions, and banks might just be unable, going forward, to create the risk assets that we all agree are necessary as part of the restructuring of this economy. So should the MPC be looking to ease banks’ liquidity condition as the TSA is implemented?

Much will depend on the fiscal side of the economy. Rising global oil prices have always been a problem. The wealth effect this engenders has always driven extra government spending, especially at the expense of the changes needed to improve the local economy’s ability to absorb this additional money. With Brent Crude price settling Friday at US$126.16 and the national assembly responding by pushing the 2012 appropriation’s oil price benchmark up to US$72 per barrel from US$70 per barrel, this spendthrift effect remains a real and present threat. In light of the failure of additional reforms to the structure of this economy needed to increase its absorptive capacity, any over-spend by the public sector would drive up liquidity in the wrong places, put pressure on domestic prices, and threaten the new found stability of the naira. In such circumstances, it would be inappropriate for the central bank to increase banks’ liquidity.

It would be important, instead, if we are to attain the goal of fiscal consolidation, that the federal government maintain its original benchmarks for the 2012 budget – even when we are all agreed that the 2.48 million barrels per day oil production number is anything but realistic.


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