Sunday, September 24, 2017/4:43PM/Temitope Oshikoya**
“Reading the policy stance and future guidance of some MPC members at the July and September 2014 meetings, and the shift between both meetings, suggest an ad-hoc monetary policy reaction function, which should not replace a medium-term strategy for monetary policy based on solid economic analytical rigour.” Monetary Policy Committee at cross-road (The Guardian, November, 2014).
Advocacy versus analysis
Advocacy is often mistaken for economic analysis as the former overshadows the latter. There is a big difference between the two. Analysts start with questions and try to find answers. Advocates often start with entrenched positions and work towards defending the positions without regard to facts and reality. There is no better way to illustrate this than with the market intelligence gurus and their advocacy on interest rate and foreign exchange rate regimes in Nigeria.
Interest rate regime: Oil prices, bank insider-lending and impaired credit
With the latest release of the statements of the members of the Monetary Policy Committee (MPC), there has been a deluge of media reports on high interest rate, policy inconsistency, private sector crowding out, and impaired credits.
Why cry wolf now? In the article quoted above, this writer had observed that with the high rate of unemployment and jobless growth, it is safe to state that the economy is already below its potential output growth; and added to it are the potential recessionary gaps from realized and emerging shocks. Based on the analysis presented, it was observed that there was no need for elevated policy action on the interest rate in the short term.
We have also been serenated with the news of rising non-performing loans (NPLs) and that the Top 5 banks are responsible for 47% of NPLs. We should put this in perspective as the Top 5 banks also account for 56% of assets, deposits, and loans. Further, the average NPLs among the Top 4 are about 3.7%, with the fifth bank being an outlier at 22%.
Our article on “How not to manage the economy” in January 2015 had predicted that oil prices could go as low as $30; it eventually did and its reverberations on oil-related credit exposure by banks have suddenly become palpable. However, Nigerians should be more concerned now that most of these NPLs are insider-related for which forbearance are often sought from the CBN as well as the reluctance of the Top 5 banks to lend to small businesses, as only 11.5% of their loans are to SMEs.
In an earlier article, ‘Microeconomics of banking, high lending rates,” in February of that year, we highlighted that commercial banks’ reluctance to lend to private sector especially SMEs reflects several factors including information asymmetry, credit rationing, and preference for financial assets such as treasury bills and bonds, and attractive returns from the foreign exchange market. For the Top 5 banks, net interest income is about two-thirds of total operating income, but the gains are mostly treasury-related while FX-related income accounts for a fifth of total operating income for the Top 5 banks. In any case, we had earlier noted that “as most banks are discovering, naira floatation is a two-edged sword: rising non-performing loans appear to outweigh temporary foreign currency translation gains.”
Exchange rate regime: Economics, markets, and politics
In another article, “Devaluing the devaluation delusions in Business day and The Nation in January 2016, we sought to analyze the political economy context of the three key factors—economics, markets, and politics – that determine the choice of exchange rate regimes. We observed that these three factors impose constraints on policy-makers.
We argued that it is the interface and tension between the market constraints and political constraints that lead governments to respond in a predictable manner to the structural constraints imposed by the monetary trilemma in economics. First, on the economic front, governments are faced with the monetary policy trilemma and its systemic constraints. Then, policy makers can only take two out of three options at any point in time.
Second, in an open economy with increasing capital globalization, markets constrain the government’s ability to conduct policy in response to economic shocks. In general, market participants would favour a more flexible exchange rate regime with another round of devaluation, unencumbered capital flows, and a higher interest rate regime. Third, governments also face political constraints imposed by their domestic constituencies applying pressure to select exchange rates regime that favour particular domestic goals and interest groups.
We concluded that article by noting that “while the financial markets intelligence gurus tend to focus more on market constraints, they neglect the systemic constraints of the monetary trilemma and domestic political considerations relating to the choice of exchange rate regimes. They should wake up to the scent of change in the air.”
A recent article on Nigeria’s Foreign Exchange Dilemma clearly shows that It took the market intelligence advocates nearly two years to come to the realization of the conclusion that we had reached in our previous article.
These are the extracts from the article on Nigeria’s Foreign Exchange Dilemma (Proshare, September 7, 2017). “A single rate is unlikely. By allowing banks to align their rates with market rates the government appears to be moving closer to a single rate for the naira, but a number of factors make it unlikely that the government will completely scrap its official exchange rates. There are implications to liberalization that would be politically and economically objectionable to the government and members of the nation's broader political elites….”
“Many Nigerian politicians view the ability of the government to set exchange rates as a necessary mechanism of social intervention by the state…Having gone through many ostensibly market oriented adjustments to its foreign exchange system since the mid1980s, but always ending up with multiple exchange rates, it is evident that a lasting reform of the system would require fundamental change in the mindset of Nigeria's rulers and the way policymakers view the role of the state in the economy. This seems unlikely in the medium term.”
What took the market intelligence advocates so long to come to this realization? They have obviously been very busy advocating on behalf of specific domestic constituencies, just as some other constituencies were taking opposite positions. We prefer a balanced analytical approach to economic policy issues instead of advocating positions driven by extremism and hype.
Advocacy, especially the paid-genre, tends to temporarily cast a total eclipse on analysis, but eventually brighter illumination shines through analysis. Much like the solar eclipse where totality is brief, analysis eventually trumps advocacy.
**Dr Temitope Oshikoya is an economist and a chartered banker
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4. MPC to Hold Rate Steady as Green Shoots of Recovery Emerg
5. Personal Statement by the MPC Members at the 114 MPC Meeting of July 24-25, 2017
6. Growth in Money Supply Falls below Targets
7. Pre MPC Note: Tightening Argument Overriding Despite Strengthening Case for Easing
8. South Africa – Cautious Rate Cuts Ahead, But Risks Finely Balanced
9. Ghana - Monetary Easing Cycle Set To Continue in 2017
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12. MPC Maintains Status Quo; Notes Economic Recovery is Still Fragile
13. Emefiele Tasks Varsities on Research; Lists Policy Options for Economic Growth
14. Reviewing the Effect of Our Monetarist Play Book So Far
15. MPC Holds Rate as Members Pivot towards Easing
16. CBN Communiqué No. 114 of the MPC Meeting – July 24-25, 2017
17. MPC Again Leaves Policy Rates Unchanged
18. 257th CBN MPC Meeting: Nigeria's Key Economic Indicators