Avoid Actions That Undermine Monetary Policy, MPC Member Charges Fiscal Authority

By Geoff Iyatse

Amidst rising recklessness and fiscal waste, a member of the Monetary Policy Committee (MPC), Prof. Mike Obadan, has urged the fiscal authority to avoid measures that undermine the monetary authority and worsen inflationary pressure.

He balked at the efficiency of the monetary tools in cooling inflation in the face of multiple supply-side constraints and called for complementary measures from the fiscal authority.

The economist said the restrictive monetary regime, which has raised the monetary policy rate (MPR) to 16.5 per cent, could only address inflationary pressure coming from demand linked to “monetary expansion but not the inflation arising from other sources.”

Obadan highlighted insecurity and banditry, oil theft, legacy infrastructure and logistics challenges, an undiversified economy and heavy import dependence as some of the constraints the government must address to increase efficiency and boost productivity.

The observations are contained in the communique of the November MPC meeting, which was released by the Central Bank yesterday. He urged his colleagues to be mindful of the recessionary implications of over-tightening.

The CBN Governor, Godwin Emefiele, at the Bankers’ Committee annual retreat held in Lagos recently, also raised concern about slowing growth and called on the government to urgently stop it to save the economy from possible recession.

Though still positive, output growth has been trending downward since last year. It sloped from 3.54 per cent in Q2 to 2.25 per cent last quarter. Some economists have called on the monetary authority to balance inflation concerns with the need for growth in its intervention.

Dr. Chiwuike Uba, a development economist, observed that the money supply’s contribution to the country’s headline inflation is merely 10 per cent with the remaining 90 per cent coming from exchange rate volatility and supply-side constraints.

Obadan, a former Director General of the National Centre for Economic Management and Administration, noted: “Importantly, it is not certain how much rate hikes need to be implemented to tame inflation. Empirical estimates may be helpful but there is no certainty about it; moreover, there is no one-to-one correspondence between policy rate hikes and inflation reduction because of the existence of numerous extenuating factors beyond monetary policy influence.

“So, while the monetary policy stance should remain generally tight, policy rate hike should now be moderately done while a strong appeal is made to the fiscal authority to complement the Bank’s efforts by implementing necessary bold reform measures aimed at addressing insecurity, significantly boosting revenue and foreign exchange and also ensuring fiscal consolidation.”

The professor called on the fiscal authority to avoid actions and measures “that tend to undermine monetary policy”. It should ensure proper coordination of fiscal policy with monetary policy, he advised.

He urged the fiscal policymakers to engage in aggressive non-oil revenue mobilisation through innovative taxes, proper taxation of high-income groups and abolishing tax waivers.

“Undertake fiscal consolidation to prevent the need to accumulate ways and means advances”, Obadan said, noting that fiscal consolidation involves measures that reduce fiscal deficits.

Source: The Guardian