JUST three weeks after they rose from a regular Central Bank of Nigeria Monetary Policy Committee (MPC) meeting (which holds every two months), the fewer than 15 committee members were summoned through newspaper advertisements to an extraordinary meeting on October 10, 2011. It was a mere ritual, as the programmed MPC decisions down to their minutiae had appeared in the print media several days in advance of the meeting. The MPC raised the monetary policy rate (MPR) to 12.0 per cent, double the rate first set in July 2009 under the current CBN governor, in order to contain threatening price and exchange rate instability.CBN Governor Lamido Sanusi may characteristically remind critics that his predecessors had fixed similarly high and even much higher rates. Since the introduction of the MPR-in-corridor system, the upper border of the corridor dubbed standing lending facility rate (SLR) represents the erstwhile minimum rediscount rate (MRR). The current SLR of 14.0 per cent ranks ninth behind the highest ever MRR of 26.0 per cent in 1993. Four of the higher MRRs occurred in the present democratic dispensation, namely, 19.0 per cent in 2002, 15.75 per cent in 2003, 15.0 per cent in 2004 and 14.31 per cent in 2001. However, it should be stressed that the wide, frequent and undulating gyrations in the level of the MRR or SLR from 5.0 per cent in 1978 when the fluke oil boom economy petered out through 26.0 per cent to 8.0 per cent in 2009 and the resumed upswing journey that has just berthed at 14.0 per cent are proof that the fundamental cause of price and exchange rate instability remains unaddressed.Needless to state, high MPRs lead banks to charge high lending rates. The SLR of 14.0 per cent will therefore push up the average maximum lending rate, which stood at 22 per cent in August when the SLR was 10.75 per cent. Businesses are impacted directly by interest rates. Recently the Manufacturers' Association of Nigeria (MAN) disclosed that average manufacturing capacity utilisation was about 45 per cent in 2010. Thus the implications of rising and lending rates for domestic manufacturing activity are dire. The volume of domestic bank credit to the core private sector that stood at 39 per cent in 2009 but dropped to 30 per cent of GDP in 2010 is bound to further decline this year and in the near future. A more meaningful picture emerges from the latest available UN comparative data on domestic credit to private sector as a percentage of GDP in 2006, which show, for example, Nigeria (15), Malaysia (108), Singapore (99), South Africa (161), U.K. (176) and USA (201). Even when the apex bank drove down the bottom border of the MPR corridor, the standing depositfacility rate, to one per cent in March 2010 in order to encourage lending to the real sector, deposit money banks preferred lodging any extra funds with the CBN to earn the assured one per cent interest. In effect, CBN policies have proved unhelpful to the real sector.In its management of exchange rate, while domestic industries wither under scorching fiscal and monetary measures, the CBN purports to defend the naira by using the humongous amounts realised from both oil exports and autonomous inflow of foreign exchange to fuel growth in other lands. The country's foreign reserves provided import cover for 23 months in 2006, 22 months in 2007, 16 months in 2008 as well as in 2009 but just seven months in 2010. Whereas average monthly imports dropped by 21 per cent in 2009 from the 2008 monthly average, imports soared by 69 per cent in 2010 from the 2009 monthly average. These were not increased imports of machinery and intermediate goods to feed domestic manufacturing firms and build verifiable infrastructure projects but mainly final consumer products that asphyxiated domestic production. The apex bank has even confessed that substantial amounts of foreign exchange were being disbursed for sham petroleum imports. On the other hand, when appropriately handled, the country's ample oil proceeds and home remittances by Nigerians in the Diaspora should translate into self-generated foreign direct investment that would turn Nigeria into an oasis of exceeding economic buoyancy.The MPC explained that it was necessary to increase the MPR so as to stem pressure on the naira. It identified 2011 fourth quarter budget releases and a supposedly expansionary 2012 draft budget as the major contributory factors to the pressure. This is a fundamental error. The greater part of budget revenue is in the form of dollars derived from oil exports. The three tiers of government are expected to convert their individual shares of dollar proceeds into realised naira revenue in the foreign exchange market. Pressure is naturally on the dollar and certainly not the naira. In any case, the budget naira/dollar exchange is fixed and stable all year long. The intractable price and exchange rate instability confronting the CBN is caused by very high fiscal deficits, which in 2010 reached 19 per cent of GDP, because Federation Account beneficiaries did not convert their oil export receipts into realised naira revenue. Stability will only be maintained in the system by converting budget oil proceeds through deposit money banks into naira revenue at the dirty or managed naira exchange rate contained in the Appropriation Act. That way, depending on the volume of realised revenue and tempo of implementation of any year's approved budget, there will result ex-post budget surplus, balanced budget or low three per cent at most deficit budget. It is then inflation and lending rates would fall to levels that are commonplace in focused economies.In Malaysia and Singapore, for instance, inflation rates in normal years range from 0.5 per cent to three per cent. It is a futile exercise to attempt to find bank rates as high as three per cent in both countries. Therefore, when bank rates in the U.S.A., Japan and economies that work are fixed at between 0 and one per cent, the MPC decision to raise MPR to 12.0 per cent shows that the management of the apex bank does not understand or possess the skills to turn our resource-rich economy around.
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