Reviewing the Effect of Our Monetarist Play Book So Far


Wednesday, July 26, 2017 2.04PM / Proshare Research


The first meeting of the CBN Monetary Policy Committee (MPC) in the second half of 2017 was held on Monday and Tuesday 24th and 25th of July, 2017.

Across board the expectation by most analysts was that the MPC will throw in the familiar hold card.  They did not throw in any surprise has the committee  stuck to its guns by patiently leaning on the cycle (pro-cycle), with the conviction to protect stability and allow further fade off in structural factors.

The committee was not convinced “it was close to kill”, thereby deviation from its present path was uncalled for.

Why not allow monetary policy harvest patience to the bream? To be fair to the lords in the apex towers some of the structural factors are gradually fading off. At the same time, there has always been a consensus along both aisles.

That substantial structural factors responsible for the downswing, will give way at some point in the cycle, alia making them transitory. It is expected that leading indicators at that point of the cycle will naturally begin to heal.

Well coming from a” soft hawkish’’ tendency, leading indicator at that point of the cycle will heal at a faster pace if intervention were put in place earlier. At the same time given the nature of our economy as a mono one, the dynamic adjustment path will gradually begin to correct itself either through an increase in oil price or the touted base effect.

Obviously, it has always been an open secret, causation agent at some point were going to be compelled to take their leave either by an increase in exogenous inflows to the federal government or by arithmetic.

What Has Changed So Far?

Fig 1: Headline Inflation and Core Inflation

Source: NBS, Proshare Research

Inflation for the month of June stood at 16.1%, reflecting a dip in inflation by 0.15% compared to the previous month. Core inflation in the same period also fell from 13.02% to 12%, reflective of a shed in core inflation by o.52%.

Food inflation reversed its earlier occurrence in May 2017 to rise from 19.27% to 19.91%, evidently caving inwards by 0.64. Suggesting the occurrence in May was more of a random deviation than a gradual weaning in momentum.  

On a 12-month run, core inflation is correlated to headline at 0.91%, while food inflation is correlated at -0.41% to headline inflation. Implicative of headline and core inflations at tandem with each other, while the trend between food and headline inflations has been largely divergent. 

Thus, the ease-off in transitory pediments is partly responsible for the hair cut in inflation. More importantly inflation has slipped to levels lower than the corresponding month of 2016.

The negative correlation between food inflation and headline inflation reflects the divergence in trend between the two. More importantly it points out that food inflation is largely vulnerable to non-monetary factors and supply shocks.  

Fig 2: Labour Productivity


productivity in (N)

Productivity ($)

2015 Q4



2016 Q1



2016 Q2



2016 Q3



2016 Q4



Source: NBS, Proshare Research 

The Nigerian Bureau of Statistics made available figures for labour productivity on June 8th 2017.  Labour productivity when denominated in naira terms stood at N785.51, implying  a rise of  10% and 11.1% compared to the previous and corresponding quarters respectively. 

On the other hand, labour productivity reversed earlier gains to shed 11% from 3.62$ in 2016 Q3 to 2.57$ in 2016 Q4.  

The increase in the quantity of money due to earlier devaluation fused with subsequent buffering in exogenous inflows to the federal government has improved labour productivity; in Naira terms. The effect was faintly felt on labour productivity in dollar terms due to overruns suffered by the existing de-factor exchange rate (fig2).  

Presently, the growth in exogenous inflow to the federal government coupled with the introduction of the Nigeria import and export (NIFEX) window has led to a simmering down in the foreign exchange recoil.  

It is expected that such simmering down will act as a tailwind for labour productivity in the subsequent quarters ahead and also bolster autonomous inflow. The earlier episodes of wild swings suffered by the interbank rates seemed to have tampered down a bit.

Regardless, the apex bank policy of consistent intervention either through its open market operation or exchange rate sterilization coupled with fiscal dominance still makes the rate largely vulnerable to wild swings (fig3).  

Fig 3: Interbank Rates

Source: CBN, Proshare Research 

The loan to deposit ratio climbed up to 80.6, which has tilted higher than the prudential threshold of 80%. Conventional wisdom holds that banks at this point of the cycle have ran out armoury to take on counter-cyclical spending. They will rather be concerned about carrying out a budget repair and stick more to soft allocations. 

Fig4: Loan to Deposit Ratio 

Source: CBN, Proshare Research

The gross domestic product contracted by 0.52% at the end of the first quarter, making it five consecutive quarters of contraction.  Therefore, implying a steam down in the earlier levels of bloodletting when compared to the previous quarter.  

Even though the contraction is less off and growth levers are emerging. The macro reality still under cuts the projected growth recovery of 2.7% for 2017. Presently, the fragile recovery still poses as an up risk to the projections of the ERGP, but more aligned to the IMF projection of 0.8%.  

The MPC has persistently discounted the lag effect on unemployment as it consistently trades off unemployment for price stability. The fallout from the MPC meeting of preferring to  throw its dart after price stability alone has triggered an uptick in youth unemployment. 

Evidently, monetary policy has failed to discern properly between when price do matter and price alone matter. Disturbingly high interest rate neglects the fact that push factors could also be the root cause of inflation. Therefore in such scenario like this one, the apex banks seem to be throwing darts after symptoms rather than the root cause.   

Fig5: Youth Unemployment

Source: NBS, Proshare Research  

Such policy cast of trying to reconcile long term benefits of low inflation with the fluid benefit of preferred habitation, while ignoring relatively huge output gaps on the short term always comes at a huge cost.  

The huge cost is an astronomical increase in public debts, fast depletion in fiscal space, high unemployment gaps, income stagnation and low growth.  

Certainly, the tail end of the apex bank present monetary play book has helped to regain credibility, given its earlier crude exchange rate policy.   At the same time, the simmering down in structural factors provides the bank the needed monetary manoeuvring for a multi enforcing position, where other factors like growth and employment do not just matter but matters a lot.  

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