Stabilising Naira By Keeping MPR At 14% Counter-productive, says Adedipe

Economic analyst, Biodun Adedipe wants the Central Bank of Nigeria (CBN) at its next Monetary Policy Committee (MPC) meeting to consider a downward review of the benchmark Monetary Policy Rate (MPR), arguing that leaving it at the current 14% is more counter-productive to domestic productive activities than to investment in financial instruments.
Adedipe, Chief Consultant of Biodun Adedipe Associates Limited, ‘Biodun Adedipe, who spoke on Thursday at the 2017 half-year economic review of Nigeria organized by the Finance Correspondents Association of Nigeria (FICAN) in Lagos, rejected the decision to retain the MPR at 14% on the argument of inflation risk, stabilizing the exchange value of the naira and bond prices.
Speaking on: “Nigerian Economy: First Half 2017 and Outlook,” he said MPR, which is the benchmark rate was raised to 14% per annum in July 2016 from 12%, adding that the increase has not sufficiently impacted bank deposit/lending rates as well as in banking credit volumes.
“The most volatile interest rate variant is the inter-bank rate, which is more of a reflection of the liquidity in the banking system (affected by the flow from federal allocations to the states) rather than of changes in the MPR. The deposit and prime lending rates moved in adverse directions, respectively with deposits becoming cheaper to the banks and borrowing more expensive to borrowing customers. But actual lending rates were much higher – mostly at 29% and above,” he said.
The continued retention of MPR at 14% he continued, “only extenuates government’s cost of borrowing and makes government’s debt instruments very attractive to astute investors. This long spell of fixed MPR is also gradually making the rate to lose its strategic relevance as a signal rate.”
He however supported the Federal Government’s plans to reflate the economy through borrowing, stressing that such funds must be for investment in critical infrastructure that can generate enough resources to repay the loans, rather than for recurrent expenditure.
“When an economy is seeking to get out of recession, the typical response is for the government to embark on massive spending, which is referred to as fiscal stimulus. Often times, the government may lack the volume required and will therefore, have to borrow beyond the normal range for an economy that is either in boom or the recovery mode.
“No professional economist will argue against borrowing to stimulate a recessed economy. But the question will always be to spend on what? If the answer is infrastructure, my take is to go ahead and borrow as much as you can,” Adedipe advised.
He expressed belief that the CBN has the capacity to sustain ongoing foreign exchange (forex) interventions, despite the pressure on the foreign exchange reserves, which on a 30-day moving average have risen from $29.07bn at end of 2015 to $30.36bn on July 11. The liquid portion of the reserves stood at $29.62bn, which translates to 12.31 months of imports cover.
The required international benchmark, he continued, is enough reserves to sustain at least six months of the nation’s import bill, which means that Nigeria is still doing great at current level of import cover.
The economist, said Nigeria’s total import figure for the first half of this year was N2.2tr ($7.218bn), with an average monthly figure of $2.406bn, adding that due to the recession, import figure fell from $14.171bn or a monthly average of $4.724bn in the first quarter of 2015, even as foreign trade had picked up since the first quarter of last year, with imports declining.
Adedipe also described as aberration calls on the CBN to freely float the naira, adding that no country in the world adopts such approach to exchange rate management. He said the ongoing spike in naira exchange rate occurred after the CBN was pressured by several stakeholders to adopt flexible exchange rate system and freely float the Naira.
“That of course, was a huge aberration, as there is no country that freely floats its currency (even the US) – the job of the central bank is to defend and protect its currency by intervening in the markets as necessary. The voices are coming from too many experts that know nothing other than to echo what the Breton Woods institutions have said,” Adedipe stated.

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