Nigeria: Economists, stock market wait on monetary tools as MPC meets

All eyes will be on the Monetary Policy Committee (MPC) today, as it commences what many have described as a very significant meeting in Abuja amid concerns about rising prices and economic growth.

Ahead of the first MPC this year, some economists have expressed worry at the effectiveness of the monetary tools, irrespective of its decision today, while calling for extra-ordinary intervention to rein in sticky prices.

The country’s headline inflation exceeded 18 per cent last year, double of the Central Bank of Nigeria (CBN)’s nine per cent target.

Despite a recent moderation spanning eight months, the current rate of 15.63 per cent is still far from the much-desired single-digit inflation.

Analysts expect the Committee to assess global growth prospects for the year within the context of rising cases of the Omicron variant amid the ongoing unwinding of monetary stimulus by global central banks.

Analysts at Cordros Research are of the view that on the domestic front, the uptick in headline inflation in December will likely stir up a debate among Committee members about whether it is a blip or a trend that will persist in the coming months, saying, “we expect the Committee to retain the MPR at 11.5 per cent alongside other monetary policy parameters.”

The significance of this meeting is predicated on the body language of the Committee. Like the November meeting in 2021, experts expect the Committee to affirm its view on monitoring the policy options of global central banks before commencing its tightening cycle.

Yesterday, Dr. Femi Saibu of the Department of Economics, University of Lagos, said no amount of adjustment on the Monetary Policy Rate (MPR) would affect the direction of the inflation, which he said is ‘supply-induced.’ He said there was little or nothing the interest rate could do to moderate the growth of inflation.

The economist insisted that the “inflation rate was not originally triggered by monetary expansion but supply rigidity and production bottlenecks,” which could be addressed by frontally tackling insecurity and other logistics challenges that increase the cost of transportation.

“The government should look at what it can do to reduce rigidity in the productive sector, reduce banditry that has stopped farmers from accessing farmlands. When this happens, people will be able to move freely to different parts of the country and transport food without much hindrance. When that happens, supply will increase and prices will crash,” Saibu said, stressing that 80 per cent of the inflation is triggered by food shortage.

According to him, Nigeria cannot “continue to rely on trends to address local challenges as the factors driving what appears the same challenge are often different, from one economy to another. Nigeria could fall deeper as the money supply is not the driver of Nigeria’s inflation even though it is elsewhere.

“Solutions must be tied to problems. If the inflation is not caused by excess money supply as we have seen, monetary tools will be handicapped in addressing it.”

A professor of applied economics and World Bank consultant, Godwin Owoh, shared the same view with Saibu, arguing that there is a complete breakdown of the monetary transmission mechanism resulting in an unrestrained rise in the three key prices – inflation, exchange and lending rates.

He noted that conventional monetary policy decisions by the MPC cannot save the day while calling for the establishment of a price control mechanism that is independent of the national economic managers.

Owoh, who has consistently called for the reform of the macroeconomic management processes, said: “When the prices are completely broken down, there is nothing anybody can do. At that point, monetary policy will become a mere ritual. Today, prices are out of control. The market we have now is a false structured environment. When that happens, you must correct it first before the adjustment in the three macroeconomic prices outside the general price level.

“How do you do that? First, you monitor the money supply and anchor it on inflation targeting. Then, connect with the voices of households for proper data gathering and analysis.

The price level makes an impact at the household level. The people in the village are not interested in MPC but the cost of goods in the market. MPC cannot be detached from the realities in the market. People wake up and fix prices without any restraint. Most Ghanaian schools have not increased tuition in the past seven years. But can you say that about Nigeria?”

As a matter of necessity, Owoh said, MPC should advise the Federal Government on the establishment of a price control system.

“A bottle of water is almost the same price as a malt drink. What value has gone into the production of water that will make it as expensive as malt? With the high price, people still consume it. They sacrifice other consumptions to afford essentials because they don’t have options. We used to have a price control board in the military era. That was the crudest form of what I suggest, but we must intervene in the price system to make those who control price accountable,” the professor said.

