ON THE NEED FOR EFFECTIVE COORDINATION OF MONETARY AND FISCAL POLICIES TO STIMULATE THE NIGERIAN ECONOMY
By Ceeja Ojong
Monetary and fiscal policies contain the standard tools for macroeconomic management. Broadly, monetary policy looks to manage and control the inflation rate, interest rates and exchange rate as well as growth of money base. Whereas fiscal policies revolve mainly around the control and management of government expenditure, taxation and borrowing.
Depending on the objectives of macroeconomic management or policy design at any one time period these policies could be expansionary or contractionary or a combination of both. Expansionary policies usually entail increased government expenditure, reduced taxation, lowering of interest rates, increase in money supply and increased borrowing, etc. Contractionary policies would usually represent the opposite picture.
Stimulus packages for jumpstarting economies already in recession or depression or going into recessions are designed around expansionary fiscal and monetary policies following the Keynesian orthodoxy. A lowering of the interest rates may be also desirable in such situations.
However, expansionary monetary policy could conflict with the overly concerns of most Central Banks with satisfying their most important objective of maintaining price stability in the economy implying they try to deploy all the tools in their kit to rein-in inflation.
In doing so, they also respect the economic wisdom that says inflation rates must not be higher than interest rates if we are not to dampen investments and further ruin prospects for recovery or growth. So, this is why the CBN sets the MPC rate (monetary policy rate) which approximates to the benchmark interest rate (short-term) at defined intervals to be higher than the inflation rate.
Nevertheless, higher interest rates could in themselves discourage investments since the cost of funds in the economy will become too high for prospective borrowers or users of funds. Again, it is to be noted that inflation itself is only an intermediate target or goal. The final goal is to achieve sustainable and inclusive economic growth and in some cases a modest rise in inflation rate is to be expected in situations of accelerating economic activity or increasing growth rates.
Part of the perplexity that now exists is the sterilization of funds in the CBN by way of the TSA (Treasury Single Account) rather than releasing the money to create more value through the multiplier process in the economy. The key idea of the TSA was not to tie down the funds in the CBN as to crowd out private sector investments or increase the cost of loanable funds in the economy, but mostly to ensure that the government has a clear picture of its cash position on a daily basis and to be able to deploy the funds to its priority areas on a needs basis.
Add all of these to the drastic drop in foreign exchange earnings, divestment of foreign portfolio investments and cut-back on foreign direct investment (FDI) and unfavourable terms of trade vis-a-vis the huge appetite for forex from the domestic economy then one would not envy the CBN Governor’s tough task at the moment.
The economic situation is further complicated by the fact that most contract quotations as included in the budget estimates and the exchange rate assumption for the National Budget were pegged at the rate of N197 to US$1 that has now depreciated to about N306 to US$1. The implication here is that the 2016 National Budget may not be implementable at the expected level of activity. The obvious reality is that there are no additional earnings to augment for the nominal value increases especially in capital budget items arising from exchange rate depreciation against the 2016 Budget target rate.
What is now actually needed for our country is policy harmony and effective coordination of fiscal and monetary policies. I doubt that any such robust framework is existent at the moment.
We do as well need not only innovative and visionary leadership but also serious financial engineering and macroeconomic wizardry to get us out of the woods.
May God bless Nigeria!
