Nigeria Content Online

Last week, the
prevalent apprehension was with inflation rates. How could the rate of
change in domestic prices, as measured by the official number crunching
agency, be southbound, when the world is affrighted by both rising
energy and commodity especially food prices?

The answer to this
question mattered for a variety of reasons, not least of which is its
implication for the relationship between the appropriateness of policy
responses and the relevant signals from the economy. Two questions
allied to this line of inquiry, recommend themselves: “How much of our
domestic policy error is the consequence of poorly generated data?” And
“how much is the result of defective policy frameworks?” Coming just
before the meeting this month of the Central Bank of Nigeria’s (CBN)
rate setting committee (the MPC), the release by the National Bureau of
Statistics (NBS) of its consumer price index (CPI) numbers for February
2011, was topical, if nothing else.

Against the
backdrop provided by the direction in which domestic prices appear
headed, there was always going to be a lot of interest in the
consequent policy direction. The widening arbitrage opportunity between
the official and parallel market exchange rates could mean that the
one-way bets on the national currency that we were warned against
earlier were being taken. The general elections loomed on the horizon,
and it is counter-intuitive to think that election-related spending
would not put pressure on domestic prices. So, what was the MPC to do?
Raise the policy rate? Not if the inflation rate is down.

Oddly, the MPC not
only raised the policy rate at its meeting last week, and by definition
the symmetric corridor around its standing facilities, but also raised
the rate far faster than any commentator had anticipated – by 100 basis
points to 7.5 per cent. Now this decision has its uses, for if rates do
not go up until they are higher than the measured rate of change in
domestic prices, then the negative real returns currently to be had
from the financial services industry will continue to discourage
savings.

The level of
private savings is important in a rather roundabout way. With the
transition in the formal pension system, from defined benefits to
defined contributions, the amount of money that households currently at
work salt away matters a lot over the long-term. Where society does not
have a social security arrangement, then people must save if they are
not to become public charges after their useful work life is done. What
better way to encourage the necessary savings than by ensuring positive
real yields on all financial instruments traded in this economy?

Moreover, in our
environment, where the formal financial services sector, by one
estimate, accounts for only about 1 per cent of short-term finance for
formal sector businesses, then savings by businesses (or their retained
profits) also matter. Without these, investment in the capital stock
necessary to boost domestic productivity growth just would not happen.

But even more
significant is the national savings rate: this is the sum of household,
corporate, and public savings. In the last four years, this has been
depressed by the growing public sector deficit. Government, apparently,
has borrowed to finance its huge appetite only because of its access to
rather cheap funding sources. And cheap money may actually have helped
shift the focus of public spend away from net capital formation towards
recurrent expenditure. Higher rates should thus push up the cost of
public borrowing, and by default encourage the bean counters in the
public sector to take a more serious approach to estimating the
sector’s borrowing requirements.

Cheap
naira-denominated assets may likewise be implicated in the growing
demand pressure currently being experienced in the market for foreign
exchange. If the opportunity cost of converting naira-denominated
assets into dollar-denominated ones remains this low, the CBN would
strive in vain to meet demand in the official foreign exchange market.

Against this
argument for raising interest rates, there is always the possibility
that the average Nigerian politician, concerned to conceal the
provenance of his/her ill-gotten lucre, will stop at nothing to convert
naira-denominated assets into dollar-denominated ones. In which case,
the political class might be indifferent to the cost of borrowing in
naira. Nonetheless, by making such deviant behaviour more expensive, we
would have signalled our intention to stop offering subsidies to
conduct inimical to our welfare.