Harmonising Monetary and Fiscal Policy

Ngozi Okonjo Iweala, Finance Minister

Obinna Chima examines the need for monetary policy to be complementary in order to achieve the desired economic growth

Economic stability is a necessary condition for any nation to achieve its desired goals. These goals may include achieving reasonable economic growth, decreasing unemployment rate, maintaining the equality of development, and increasing society welfare.

That is why economists globally have continued to canvass for a balance between monetary and fiscal policy. While monetary policy, which is the process by which the monetary authority of a country controls the supply of money, manifests in the form of interest, exchange rate management and inflation targeting, fiscal policy on the other hand, is the use of government revenue and expenditure to influence the economy.

But while some financial market analysts have continued to express displeasure over the tight monetary policy stance of the Central Bank of Nigeria (CBN), the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, believes that the action by the apex bank has supported the federal government’s fiscal policy objectives by removing obstacles to economic growth.

The central bank has kept all its monetary policy tools at double digits in the past one year. In fact, while the Monetary Policy Rate (MPR) currently stands at 12 per cent, the Cash Reserve Ratio (CRR) is also at 12 per cent and the Liquidity Ratio at 30 per cent. This has resulted to exchange rate stability and accretion of Nigeria’s foreign exchange reserves.

Fiscal Policy
Okonjo-Iweala, who spoke on “Fiscal Consolidation with Growth,” at a recent forum organised by Renaissance Capital, argued that the interaction between fiscal and monetary policy objectives contributed to the growth achieved by the country.

She explained: “Now people would say what I mean by that, because the debate in economics has been about fiscal consolidation or growth. We don’t see this as two things that are separate. How can we consolidate and be fiscally tight whilst at the same time supporting growth? We can do it because we have opportunities and sources of growth in this economy.

“When you tighten, you better direct investments to remove those obstacles on the way of growth and you are going see growth increasing. So we are tightening, we are focusing and directing our investments into those areas that represent the obstacles and challenges to growth, to remove those constraints, so that we can keep growing faster than we are today. That is what we mean by fiscal consolidation with growth.”

Okonjo-Iweala also pointed out that the government was also trying to manage the increasing inequality in the country. According to her, the growing gap between the rich and the poor, if not managed, would have negative implications on the economy in the long-run.
“We have to manage the gap between the rich and the poor. Jobs and rising inequalities are two issues that are being looked at. Nigerians have been asking that despite the positive growth rate, what is happening to unemployment. Our biggest challenge is the issue of unemployment.

“We have a high unemployment rate of about 23 per cent. We have a lot of under- employment in the informal economy, and what we need to do is to create jobs needed for the young people in the economy. But Nigeria is not alone in that. Spain as you know is suffering, the United Kingdom and the United States are also suffering from this.”

Continuing she said: “We have been able to attain a steady macro-economic environment because if we don’t, the rest of what we are trying in various sectors will not work. On the fiscal, we are correcting our past records of fiscal lapses.

“In the 2013 budget, we are trying to be discipline. In our budget, there is too much of recurrent expenditure and too little on capital investments. That is not the type of approach we want, because we need the capital to lift those constraints. Nigeria has been growing at an average of seven per cent for almost a decade and people have been excited about these growth figures.”

But the President, Finance Houses Association of Nigeria (FHAN), Mr. Samuel Durojaye, argued in a chat with THISDAY that the monetary policy regime suffocated the growth of businesses as well as the real sector.

“I can tell you that all over the world, when you implement a tight monetary policy, it does not help any business. Well, the central bank has its reason for the tight monetary policy that is in place as it says it needs to cage inflation.

“We have a peculiar system in this country where we are operating a tight monetary policy but with expansionary fiscal policy. You will find out that the structure of the country’s budget is such that as high as 85 per cent goes to recurrent expenditure,” he said.

Similarly, the Director-General, Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, argued that the country’s monetary policy position had brought about depressed economic activities, low sales, weak consumer demand, huge inventories by manufacturers, liquidity squeeze and tight cash flow conditions in the economy.

“What is paramount at this time is the stimulation of the economy and that is the norm globally. Affordable and long-term finance may not be a sufficient condition for economic growth, but it is a necessary condition

“Consequently, all policy tools – monetary and fiscal - should be deployed to stimulate the economy. Low inflation and robust reserves are good, but they are not ends in themselves; they are means to an end. The ultimate objective is to strengthen the economy and improve the welfare of citizens. The fixation of the CBN for curbing inflation and building reserves is, in our view, disproportionate,” he maintained.

Monetary Policy
CBN Governor, Mallam Sanusi Lamido Sanusi, has said that the banking sector regulator would not adjust its monetary policy instruments until it was convinced that the risks in the economy had minimised. He explained that the banking sector watchdog did not want to send a signal that the restrictive monetary policy regime was over by lowering interest rate.
According to him, the major risk that economy faces was the risk to stability, because the Nigerian economy was very vulnerable to oil prices.

He pointed out that although oil  was only 13 per cent of Nigeria’s Gross Domestic Product (GDP), it accounted for 99 per cent of the country’s export earnings.

“It is very easy to take stability for granted. Why we are no longer dealing with banking system that was on the verge of collapse, external reserves that was crashing, with multiple exchange rates, with inflation at 15 per cent, it is nice for people to be complaining whether interest rate should be 50 basis points or 100 basis points lower.

“No, we are not going to take stability for granted. The message is that we are not in a hurry to loosen interest rate until we are satisfied that there will be no risk to stability. We are not in a hurry to send a signal that a tightening policy is over, only to turn around and raise interest rate. So, we have chosen to stay on the side of caution so that people would manage their expectations,” the CBN governor said.

He also concurred that there had been a balance between monetary and fiscal policy in the country, just as he disagreed with the allusion that the high rate of interest was the major reason why companies don’t have access to credit.
From the foregoing, it is essential that all government agencies and other arms of government to follow on the path of fiscal consolidation and removal of wastages so as to help the central bank in its pursuit of stability and economic growth