Rising Inequalities, Monetary Policy, and Social Cohesion, By Uddin Ifeanyi
…as a friend argued recently, “as income inequality rises, then, the challenges around social cohesion rise”. Across vast swathes of the country, this ugly dynamic is playing out at great cost in lost lives, property, and income-earning opportunities. That the central bank may be adding faggot to this fire ought to worry all…
Embedded in discussions about how well the Central Bank of Nigeria (CBN) is doing managing monetary conditions is a rarely acknowledged fact. The whole point of designating a price stability goal for the central bank, and of designing a monetary transmission mechanism in support of this, is that people react to policies. When, therefore, the central bank tightens monetary conditions (by raising its benchmark interest rate), people save more, and spend (also, invest) less. That ordinarily should put downward pressure on domestic prices. This process also works the other way.
In this accounting, the central bank’s monetary policy rate (MPR) is an essential part of a process that signals policy direction to the markets — helping, in this way, to manage inflation expectations. Deployed properly, it should nudge the markets in the CBN’s preferred direction. “Properly” is, though, a problematic adverb. It’s often a function of the body of education (and the burden of prejudices) that one has been exposed to. Accordingly, there’s an interpretation of a proper use of policy tools, which argues that (changes in) the direction of policy-making must be available to all market participants at the same time. To have certain parts of the market privy to policy decisions ahead of their official announcement is categorised as “insider trading” — which is unethical, and illegal in most jurisdictions.
However, where the general principles of economics have been upended, in favour of local binding constraints (the “uniqueness” of a people and their country, for example), and/or a new authenticity, “proper” conduct is open to a new interpretation. Of late, this interpretation appears to have governed the CBN’s policy trajectory. At the end of its July 2016 meeting, the CBN’s policy committee moved the MPR up by 200 basis points (one basis point is a hundredth of a percentage) from 12 per cent to 14 per cent. Rising prices were a major worry that year. Since then, the apex bank has left the rate on this policy instrument unchanged.
Anyone, therefore, who looks at the path of the MPR to understand the Nigerian economy is likely to come out of the exercise with a severely distorted perspective. Between 2016 and today, the economy has been through not just rising prices, but a severe recession.
Anyone, therefore, who looks at the path of the MPR to understand the Nigerian economy is likely to come out of the exercise with a severely distorted perspective. Between 2016 and today, the economy has been through not just rising prices, but a severe recession. Indeed, the recession has been a major argument in favour of the current policy stasis. Irrespective of where prices are headed, and/or how fast they are travelling, goes this perspective, the CBN can only put up rates, if it is indifferent to the impact of this on domestic growth.
In truth, tighter monetary conditions, as the U.S. Federal Reserve’s Open Market Committee’s latest rate decision indicates, could asphyxiate domestic growth. But in the local example, much of our inflation burden is the result of louche public expenditure management frameworks. In other parts of the domestic conversation around the CBN’s policy direction, it has also been argued that the apex bank may have succumbed to “fiscal dominance”. This latter condition obtains, according to one definition, when “a country has a large government debt and deficit such that monetary policy targets keep the government from bankruptcy as opposed to economic targets such as inflation, growth and employment”. Few would argue that the federal government’s debt burden is not becoming burdensome. Not the CBN, at least. At the first meeting this year, of its policy committee, the CBN “noted the increase in the (economy’s) debt level, advising for caution, noting that it could fast be approaching the pre-2005 Paris Club exit level”.
In other words, there is a strong, if not compelling case for the CBN’s current policy trajectory. Except that the trajectory is a contrivance. For the CBN has continued to tighten policy through its open market operations (OMO), where yields have gone up, tenors have lengthened, and banks have adjusted their operations to the issuance of “special OMOs”. If domestic prices have softened, it is not because the CBN has proved, through holding off from moving its policy rate in response, that the much-vaunted link between rising prices and tighter monetary conditions is a fiction favoured by liberal economists. It is instead that the CBN has opted to tighten monetary conditions through the backdoor.
…the surreptitious use of monetary policy involves a transfer of resources from asset-poor segments of the population to asset-rich classes — in other words, our current monetary policy may be reinforcing rising income inequality.
In part, this policy denies the populace a useful education on the relationship between prices, in the same degree as it messes up the CBN’s policy signalling capacity. Beyond all of this, though, is that the surreptitious use of monetary policy involves a transfer of resources from asset-poor segments of the population to asset-rich classes — in other words, our current monetary policy may be reinforcing rising income inequality. How do I mean? Retail savers with banks earn interest at 30 per cent of MPR. A flat MPR leaves the yield for this category of savers unchanged irrespective of the direction of the economy — include inflation in this computation, and this class of our compatriots are poorer every year the MPR remains unchanged. However, with the effective yield on the CBN’s OMOs nearing 18 per cent per annum, savvier asset-rich segments of the population are smiling to the bank. And this is largely because the return on their investments yields at “inflation+”.
Surely, this can’t be the intent of those who would overthrow “bourgeois economics” in favour of a “genuine autochthonous” variety. For, as a friend argued recently, “as income inequality rises, then, the challenges around social cohesion rise”. Across vast swathes of the country, this ugly dynamic is playing out at great cost in lost lives, property, and income-earning opportunities. That the central bank may be adding faggot to this fire ought to worry all who are sufficiently concerned about this country’s outcomes.