The hawkish monetary policy stance of the Central Bank of Nigeria (CBN) by holding benchmark lending rate constant at high 14 percent for almost two years based on the need to ensure sustained price and foreign exchange stability is having detrimental impact on productivity, according to Lekan Shitta-Bey, an investment banking analyst and managing consultant at Grant Alsthom Consulting limited He also queried government’s claim of having achieved a N1.3 trillion capital expenditure, saying that is not seen in the economy.
Speaking at the sideline of the business a.m./GTI Finance and Invest Forum in Lagos, late last week, ShittaBey said that though the price stability agenda of the CBN is looking bright, the one size fits all policy of the apex bank is a bit naïve, adding that a little inflation would not hurt if there was a policy timeline for expansionary or contractionary periods are spelt out. “We (Nigeria) could tolerate a little bit of inflation. This should, however, be a hardship that will have a timeline.
There should be a sunset clause called forward guidance. The CBN can tell the fiscal authorities that, ‘we are going to tolerate inflation up to this point this year, then next year we are going to make sure that the inflation rate does not go beyond certain levels,’ he said, adding that with that kind of policy people and business agents who are taking decisions would be aware of how to make plans.
“But a one size fits all policy is a bit naïve,” he stressed.
“There must be an economy first before you decide you want to control inflation. But in a situation when the economy goes caput, and everybody is unemployed, what inflation will be there to control?” he queried Shitta-Bey explained that in a fixedly bid to control inflation there would be the likelihood of creating unemployment, which, according to him is what is obtainable in Nigeria today.
He pointed out that the monetary policy confusion problem in the country started when the CBN took over both fiscal and monetary operations since the president for a long period of time could not appoint a minister of finance, and that when the minister eventually came on board, there has since been a turf war. “When we have a young vibrant population that is unemployed and frustrated it irks me. Unfortunately, unemployment, slow GDP growth are all the results of not reflating the economy.
Everybody keeps saying Nigeria’s recession recovery is fragile, meaning anything could tip us, any adverse movement in oil prices will take us back to the position of having a recessionary economy again, my argument is this, we can tolerate a little bit of inflation, but what we need to identify is a near and longterm objective.”
He explained that a reinflation of the economy will create opportunities for people to generate goods and services, as goods and services become abundant the prices of those goods and services start to drop and inflation rates also drop. However, these production lines must be created first.
According to Shitta-Bey cost of capital is currently too high, and that investors are also wary because default rates are high, saying that with high-interest rates, breaking even is a mirage. He advised fiscal authorities to also cut tax, even though the government sees it as more revenue.
He said “cutting tax leaves more money in the private sector for that sector to grow. After growth, more money through taxes can eventually be made.”
“I will want to see a more positive collaboration. The monetary policy authority could benchmark the inflation rate while the fiscal authorities can give the CBN a policy wrap that is comfortable so that the CBN does not have to start mopping up excess liquidity after money has been pumped into the economy by the fiscal authorities.
This will lead to jobs being created, and an economy that would not only be growing but be growing in double digits. He equally queried the assertion by the government that a N1.3 trillion capital expenditure has been executed, arguing such expenditure has not reflected on the economy.
He wondered why interest rates are not much lower in the country if ever we achieved a capital expenditure of N1.3 trillion. “That amount is the highest capital expenditure we have had in recent times at any one time, how come with so much money in capital projects, rates are not going down?” he queried.
“There is a puzzle about Nigeria’s monetary and fiscal regime,” he said.
For him, a typical economic model comprises consumption, investment and government expenditure coupled with the export and import figures, which components are manipulated to create an expansionary or contractionary effect on the economy, through policies adopted by the fiscal and monetary authorities’ i.e. the ministry of finance and the central bank.
He described the dynamics of the economy with a macroeconomic term called the Keynesian curve, explaining: “When I push money into the system and it goes into capital areas, what it does is that it opens up the economy.
Gross Domestic Product (GDP) moves upward through the pumping of money into the system and if these monies are not for current expenditure, but capital expenditure, which is the creation of investments. These investments should reflect in the capital market and push the economy forward.”
He added: “If the capital expenditure has thus moved by about N1.3 trillion how come we are not seeing a growth in investments? “Employment also ought to have improved, but the reverse is the case. When we have a growth rate in employment, no one will tell a man with wife and children and an expected bright future to carry guns and start killing people.
This is because he is rational, values are higher and his actions are now more forward-thinking and the tendency to take extreme risks reduces,” he stressed. Giving his remarks at the event, Abubakar Lawal, group managing director/ CEO of GTI said Nigeria’s capital market with about N40 trillion in total market capitalisation is about 5 percent of the GDP, which according to him is dismal.
“Our own market is supposed to be about 20-40 percent of the GDP, but why we are here today, is to ponder on measures to take towards making the capital market better again. Abubakar’s measures include creating institutions and enabling policies that will make Nigerian citizens meet their diverse expectations in terms of employment and well-being.