I was able to listen to the CBN director of MPC this morning on Channels TV
and I got his side of the argument on why the CBN cannot drop the MPR now. His major concern was the monetary inflation that could be triggered if MPR is lowered. As in plenty money chasing few goods. coupled with a stagnant economy. This is called Stagflation in economics. It is a rare problem in any economy.
Those who have a little knowledge of "Philips Curve" will agree with me.
It is a lesson for everyone . Government is like a society. It comprises of parts and a decision taken by a part or parts affect the entire body.
Stagflation is like a patient that surgery needs to be carried on but with a high blood pressure. It is not advisable to carry out a surgery when the BP is high. The BP must just drop for you to work safely. The BP in this case is inflation of about 18%. You wanna boost the economy by pushing funds into the economy but you are scared of triggering a monetary inflation at the same time.
The inflation we have at the moment is more of COST PUSH but the CBN is scared of risking a monetary inflation that may come if MPR is lowered beyond 14%. This has helped my analysis a little.
What triggered our Current Cost Push inflation?
1. Inadequate FOREX for importers at the CBN rate
2. 45% in the electricity tarriff
3. Pump price from 86 to 145
4. MPR from 11% to 14%
5. Various Charges (Including bank charges).
Our Errors.
Item 1 to 5 are products of policies. I won't hold the
govt responsible for item 1. But for the rest. They were all launched into the economy at the same time. And they killed the purchasing power of the people. Because they are all draining channels.
The demand of the people continued to fall, prices began to fall (including the PMS at the filling stations) the supply followed suit and jobs followed.
Economic policies are released one after the other into the economy. Never at once. You will kill the people. Item 1, 4, and 5 are monetary policies. 2 and 3 are fiscal policies. This is why both the ministry of finance and CBN must work together to achieve a great result. But at the moment, that is not there.
Solutions
1. We need to pray that oil price improves in the global market and peace in the Niger Delta. This will bring in more Forex , income to the govt and drop the pump price in the long run.
2. We need a concrete synergy betweed the Fiscal Policy and Monetary Policy. They seem to be driving opposite at the moment. That means we are in a big mess. We need more competent hands if these ones are no longer fit.
3. Taking the risk of forcing down all monetary instruments which include, MPR, RR and LR by the CBN. The outcome will encourage SMES, government borrowings etc if all go well. But if the money is diverted and failed to go into production. We will all be in a greater mess. That is hyperinflation. God forbid. So, it must be monitored.
4. Relieve or discentralise the cumbersome structure of government spending process. If not ,another 350B into the economy won't make any effect. It is like a car. Something aggressive must ignite the engine to restart again.which means there will be a lot of transactions that must take place continuously and aggressively for at least 3 months to come out of recession.
All these must urgently take place btw now and December. If not, if this moves into depression, it will take miracle to get out again. Because we don't have the infrastructural support to take us out.
God bless Nigeria
@tunde_adenuga
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