Consistent with the on-going efforts aimed at strengthening the handshake between monetary and fiscal policies, a major challenge facing the CBN is how to get the Deposit Money Banks funnel credit to the productive sectors of the economy. This has become compelling in view of the dire need to reduce the high unemployment rate as well as solidify economic recovery. As disclosed in the CBN Economic Report Q1 2017 (the most recent on the website of the CBN), published on July 13 2017, ‘’banking system’s credit to the private sector, contracted marginally by 0.4 per cent, at the end of first three months of 2017, compared with the decline of 1.1 per cent at the end of the preceding quarter’’. This aversion to private sector credit apparently continued till the fourth quarter of last year as corroborated by the CBN Communiqué No. 116 of the MPC Meeting of November, 2017 which stated that ‘’credit to the private sector, however, contracted by 0.24 per cent in October 2017, compared with the provisional benchmark of 14.88 per cent’’.
Much as structural constraints in the economy arising from infrastructure gaps and persistent insecurity partly explain the high interest business environment, it is a no brainer that the justified hawkish monetary stance of the CBN has equally played a role. Indeed, in an effort to manage the strains associated with high inflation rates, the apex bank has maintained tight monetary policy especially since July 2016 when the MPR was jerked up from 12 percent to 14 percent. However, this monetary trajectory seems to be nearing tipping point. The green light was flashed recently by Godwin Emefiele, the CBN Governor, in a widely publicised comment to the effect that ‘’the monetary policy committee may consider lowering the policy ratebetween the end of the first and second quarter of 2017’’. Indeed, the economy looks set to welcome the doves. Although, headline inflation is still in breach of the CBN upper regulatory band of 9 percent, the slowdown in inflation rate from a peak of 18.72 percent in January 2017 to 15.37 percent in December,the relative stability in exchange rate, stock market recoveryand growth in external reservesprovide some room for monetary easing to support output in the short to medium term.
As the apex bank contemplates opening its doors to softer monetary policy, it is important to recognize that similar approaches in the past,without appropriate safeguards, failed to yield the desired results. Whereas banks were quick to reprice their assets whenever the policy rate was increased, a move that undermined financial stability, they were reluctant in lowering lending rates in line with lower policy parameters. This asymmetry in the response of the market interest rates to policy rate adjustments is not unconnected with the harsh operating environment especially for banks struggling to repair their loan books. In effect, monetary policy easing was neither successfully transmitted through the interest rate channel as the DMBs did not respond with lower lending rates nor through the credit channel owing in part to the discriminatory stance of banks in disbursing new loans.
For instance, the CBN had adopted accommodative monetary policy in July 2015 (which was retained in September) in the hope of addressing growth concerns, effectively freeing up more funds for DMBs by lowering both the Cash Reserve Ratio and the Monetary Policy Rate. This was aimed at moderating domestic interest rates so as to increase lending to the real sectors including agriculture, solid minerals and SMEs sub-sectors of the economy. Regrettably, DMBs did not grant credit to the productive sectors as envisaged.This much was confirmed by the Monetary Policy Committee in itsCommunique number 104of November 2015 when it noted with concern that ‘’previous liquidity injections embarked upon through lowering of the Cash Reserve Ratio (CRR), in the last MPC, has not transmitted significantly to improved credit delivery to key growth and employment in sensitive sectors of the economy’’.
Although the country’s huge infrastructure gaps hinder the proper transmission of a loose monetary policy, the DMBs too have not helped matters as they prefer to build liquidity profiles in anticipation of government borrowing.It goes without saying that the sluggish growth in private sector credit is exacerbated by the DMB’s appetite for government securities. Gladly, government’s strategy of rebalancing the public debt stock in favour of foreign loans will help bring about a lower interest rate environment.
On its part, the CBN should explore innovative ways of accelerating the rate of credit growth at low cost to the productive sectorsof the economy with sufficient employment capabilities and the potential to generate growth.To this end, the CBN should come up with a regime of incentives including the prescription of lower Cash Reserve Requirementfor banks that increase their credit allocation to the real sector beyond a specified level.In addition, liquidity arising from the reduction in the CRR should only be released to banks that are ready to channel it to employment generating activities in the economy such as agriculture, infrastructure development, solid minerals and industry.
The Malaysian example is worth citing here. In order to ensure that priority would be given to lending for productive and export-related manufacturing activities, the Central Bank of Malaysia, (Bank Negara Malaysia) requires banks in the country to submit a credit plan every year which outlines among others each bank’s strategies for extending credit to the productive sectors. The progress of each bankin adhering to its credit plan is closely monitored by the BNM through a bouquet of incentives and sanctions.
By the same token, any attempt by the CBN at easing liquidity into the economy should be directed at targeting the real sector. Ahead of the expected downward adjustments to policy parameters, the apex bank should put in place necessary measures to ensure strict compliance by the DMBs.This time around, the CBN should go beyond moral suasion in tackling suboptimal bank intermediation that defeats the goal of monetary policy accommodation.
Uche Uwaleke
