Yemisi Izuora
The Central Bank of Nigeria, CBN, Monetary Policy Committee, MPC has ended its meeting in Abuja with a consideration for interest rate reduction to spur credit growth, not only in the private sector but also by the public sector.
This it said will help provide liquidity to stimulate consumption and investment spending.
The Committee though observed that similar action on rate cut had occurred in the past but found that rather than deploy the available liquidity to provide credit to agriculture and manufacturing sectors, the rate cuts provided opportunities for lending to traders who deployed the same liquidity in putting pressure on the foreign exchange market which had limited supply, thus pushing up the exchange rate.
The Committee however was of the opinion that providing opportunity to the public sector to borrow at lower rates to boost consumption and investment spending and to stimulate growth through aggressive spending, efforts should also be made to boost industrial output through concrete actions to deepen foreign exchange supply for raw materials so as to help reduce unemployment and boost industrial capacities.
The Committee was also of the view that consumer demand for goods which will be boosted through increased spending may indeed be chasing too few goods which may further exacerbate the already heightened inflationary conditions.
While it acknowledged the weak macroeconomic performance and the challenges confronting the economy, the meeting noted that the MPC had consistently called attention to the implications of the absence of robust fiscal policy to complement monetary policy in the past.
The Committee also assessed the impact of its decision to tighten the stance of monetary policy by raising the MPR in July 2016.
The Committee also recognized that monetary policy had been substantially burdened since 2009 and had been stretched as it notes that new capital flows into the economy, approximately US$1 billion, had come in since July, while month-on-month inflation has declined continuously since May 2016.
Against that background, members reemphasized the need to prioritize the use of monetary policy instruments in dealing essentially with stability issues around key prices (consumer prices and exchange rate) as prerequisites for growth.
The MPC noted that stagflation is indeed a very difficult economic condition with no quick fixes: having been imposed by supply shocks as well as fiscal and current account (twin) deficits.
It therefore considered urgent re-engineering of the policy framework to provide a lever for reversing the negative growth trend.
While the imperative for ensuring financial system stability remains, the MPC reiterated the fact that monetary policy alone cannot move the economy out of stagflation and maintained its stand on rates reduction even though it notes that the greatest challenge to the economy today remains incomplete fiscal reforms which raise costs, risks and uncertainty.