By Yange Ikyaa
In view of the recent musings from the two-day statutory bi-monthly meeting of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), an Adjutant Professor at North Dakota University, USA, Dr. Wisdom Patrick Enang, has explained in details what the CBN Monetary Policy in synopsis entails.
Dr. Enang also proffered solutions to the subsisting economic quagmire in which Nigeria is currently muddled.
The globally renowned Oil and Gas Consultant, who unravelled the full meaning and implications of the policy during a recent interview with journalists in Uyo, defined monetary policy as any measure designed by the government through the Central Bank and its ad-hoc committee to control the cost, availability and supply of credit as a means of promoting national economic goals.
He further described monetary policy as a combination of measures designed to regulate the value, supply and cost of credit in an economy, in consonance with the expected level of economic activity.
These activities, he said, are aimed at achieving price stability, economic growth, and balance of payment equilibrium.
Speaking on the Monetary Policy Committee itself, Dr. Enang, who is a Fellow of both the Nigerian Society of Engineers (FNSE) and the Nigerian Institution of Safety Engineers (FNISafetyE), informed that the MPC which came into existence in July 2004, is statutorily charged with the responsibility of conducting and formulating monetary policies in Nigeria, and also has the mandate to monitor the implementation of the policies so formulated in order to achieve set objectives.
On how the decisions of the Monetary Policy Committee affect Nigerians in general, the Nigerian born British trained Chartered Engineer revealed that changes in monetary policy affect interest rates in the economy, while changes in interest rates in turn affect economic activity and inflation, which consequently affects citizens, directly or indirectly.
Explaining further, he mentioned that the recent MPC policies primarily affect the cost of borrowing, forcing interest rates to go up, which ultimately affects the operating cost of businesses whose operating capital comes from bank loans.
Dr. Enang emphasized that the scenario under review makes it difficult for businesses and entrepreneurs to borrow money due to the high cost of servicing debts, as this makes a “debt default scenario” more likely. He further explained that with a steady rise in inflation despite the tightening economic stance of the CBN, more contractionary economic measures should be expected by Nigerians in the nearest future.
The energy scholar regretted that Nigeria’s inflation accelerated to 22.79 percent in June 2023, from 22.40 percent in May 2023, according to the National Bureau of Statistics (NBS).
The Monetary Policy Committee which is chaired by the Governor of the Central Bank of Nigeria (CBN), commenced its series of Monetary Policy Rate (MPR) hikes in May 2022 sequel to the onset of the Russia-Ukraine war, raising it from 11.5 percent to 18.75 percent in July 2023.
Dr. Enang explained that when the CBN raises its benchmark interest rate, the cost of borrowing goes up for borrowers, but for savers, this measure presents an opportunity to get more value for their savings.
Explaining further, he stated that by increasing the interest rate, the CBN is attempting to reduce liquidity in the economy, since intending borrowers will be discouraged, and people with surplus money will be incentivized to consider saving instead of spending.
He however noted that despite these measures, inflation still persists alarmingly in the nation’s economy due to three primary factors, which are exchange rate volatility; the high level of cash currently in circulation; and the effect of the fuel subsidy removal.
Speaking further, Dr. Enang faulted the CBN’s decision to hastily float the Naira, considering the plan as ill-timed and premature, in view of the fact that at the time of the policy implementation, there were no provisions in place to stimulate the FX supply required to adequately hedge the floated currency.
His words: “The removal of fuel subsidy and floating of the Naira simultaneously are two policies that inadvertently exert enormous cost-push inflationary pressure on the Nigerian economy. Worst of all, the stochastic nature of the current Naira exchange rate regime, with lack of a well-coordinated response strategy from the CBN indicates that this policy was championed without detailed consideration by the Executive, and hastily implemented without adequate economic sensitivity and consequence analysis by the CBN. This sort of decision reveals the fact that there is a disconnect between Nigeria’s Monetary Policy Framework and its Fiscal Policy Framework.”
On the prerequisites for a successful monetary policy, had this to say:
“A successful monetary policy is a function of certain fundamental imperatives. Among others, relevant legal and regulatory framework, deep and broad financial market, good understanding of monetary transmission lag, and availability of timely and accurate data and information for the monetary authorities, are all crucial for the design of a successful monetary policy. Additionally, a good balance must be established between the monetary policy, and the fiscal implications for the economy”.
According to Dr. Enang, the FX market price is primarily a seller’s market and pricing under this type of market model is skewed mainly in favor of sellers, in the absence of adequate supply, to provide a hedge against volatility.
He also re-echoed the inferences of leading global financial institutions like the International Monetary Fund, the Bank of America, and the World Bank, who unanimously agree that although the Naira was overvalued under the previous exchange rate regime where the currency’s value was pegged arbitrarily by the CBN, it is now grossly undervalued under the new regime where the currency’s value is being floated.
“According to Bank of America (BOA) analysts, the fair value estimate for the United States Dollar to the Nigerian Naira exchange rate now stands at N680 per USD, indicating that the Naira is undervalued under the current official exchange rate of N780 per USD.” Dr Enang also added that the effect of “currency speculators” is also responsible for the current undervaluing of the Naira, terming the observation a “knee-jerk” effect, which will normalize over time,” he said.
The erudite scholar recommended that the CBN should come up with ways to organically stimulate forex supply into the national economy in order to hedge the floated Naira. He also recommended that the CBN should consider implementing currency swap agreements with Nigeria’s key trading partners like India and China.
Dr Enang also lamented the variance observed between the Naira exchange rate in the official market and that of the parallel market, even in the current free-market system. He highlighted that this disparity was also a key factor of cost push inflation for import focused businesses that are not eligible to obtain FX at the official rates.
To address this issue, Dr. Enang recommended that the CBN should fast-track plans to activate the licenses of registered BDCs (Bureau de Change), and they should be authorized to also bid for forex at official prices, and sell same to their customers with marginal profits.
To mitigate the concern of money laundering, he recommended that the CBN should put in place strict restrictions on the maximum quota that each BDC is allowed to sell to private buyers and businesses, in addition to detailed documentation from each buyer in order to confirm proof of purchasing funds and intended use of the procured FX.
While discussing ideas around how the CBN can reduce the level of cash circulating the Nigerian economy, Dr. Enang recommended that a systematic approach be taken in rolling out the redesigned paper notes as the new currency. He however advocated for the replacement notes to be circulated in reduced but economically sufficient quantities.
According to him, it takes about 24 months for changes in monetary policy to have full impact on inflation, and pleaded for some patience from Nigerians in this regard.
On the issue of alleviating the hardship felt by Nigerians sequel to the fuel subsidy removal, Dr Enang advised that the Federal Government should partner and synergize with the State Governments to drive citizen-oriented post-subsidy policy thrusts such as the introduction of subsidized or free mass transit road transport vehicles, increased funding or business support grants for SMEs, increased minimum wage, increased financial support for farmers, and increased drive to diversify the Nigerian economy, while expanding the mid-stream and downstream sector of the Nigerian petroleum value chain.
