It is About Time to Resolve Nigeria's Monetary Policy Conundrums


Friday, April 07, 2017 4:50 PM / SSRN / Ayo Teriba / Economic Associates

The MPC Policy decisions have included easing just once in the last six years for the policy rate, and just twice in the last six years for the CRR. In contrast, the policy rate has been tightened ten times in the last six years, including twice during the recession in 2016, and the CRR has also been tightened ten times in the last six years, including once in 2016.

It is very puzzling that MPC finds extraneous reasons, typically about banks or foreign exchange supply, to tighten monetary policy, even when the economy is contracting and can do with some liquidity boost. We demonstrate that MPC decisions have been disconnected from economic realities, and urgent steps must be taken to ensure a reconnect. The economy is bigger and more important than the banks, but MPC statements continue to dwell on banks’ conditions, indicative of lapses in banking supervision, rather than on economic conditions.

Failures of micro/macro-prudential policies are spilling over into the monetary policy space, inflicting high costs on the economy. What the UK government has done in reforming the Bank of England over the last two decades, especially in functionally separating responsibilities for monetary policy and micro/macro-prudential policies, is a good example of the reforms required in Nigeria’s monetary policy and micro/macro-prudential policy arrangements.

Apart from banks conditions, MPC statements also had a lot to say about the need keep the policy rate high enough to attract foreign portfolio inflows, rather than ease rates to stimulate growth and investment, betraying another spill-over into the monetary policy space from weaknesses in the foreign exchange policies of the CBN. Nigeria’s foreign investment policy must be recalibrated away from preoccupation with volatile and easily reversible portfolio inflows towards harder to reverse diaspora and foreign direct investment inflows.

We argue strongly for immediate reforms in Nigeria’s monetary policy processes, Nigeria’s banking supervision arrangements, and Nigeria’s foreign investment policies. Those reforms are needed to ensure an orderly transition to a low MPR/low CRR regime that is urgently needed to boost growth and investment.

Report Contents

1. Making Sense of Historical Monetary Policy Decisions   

  a.      Soludo Era

  b.      Lamido Era

          c.       Emefiele Era

   2. Tightening monetary policy stance in a recession is very puzzling

   3. It results from conflicts from laxity in banking supervision/prudential regulation

   4. Monetary and micro/macro-prudential policies must be realigned

   5. Policy rate does not have to be kept high or positive in real terms

   6. Concerns about monetary policy considerations

   7. Concerns about MPR

  8. Concerns about CRR

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