Epunchng - Most read newspaper in Nigeria 13th-September-2017 - Page 20

20 WEDNESDAY, SEPTEMBER 13, 2017 viewpoint Recession exit: cbn as the major game in town Uchenna Uwaleke uchejoe1@yahoo.com I N his seminal book titled, The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse, Mohamed El-Erian, economist and former chairman of the US Global Development Council (famous for coining the now-ubiquitous phrase, “the new normal”) examines the changing role of central banks in national economies, explains how apex monetary institutions saved the financial system from collapse in 2008 as well as why central banks have become critical policy actors in today’s global economy beset by low growth and rising inequality. By the same token, the narrative on Nigeria’s journey out of a U-shaped economic recession that lasted five consecutive quarters since the first quarter of 2016 would be incomplete without mentioning the crucial role played by the Central Bank of Nigeria. Following a significant decline in foreign exchange earnings, which triggered the economic recession in the first instance (Nigeria is dependent on crude oil sales for over 90 per cent of foreign exchange earnings), the CBN had to ban several items of import from access to the official foreign exchange market in order to halt the sustained depreciation of the naira. This demand management strategy not only helped to conserve dwindling foreign reserves, it also promoted the import substitution strategy of the government. Amidst forex management challenges, the CBN courageously resisted calls by the Bretton Woods Institutions to free-float the local currency which would have rendered the value of the naira worthless (given the huge supply-demand mismatch at the time), driven commodity prices to the roof tops as well as prolonged the journey out of recession bearing in mind that real Gross Domestic Product is an inflation-adjusted measure that reflects the value of final goods and services produced by an economy in a given year. Gradual accretion to foreign reserves on the back of uptick in crude oil price and output enabled sustained interventions by the CBN in the foreign exchange market. The result was improved liquidity and reduced speculative attacks on the naira. The introduction of a foreign exchange window for investors and exporters (NAFEX) sometime in April 2017 led to significant stability in the naira exchange rate across all segments of the foreign exchange market and improved foreign investment inflows. Indeed, the multiplier effects of these measures have been remarkable. Data from the National Bureau of Statistics indicate that the month of May recorded the highest amount of capital importation ($616.5m) in the second quarter of 2017 apparently on account of N “ NAFEX introduced by the CBN the previous month. Similarly, the Purchasing Managers’ Index, published by the CBN, has been above the 50 index points threshold for several months this year which is an indication of expansion in manufacturing activity, while the stock market performance has gained traction posting positive real returns since May 2017, a reflection of growing investor confidence in the wake of improved liquidity in the foreign exchange market. The CBN has maintained tight monetary policy stance since the onset of a recession, complicated by rising inflation. In March 2016, the Monetary Policy Committee of the CBN increased the monetary policy rate from 11 per cent to 12 per cent in response to the spike in headline inflation from 9.6 per cent in January to 11.4 per cent in February 2016. In an apparent move to support the naira, the policy rate was further increased to 14 per cent in July 2016 after the central bank had discarded the currency peg to the dollar the previous month. Regarding monetary policy stance, it is not difficult to see why the “hawks” have held sway ever since. For sure, the reality of sustained pressures on prices could not have been ignored by the CBN given its primary mandate of price stability. Consequently, loosening would have exacerbated inflationary pressures, worsened the exchange rate and further pulled the real interest rate into negative territory. The apex bank has always taken the view that since empirical studies have shown that interest rates are sticky downwards, loosening may not necessarily transmit into lower retail lending rates. Well, there is evidence now to suggest that this contractionary stance eventually succeeded in easing elevated inflationary pressure that peaked in January 2017 when inflation rate stood at 18.72 per cent. Latest Consumer Price Index data from the NBS show that headline inflation (year-on-year) moderated for the sixth consecutive month since February 2017, falling to 16.05 per cent in July, effectively reversing the monthly upward momentum witnessed between January 2016 and January 2017. 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