Liquidity squeeze: Options for monetary policy manipulations

The monetary policy committee of the Central Bank of Nigeria (CBN) had a choice between the devil and the deep blue sea in its decision on the current monetary policy rate (MPR).


It opted to dine with the devil by maintaining the status quo rather than plunging into the deep blue sea by pushing MPR in either direction.


At 11.5 per cent, MPR is 4.2 per cent below inflation rate. That would have tempted the MPC to inch it up closer to inflation rate.
An upward movement of MPR would reduce liquidity in the system and curtail the flow of the trillions of naira in the foreign exchange market pounding pressure on the naira and forcing it into embarrassing depreciation.


It could stabilize the naira momentarily and probably lure foreign investors to take positions in the tottering economy.
However, the economic gains of sacrificing interest rate on the altar of exchange rate would have been negligible as deteriorating security situation and decaying infrastructure combine to repel direct investments in the economy.


The other option would have been to effect a downward review of MPR in a bid to reduce the cost of funds and encourage investments and consumer spending that would push the economy out of recession.


However, a downward review of MPR and by implication lending rates, to encourage lending and investments in a bid to push the economy out of recession would have been dangerous for the exchange rate of the naira.


It has the potential of flooding the economy with liquidity, accelerating the depreciation of the naira and worsening inflation rate.
That obviously informed the MPC’s decision to leave MPR at the status quo and damn the consequence. By leaving MPR at the status quo, the MPC probably believed that the devil you know is better than the angel you do not know.


The truth is that with the federal government’s fiscal rascality, Nigeria is one of the world’s most difficult economies to manage. The federal government has a penchant for reckless spending and has defiantly ignored repeated calls to diversify the economy in the last 30 years.
The current liquidity squeeze emanates from the fact that Nigeria depends on crude oil exports for close to 80 per cent of its foreign exchange earnings and 70 per cent of revenue.


The one-handed economy is responsible for the budget deficit of more than N5 trillion and debt service burden of N3.3 trillion in 2021. Nigeria’s liquidity squeeze has passed the point where it could be sorted out with monetary policy manipulations. It requires an informed fiscal intervention on the part of the federal government.
Even if the MPC reduces MPR to one per cent, very few would make direct investments in Nigeria because the environment is very hostile. Murderous Fulani herdsmen kidnapping people and feeding their cattle with crops planted by toiling peasant farmers constitute a major obstacle to investment.


The almajiris groomed for political thuggery by selfish politicians have discovered the wickedness of their mentors and have taken up arms against a society that refused to invest in them. They are now the forces behind the banditry that musters more AK-47 riffles than the police.


Nigeria’s eternal darkness is behind the high cost of production in the land that drives fund owners from direct investments that would create jobs. It has diverted idle funds to the capital market where it is pumping up market capitalization and making trillions of naira for a handful of privileged shareholders while unemployment surges along at something close to 30 per cent.
The first line of action to address the debilitating liquidity squeeze in Nigeria is for government to beef up its tax revenue.


Nigeria has one of the lowest tax revenues in Africa. Its tax revenue is a paltry 6.5 per cent of gross domestic product (GDP). The tax revenue of little Cote D’Ivoire is 17 per cent of GDP.
Nigeria’s low tax revenue is the consequence of endemic corruption. Transparency International (TI) last week in its corruption perception index rating of Nigeria, proved that corruption is worsening.


As TI rightly pointed out, the last #ENDSARS riots that terminated a peaceful protest by highly organized youth, exposed the fact that aside from massive treasury looting, top politicians have descended as low as stealing food meant for the starving poor. The looting and hoarding of COVID-19 palliatives by top politicians point to the embarrassing level of corruption in the country.
The looting is simply unparalleled. Nigerian tax collectors are richer than the federal government.
They assist big corporate organisations to under-value their tax liabilities and collect bribes in exchange.


Thousands of Nigerian employers in the private sector do not remit the pay-as-you-earn (PAYE) they deduct from their employees’ salaries. They all pocket the deductions to the knowledge of tax collectors. The tax collectors are bribed to keep quiet to the detriment of government. That explains the low tax revenue and consequent liquidity squeeze.


Nigeria’s unwieldy informal sector is a huge incentive to low tax revenue. It thrives on the country’s lack of data and a menacing financial exclusion that sees most of the monetary transactions handled outside the banking system.
That explains why 60 per cent of the cash in circulation remains outside the banking system. That again is responsible for the low tax revenue. The federal government battles its low tax revenue by taxing the poor and leaving thousands of billionaires to enjoy their untaxed wealth.


Most of the rich with strong connections to top politicians evade tax with impunity. Even bumper deposits within the banking system slip through without tax. Two years ago, the Federal Inland Revenue Service (FIRS) discovered more than 6, 000 accounts with deposits ranging from N2 billion. No tax was paid on the huge sums.
At an average of N2 billion in each of the 6, 000 accounts, the cumulative deposits in the untaxed accounts would be in the range of N12 trillion. Ten per cent of that as tax would give government more than N1 trillion.


Like the TI rating last week suggests, Nigeria is a rich country impoverished by endemic corruption which has now assumed alarming proportions.
The debilitating debt service burden that the federal government inflicts on the economy is a lazy way of sorting out the liquidity squeeze by borrowing to feed rather than taxing the rich to boost revenue.


The CBN has stretched itself to the limits by trying to reverse Nigeria’s economic backwardness through monetary policy manipulations. Nigeria can only get out of its self-imposed liquidity squeeze when the federal government is willing to fight corruption and end its fiscal rascality.

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