A professor of finance at the University of Nigeria, Chuke Nwude, charged the MPC to anchor decisions on strategies that would cushion the exchange rate and save the value of naira. Nwude said an increase in MPR would not augur well for the economy, adding that any hike in interest rate would increase the toxic assets of the deposit money banks (DMBs).

He said: “The effect of the interest rate hike will be obvious in the economy. This is the time for the allocation of credits to the productive sectors of the economy. Any incentive that will place Nigeria on the food sufficiency table is welcome.

“There are already planned increases in all utilities. The import of luxurious goods should be tightened up to reduce the pressure on the exchange rate. Our healthcare and educational institutions should be geared towards efficiency to provide medicare and skilled labour to minimise expenditures on medical tourism and foreign education.”

President of the Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said the CBN has maintained an accommodative monetary policy stance since September 2020 when the MPR was reduced by 100 basis points to 11.5 per cent to support economic recovery. He said this would likely change this year.

Uwaleke said tightening monetary policy through raising the MPR could lead to rising yields in the fixed income market and portfolio rebalancing. He, however, said the rising cost of borrowing could pose a fund accessibility challenge to many businesses, including listed companies.

Thus, he called for proper coordination between fiscal and monetary authorities, urging them to put in place measures to cushion the adverse impacts of an increase in the interest rate on businesses.

This week’s MPC has drawn an unusual interest from analysts and the media on account of global move towards monetary normalcy. The Federal Reserve System had disclosed that it could increase the benchmark rate, at least, three times on the back of unyielding inflation. Other economies are also exploring the possibility of rate hikes.

While there have been speculations that Nigeria could hit the ‘runway’, Managing Consultant of B. Adedipe Associates Limited, Dr. Biodun Adedipe, said there are no compelling reasons for policy rate review. He insisted inflation is not a disturbing concern just as the growth is not as fragile as some experts have claimed.

Although the MPC signalled at its last policy meeting in November that it would likely revert its accommodative monetary stance if global financing conditions tightened due to the unwinding of asset purchase programmes by global central banks, the experts do not expect changes to policy rates at this meeting.

Historically, the MPC has often adopted a reactive stance instead of a proactive stance in responding to the exodus of foreign investments from emerging economies.

This lends credence to experts’ view that the Committee will attach a more vital weight to an accommodative monetary policy stance to enable economic growth to gain a strong foothold.

ALSO, other analysts have said trading activities on the Nigerian stock market will be driven by the outcome of the MPC meeting.

Analysts at Cowry Assets Management Limited expect the equities market index to move northward amid positive investor’s sentiment, saying, investors are expected to invest more in the equities market if MPC holds rate constant.

The chief operating officer of InvestData Consulting Limited, Mr Ambrose Omordion, said: “We expect a mixed sentiment to continue on positioning in fundamentally sound stocks and profit taking, as rallying oil price support economic and market fundamentals.

“Also, investors are targeting dividend paying stocks as they reposition portfolio ahead of fourth quarter (Q4), 2021 and full-year audited earning reports that may start hitting the market any moment from now.”

MEANWHILE, the former Managing Director of Federal Savings Bank (FSB), Mohammed Hayatu-Deen, has said the nation and its economy are in a free fall with sharp altering of people’s ways of life.

According to him, the free fall in deterioration also includes people’s dignity, self-worth and some established institutions in the country.

Hayatu-Deen raised the alarm, at the weekend in Maiduguri, during his “re-registration and validation” of Peoples Democratic Party (PDP) membership in Khaddamari ward of Jere council in Borno State.

“The nation is heading in the wrong direction,” he warned, as signs of decay have been looming on the horizon for quite some time.”

He said that in the last 13 years, the nation’s economy has literally been in a free fall.

While lamenting insecurity to life and property, he said: “We can no longer feel safe or secure in homes, streets or highways.”

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