Continued from last Tuesday
The economy is not just about singling out consumer price inflation and or real consumer spending. It is more broadly about inflation, of which consumer price movements is only a component, but also of real activity, of which consumer spending is only a component. To ensure that monetary policy actions are not doing more harm than good, discussions leading up to interest rate decisions need to be broad enough to cover the linkages between broader measures of inflation, real activity, and the policy rate and other policy instruments. This would require each communiqué of the Monetary Policy Committee (MPC) to speak to a series of measurable slacks, gaps, imbalances or deviations from norms in real and nominal economic activities, for example, nominal GDP shortfall, output gap, employment rate, unemployment rate, manufacturing and industrial capacity utilization, savings ratios, and household and corporate debt ratios.
We need to hear more about what the MPC knows about nominal and real output developments, employment and unemployment developments, wages and profit developments, developments in aggregate demand and its key components, and what views the MPC hold about the outlook of these core measures of economic activity in Nigeria. It is only then anyone can judge whether MPC actions make sense, or for that matter, whether the MPC's oft expressed views about the inappropriateness of the fiscal stance make sense. Closing measurable gaps in overall real and nominal economic performance must define the common grounds for fiscal and monetary policy. Changes in fiscal or monetary policy stance must be directed at clear measures of gaps in economic activity. But it is important that these considerations be evaluated at every meeting of the MPC and similar committees so that the appropriateness of their choice of policy stance is unambiguous.
Much of the progress in evolving better institutions for managing growth and stability in the UK have been spearheaded by the parliament, which has provided new enabling legislations as rapidly as necessary on an ongoing basis over the past one and a half decades. Each of the MPC and the Financial Policy Committee (FPC) are collectively directly accountable to the Treasury Committee for fulfilment of their mandates, just as the members of each of the two committees are individually directly accountable to the committee as a way of preserving their independence. It remains to be seen how soon the Nigerian legislature can have such functionality in economic policy management.
While MPC and FPC have overlapping membership to ensure that both committees are kept abreast of the insights from each other's deliberations, members of the MPC and the FPC give evidence on a regular basis before the Treasury Committee, and each of the MPC and the FPC in the UK includes a non-voting representative from the Treasury, who sits with the Committees at their meetings, discuss policy issues, but is not allowed to vote. The purpose is to ensure that the MPC and FPC are fully briefed on fiscal policy developments and other aspects of the government's economic policies, and that the Treasury is kept fully informed about monetary policy and financial policy. In Nigeria the Permanent Secretary of the Federal Ministry of Finance represents the ministry on the MPC as a voting member, though he/she has tended not to be an economist.
The current composition of the Nigerian MPC in which lawyers, accountants, and bankers account for as many as eight of the 12 members must partly account for the tendency to retreat from the more important but exacting task of linking policy discourse and action to aggregate, sectoral, and regional economic growth, employment, household and business spending. All the nine members of the UK MPC are economists with expertise in the fields of economics and monetary policy, while only about five of the 10-member UK FPC are economists (including the Governor and two Deputy Governors of the central bank, who also belong to the MPC), the others being lawyers, bankers, accountants or stockbrokers.
There is a need for Nigeria to create an FPC within the CBN and re-examine the modalities for appointing persons to the MPC to preserve its competence. The current composition of the Nigerian MPC in which economists are in the minority might be suitable for the FPC, that requires economists, supervisors, and regulators to work together, but only economists should be called upon to set interest rate in the MPC. Economic literacy of individual MPC members, defined as demonstrable ability to read and write technical documents in macromonetary economics, is needed to preserve the competence, integrity, and credibility of the committee. Track record of ability to publicly articulate views on practical monetary policy issues, especially in writing, is essential for individual MPC members.
Concluded
Dr. Teriba, ayo.teriba@econassociates. com, is CEO, Economic Associates, Lagos.
