Analysts urge CBN to balance price, output stances

Economic analysts have urged the Central Bank of Nigeria (CBN) to balance its price and output stances to ensure maximum employment and resource optimization.

The analysts argue that the notion that policy should downweight the unemployment gap and compensate, in some sense, by responding more aggressively to inflation is substantially weakened in the empirically relevant case in which the relationship between the level of unemployment and the rate of inflation is relatively flat and inflation is buffeted by sizable “supply,” or cost-push, shocks.

To this end they opined that caution is warranted in pursuing strategies that focus heavily on stabilizing inflation and that, which downweight substantially the unemployment gap in setting policy.

The CBN, has maintained a hawkish policy stands in the past two years by leaving monetary policy rates stable at 14 percent all in order to rein in inflation, which to most of the analysts that spoke to business a.m. stifles growth and resource optimization.

This decision has stifled out manufacturers and small business owners who are forced to raise capital at high cost, which put pressure on production and employment creation, one of the analysts said

The consensus view is that price stability so far has been achieved to a level where growth should be pursued by the CBN, and that the continued steady decline in inflation rate for more than a year counters holding rates as high as 14 percent, which they claim is no longer friendly for the economy.

They added that macroeconomic indicators like employment and job creation largely stimulated by small and medium scale entrepreneurs would continue to suffer, in spite of government’s efforts to manage it, if Nigeria remains a country with one of the highest interest rates in the world.

They noted that developed economies like Britain, Australia, Canada and the United States have lending rates of less than 2 percent, which have inadvertently made them to equally have low inflationary rate.

Speaking to business a.m. in Lagos on the CBN’s decision to maintain policy rate at 14 percent for almost two years, Lekan Shitta-Bey said, “We (Nigerians) 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.’ With this, people and business agents who are taking decisions are aware of how to make plans. But a one size fits all policy is a bit naïve,” he said

“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?” the investment banker/analyst queried

Shitta-Bey explained: “If you try to control inflation, you are most likely to create unemployment, which is what is obtainable in Nigeria today. You have to ask yourself at any particular point in time, what is the most pressing problem, the CBN’s function all over the world is to control inflation. Unfortunately for us, the monetary policy confusion problem started when the president came to power and for a long period of time, there was no minister of finance. The CBN took over both fiscal and monetary operations, and since the minister eventually came, there has 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 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 long-term objective.”

He noted that a re-inflation 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, he said, and that both lenders and investors are also wary because default rates are high and high-interest rates, which make break even points for most businesses 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 is not only growing but growing in double digits.

Our respondents on the issue agree that reacting strongly to inflation tends to induce a high degree of volatility in the (true) unemployment gap and that retaining a significant response to the unemployment gap, even if mismeasured, tends to perform better in achieving dual mandate goals than does shifting toward aggressive stabilization of inflation.