Nigeria MPC member gives reasons why he voted to raise rates last quarter

Nnanna Joseph, a member of the Central Bank of Nigeria’s monetary policy committee, said an anticipated expansionary fiscal policy in the domestic economy in the near term following the increase in FY 2018 budget by the national assembly prompted a reasoning to raise MPR last quarter.

According to Nnanna, the budget increase together with the electioneering campaigns is a threat to macroeconomic stability that must be taken very seriously by the monetary authority while resisting the urge to avoid the adoption of time inconsistent policy.

“Any positive trickle-down effect of government spending can be undermined by higher borrowing cost and unproductive public sector spending. The delayed passage and implementation in the 2018 budget affirms substantial uptick in spending in the latter months of 2018 and unbudgeted election spending is likely to upset domestic price stability,” he stated.

Nnanna argued that with the flexible exchange rate regime in place, the balance of payments will remain healthy and the current account surplus observed in recent times will be sustained on account of recovery in oil prices, high export revenues and import substitution.

Explaining that the average exchange rate at the I&E window as at May 14, 2018 was ₦360.86 to 1$, representing a depreciation of some 0.2 percent from end-April 2018, Nnanna said as at May 14, 2018, the naira exchange rate at the retail SMIS window and the BDC segment remained unchanged respectively at ₦330.00/US$ and ₦362.00 to 1$ as at May 14, 2018 from end-April 2018.

“In my opinion, the greatest threat to macroeconomic and price stability in the near term is the apparent expansionary fiscal programme with its attendant election related spending.

“Against this backdrop, I vote to raise the MPR by 50 basis points and to hold the other policy metrics. This is to signal the need to anchor inflation expectations and maintain positive interest rates to encourage inflow of portfolio and direct foreign investments,” Nnanna noted.

The monetary policy committee members of Nigeria’s central bank are nine in number who vote quarterly on monetary measures to take in order to grow and develop the Nigerian economy.

The personal statements of members released Monday, with the 118th communiqué of the last meeting held on the 21st and 22nd of May showed what influenced members reasoning.

For the first MPC member, Adamu Edward Lamtek who voted to retain all rates as the last quarter, output recovery has remained firmly on track and inflation continues to trend downwards.

According to Adamu, both developments are linked to, and greatly influenced by the sustained relative stability in the naira exchange rate, which informed his vote to retain all the policy parameters based on his assessment of developments since the current cyclical upswing began and the challenges he sees in the short- to medium-term.

“Although current global economic conditions appear to portend a favourable short-term outlook for oil prices, we have learned from experience that upswings in crude prices unwind, most times, sooner than forecasts suggest, Adamu stated. Adding that there is no doubt the recent rally in prices has had a positive impact on external reserves accretion and boosted the economy’s resilience and investor confidence.

As a result, Adamu noted that inflows, especially of portfolio investment, improved. He however said by their nature, such inflows are susceptible to sudden reversals, which prompts the need for such reality to be factored into policy considerations and actions today.

“We need to build buffers on both fiscal and monetary sides in preparation for a possible downturn. In the same vein, regulatory buffers are needed to strengthen the capacity of banks to withstand a shock, should there be one,” he noted.

From a financial stability standpoint, Adamu explained that inflation threats or risks to the naira exchange rate stability are to be mitigated upfront in order to sustain and deepen the resilience of the industry.

“In my view, the expected surge in liquidity and likely retrenchment in inflows on account of some external developments appear to be the most potent threats to domestic economic and financial stability in the short- to medium-term. In addressing these risks, policy coordination is key.”

Agreeing that public spending is needed to re-invigorate economic growth, Adamu noted that care must be taken to ensure that its essence is not defeated byunintended consequences. “Proper coordination of monetary and fiscal policies reduces uncertainty, thereby allowing for optimal deployment of instruments,” he said.