The ‘NEEDS’ programme and monetary policy circular no. 37

By Henry Boyo
PRESIDENT Buhari launched his government’s Economic Recovery and Growth plan, last week. The EGRP is in many ways similar to Government’s National Economic Empowerment and Development Strategy (NEEDS 2004). The above title was first published in the Vanguard Newspapers on February 14 2005. A summary of that piece follows hereafter.
Please read on…“The Governor of Central Bank of Nigeria, Professor Chukwuna Soludo, formally presented”The monetary, Credit, Foreign Trade and Exchange Rates” Policy Guidelines for Fiscal Year 2004/ 2005 to the media recently.
The implications of the guidelines, published in the CBN’s “Monetary Policy Circular –37” of February 14 2005, will be evaluated in relation to the potential impact on the following economic variables, i.e. inflation, interest rates, excess liquidity, exchange rates and external reserves. Invariably, the expected impact of the guidelines on these economic catalysts is, presumed to align with the objectives and goals of Government’s Economic Empowerment and Development Strategy, NEEDS.
Although, NEEDS projected inflation rate below 10%, the CBN’s report  notes that the year on year inflation rate has now fallen to 9.5% from the self-destructive 23.8% that prevailed in 2003-Q4; nonetheless, MPC’s Circular 37, also admits that the “12-month moving average inflation rate was actually 15%”! It is unusual that the year on year inflation index of 9.5% would be as much as 5.5 percentage points below the reported moving average inflation index of 15%, especially, when significant increases in domestic fuel price and a naira rate that is artificially depreciated against the dollar, continuously instigate severe inflationary pressure. Thus, the seemingly ‘positive’ statistical indices, reported by CBN, may seem progressive, but the increasing pangs of hunger and desperation continue to be real-life experiences for most Nigerians.
The monetary authorities are also clearly aware that money borrowed  with over 20% interest rate, and further compounded with, arbitrary and oppressive charges by lending banks, can only spell doom for ‘Industrial and economic growth’! Consequently, Government’s NEEDS programme therefore, sensibly adopted single digit lending interest rates as a prime objective.
The MPC Circular No. 37 also carries a comparative statistical table of key macroeconomic indicators projected in ‘NEEDS 2004’ against the ‘actuals’ for the same year.  The indices seem to portray the ‘excellent actual results against the targets!  The curious thing about the excellent results sheet, however, is that the pivotal subject of interest rate hovering around 25%, against the single digit benchmark of NEEDS was not addressed.
Nonetheless, despite the denial, the Monetary authorities clearly recognised the need for urgent remedial action. Consequently, the Minimum Rediscount Rate ( MRR ) ( i.e. the CBN base rate, to commercial banks), was reduced to 13.5% from 15%, so that, banks could then add the permissible 4 percentage points and lend to customers at 17.5%. Notwithstanding, additional bank charges which could push lending rates well above 20%, and discourage productive enterprise and job creation.
The MPC circular No. 37 also seeks to explain how the lower MRR of 13.5% was made possible by the adoption of a year on year inflation index of 9.5%, instead of the former moving average inflation index of 15% for determining   MRR. It is undeniable, nonetheless, that with MRR still as high as 13.5%, domestic cost of lending cannot be competitive against those successful economies, where policy rates below 3%, sustain low inflation rates and reduce both industrial and agricultural production costs to stimulate investments.
The MPC Guidelines also identified the main villains that will threaten macroeconomic stability in 2005 as, the decision to share part of the ‘excess’ crude accurals from 2004, with the expectedly higher, State Government budgets and increasing export revenue from a ‘crude oil premium price of $30 per barrel (compared to $25 for 2004). Consequently, inflation and exchange rate stability will inevitably become daunting challenges in 2005. But, we need ask, why should increasing export revenue, create such a big headache for the monetary authorities?  Any business corporation would normally celebrate seasons of increasing sales revenue and higher profits, to fund retooling, expansion and beefing up of working capital.  We therefore find the CBN ’s fears of ‘an imminent expansionary fiscal policy stance in 2005’ rather intriguing, particularly, in view of the severe deprivations in the area of education, health, energy and transportation sectors.
It becomes more confusing when government still goes cap-in-hand to borrow or seek foreign investments for infrastructural remediation, despite CBN’s concern of on the real expectation of increasing government revenue surplus.  The explanation for CBN ’s ambivalence and fear is obviously deep rooted in the process/mechanism, for infusing foreign exchange earned from crude oil into the monetary system.
The current mechanism is for CBN to consolidate the monthly distributable pool of foreign exchange and then unilaterally determine a rate of exchange for converting the dollar denominated revenue to naira.  Incidentally, CBN’s adopted exchange rate was notably, generally lower than the DAS rate offered in the open market by up to 25%! The currency substitution requires humongous naira cover for the billions of distributable dollars every month.  The three main sources of funding the naira cover, are direct printing of fresh naira notes, borrowing back government funds from the capital market by sale of Treasury Bills at interest rates of up to 15% and also through the direct auctions of dollar rations against surplus Naira liquidity. Invariably, the three modes of providing naira cover for the distributable dollars will spike an inflationary spiral which is clearly socially destabilizing and will make single digit inflation rates particularly difficult to achieve!
Indeed, every time, the dollar component of monthly distributable revenue is unilaterally substituted with Naira allocations, the resultant huge Naira liquidity that results in the banking sector would invariably encourage liberal advances,  which are not predicated on any direct productive activity, and will therefore further fuel a systemic and destructive inflationary spiral.
Ultimately the CBN would embark on a regular mopping up operation to reduce the huge liquidity base of commercial banks and reduce lending, even if this means borrowing back government money with double digit interest rates!  This destabilising cycle is repeated every month whenever the federation pool is shared and the outcome clearly depicts the CBN’s dilemma and the horrendous challenge to macroeconomic stability, whenever we are blessed with increasing crude oil revenue!
Thus, the larger the dollar revenue to be shared, the greater also is the problem of excess liquidity and the need for the adoption of anti industry and anti people policies! Consequently, of our monetary authorities would rather pray that providence to reduce our export revenue in order to sanitize the liquidity problem, notwithstanding the oppressive cost of government simultaneously borrowing to fund its budgets.”