Of Holes and Excavators -By Uddin Ifeanyi

“When in a hole, stop digging!” Thus, the main moral from the first law of holes.

The meeting, last week, of the Central Bank of Nigeria’s (CBN) rate-setting committee (the Monetary Policy Committee, or MPC) underlined the poignancy of this adage in our present economic clime. There is no doubting the fact that the Nigerian economy is in a very, very deep “hole”. Of those who have an opinion on such matters, some find consolation in the added fact that much of the global economy is in some similar cul-de-sac. Indeed, for most emerging economies, the indices of distress are similar to ours: worsening public sector fiscal balances as major export revenue earners suffer price losses in the world markets; weakening currencies and current account balances; and a difficulty attracting foreign capital into the economy; among others.

The difference, however, has been in the response of our monetary authority. The naira has plumbed new depths only because a major source of supply of foreign currencies to the market (crude oil exports) is in the doldrums. Rather than work to strengthen the naira’s value proposition, the responsible authorities have imposed price controls. And then, surprise, surprise! “We”, i.e. most “national” commentators have attributed the resulting queues and elevated parallel market activities to the actions of unconscionable “speculators” and dastardly “economic saboteurs”.

In the downstream sector of the oil and gas industry where similar policies have been afoot for some time now, the new recourse is to stronger law enforcement. In essence, civil intelligence services and the police have been invited to help tackle a response to economic incentives predicted by most economic textbooks!

Sadly, the MPC’s love for digging itself out of holes, in violation of the first law of holes, is not limited to the naira’s woes. In the communiqué issued after its November meeting, the MPC worried “that the previous liquidity injections embarked upon through lowering of the cash reserve ratio (CRR), in the last MPC, has not transmitted significantly to improved credit delivery to key growth and employment in sensitive sectors of the economy”. Instead, it would seem that bank beneficiaries of the new levels of liquidity proceeded to parlay these new monies into “sectors with low employment elasticity”.

Indeed, CBN staff numbers quoted by the communiqué indicate that even when net domestic credit (NDC) grew by an annualised 14.35% (much lower than the 29.30% target for the year) in the ten months to end-October 2015, much of it may have gone to the public sector, with the federal government alone accounting for most of the growth in aggregate domestic credit. According to the CBN, growth in net credit to the federal government was up by 96.66% in October this year, having grown by 142.38% in the previous month.

Now we all know that the public sector in the country has not spent much by the way of building local capacity to boost long-term growth in domestic productivity. Instead, nearly all its spend have been for recurrent purposes. It would appear, if the CBN’s numbers are to be taken seriously, that much of this expenditure may have been funded by borrowing from the domestic economy. Everyone knows what that usually means for local rates.

In spite of this, the MPC crashed banks’ cash reserve requirement from 25% to 20% at its last meeting to aid further bank lending to the economy.

At what point is it obvious to a watcher of this economy that there are structural problems with it that these piecemeal, ad-hoc, symptom-specific responses only further exacerbate?

How, to take another example, does one square the circle created by the central bank around the policy rate? Because of the CBN’s spirited efforts at boosting banking sector liquidity, especially through accelerating a decrease in banks’ cash reserve requirement, while moderating its open market operations, domestic rates have touched new lows. The MPC reports that “average inter-bank call and open buy back (OBB) rates, which stood at 15.50 and 35.00% on September 21 and 22, 2015, respectively, fell to 9.67 and 9.00% on September 23, 2015. On October 19, 2015, OBB rate closed at 1.00% with no transaction at the interbank call segment. Following the increase in net liquidity level, the interbank call and OBB rates further declined and closed at 3.76 and 0.73%, on October 29 and 30, 2015, respectively.”

Still, the committee could only agree a 200 basis points decrease in the policy rate from 13% to 11%. Even the much commented on switch from a symmetric corridor around the policy rate (monetary policy rate, or MPR) to an asymmetric corridor had all the hallmarks of an air-freshener. For not only is the MPR an orphan (actually it has been thus marooned for a long while now), unrelated to any domestic economic index, it is now completely useless as a signalling device.

How did we reach so deep into this hole? Moreover, why are we still digging?