Raising The Hardship Bar

In its wisdom, the Central Bank of Nigeria, CBN, on Monday raised the Monetary Policy Rate, MPR, from 9.25 to 12 per cent, and the Cash Reserve Ratio, CRR from 4 to 8 per cent. The MPR is the rate at which banks borrow from the CBN, while the CRR is the proportion of money banks are expected to keep with the banking regulator.

The CBN Governor, Sanusi Lamido Sanusi justified the measure as a timely response to ominous developments in the global and domestic economy, which had potential negative effects on domestic liquidity conditions, as well as posed serious threats to price and exchange rate stability.

Rising from an emergency meeting of the Monetary Policy Committee, MPC, where the decisions were reached, Sanusi said the committee viewed the belt-tightening measures as fitting, given “the specter of declining oil prices, declining foreign reserves, increased demand for foreign exchange, fiscal dominance and capital flow reversals.”

The CBN boss added: “In the Committee’s view, the increasing pressure on the domestic currency has been emanating from a number of sources not all of which can be addressed by purely monetary interventions. First, there are concerns about the likely impact of a double dip recession on oil prices and already declining foreign reserves.

“Second, there are also concerns about the delay in implementing fundamental economic decisions that will shore up reserves. Specifically, it is estimated that simply passing the Petroleum Industry Bill (PIB) and removing subsidies on Premium Motor Spirit (PMS) will add at least $10 billion to national reserves annually,” Sanusi stated.

The CBN boss though thumped the Federal Government for its ballooning spendings, he hailed the proposed removal of petroleum subsidy, and even called for reforms in the Petroleum sector to free up more funds for development, in line with international best practices.

“When we begin to have structural improvement in the economy, when we begin to have clear fiscal retrenchment, and therefore reduction of the fiscal stimuli, into the system, even the deregulation will be some form of tightening in the system, then we can look at interest rate coming down, but there is no point pretending you are going to have low interest rate when you are going to have high inflation,” Sanusi said.

Much as Sanusi tried to dress the strict measures in the garb of necessity, the reality of the biting spiral effects they will engender on the polity is not lost on economic watchers. If not for anything, the hike will automatically drive up the cost at which banks lend to businesses, with manufacturers being the hardest hit.

With lending rate currently hovering between 22 and 24 per cent, analysts fear we might see a sharp spike of up to 30 per cent in the coming days, an unhealthy development for the already troubled Real sector.

Economy experts would rather the regulator deployed an exchange rate regime to tackle the prevailing instability of the naira, not a further tightening of rates. Why? Such policy, which the CBN had employed in the past, had always not produced the desired results.

The CBN’s new policy direction, it is feared, would only further drive up the high importation trend in the country, and by extension hamper little efforts being made by local manufacturers. If this comes to be, it can only worsen an already battered economy. Should the raising of the MPR and CRR amount to raising the hardship bar for ordinary Nigerians?

The import of these can be gleaned from the already skyrocketing prices of basic foodstuff and general commodities. The CBN can pontificate over the appropriateness of its policy measures but such technicalities mean nothing to the average citizen if it will not result in cheaper commodities and better living standards. This is the heart of the matter, and it is what should form the nucleus of policies to shore up our economy.