NIGERIA ECONOMY: Between Growth and Stability, CBN in smelt Dilemma?

... I recommend Trilemma Mechanism as an antidote.

>Salis, Kolawole Yusuf E-SKY

The recent upward review of the MPR from 12% to 14% with retained CRR at 22.50% and LR at 30% by the CBN (under the aegis of the Monetary Policy Committee's recently concluded July 25/26th meeting) signalled an ostensible Dilemma of the Monetary Authority in the bid to push "Growth" as well as ensure "Stability". Whilst the country has been declared to be technically in Recession with contracting GDP, the Inflation rate is on hike mounting 16.48% (June 2016, data).

To this effect, the CBN chose to increase the MPR with a view to boosting FPI via the capital market and also curtail inflation rise. But invariably this decision will pose negative threat to the domestic industries as the cost of borrowing tends to be on the rise amounting to increasing Cost of production, amidst dwindling purchasing power of the general consumers. Obviously, the CBN cannot eat its cake and still have it, you either push for growth or you stabilise but not both simultaneously. As much as the root cause of our rising inflation is not a liquidity cause but rather structural imbalance in the face of recent Fuel price hike, electricity tariff hike, Floating of exchange rate etc., the up-view of MPR was unnecessary as the country loses out output coupled with dwindling revenue.

Even though this policy may tend to shape up the Money market (fixed income), such furtherance will only be a marginal one as most Nigerian Banks barely offer interest on the official lending rate. On the flip side, the Equities market suffers a set back with the MPR as investors now see it as less profitable. In cumulative effect, the general economic activities get declining and yet the outlook seems more negative (economic contraction).

In the same vein, the Forex market is still battling with uncertainties as naira keeps shedding against dollar (and other currencies) on a daily basis.

To this effect, the Monetary Authority should device alternative measures and focus more on Growth at this time of technical recession rather than chasing the shadow of inflation. Once productivity increases, competition will set in and output will grow to naturally cut down prices and moderate inflationary pressure.

Similarly, the CBN should work in macroeconomic policy agreement with the fiscal authority and practically engage the "impossible trinity" also known as the "Trilemma mechanism" so as to have a workable Forex system, Free Capital movement and independent monetary policy.

God Bless Nigeria.

Aurthur: Eligible-Salis Kolawole Yusuf E-sky