Farming for Monetary Policy

The Central Bank of Nigeria (CBN) recently dedicated its home page to the flagship Anchor Borrowers Program (ABP). Launched in November 2015 with a ₦40 billion war chest, the ABP was created to provide low-interest loans to farmers.

It's a commendable effort to reduce Nigeria's food import bill; but when did farming become relevant to central bank activity?

Thomas Jefferson's statement, "When you reach the end of your rope, tie a knot and hang on" has become a mantra for persistence, a trait the CBN has shown in spades. The combination of weak economic growth and high inflation has pushed the CBN to its limit, leaving the Monetary Policy Rate (MPR) stuck at 14% for half a year. Increasing rates could further hamper growth but reducing them would fuel inflation. Despite this dilemma, the CBN is driven to positively affect the economy. So in true Jefferson spirit, the ABP is the CBN's attempt at tieing a knot and holding on. 

Farming for Fiscal and Monetary Policy?

The seeds of the ABP were planted in a time of fiscal reticence. With no cabinet six months after President Buhari's swearing-in, Buhari and Emefiele visited farms in Kebbi State to launch the ABP. As Nigeria's economic descent hit a new gear, putting rice in the ground may have convinced the government that it was still doing something. Of course, the CBN has been quick to take some credit for the fact that the agriculture sector has weathered the recession. 

Admittedly, the stagflation conundrum forced the CBN into making tough choices, and the ABP looks like a quick win on paper. Cheap loans for farmers should boost production in the sector. Not only does this contribute to economic growth and development by creating jobs and reducing poverty, but higher supply should lead to reduced prices of food items – inadvertently taming inflation, the CBN's eternal nemesis. Last year, the imports of rice and wheat were part of four food items that consumed ₦1 trillion in foreign exchange. Higher domestic production will reduce this bill, thereby reducing the strain on our sacred foreign reserves and easing pressure on the naira.  

Nigerian Quantitative Easing

So the ABP has its merits; but is the CBN overstepping its mark? What about the Bank of Agriculture? Their remit includes providing cheap finance for farmers. And how common is central bank "policy" of this form?

Actually, the 2007 financial crisis precipitated a wave of unconventional monetary policies. First, central banks in the world's largest economies reduced interest rates to around or even below 0% – the zero lower bound (ZLB). This theoretical floor on interest rates exists under the assumption that individuals or firms would never accept negative interest rates which imply them paying the bank for maintaining their deposits.   

Having hit the ZLB, central banks had to come up with new ways to tackle the recession. Desperate times called for desperate measures in the form of Quantitative Easing (QE), implemented in the United States and Europe for the first time. QE involves central banks purchasing government or corporate bonds. Why would they do this? Buying these bonds pushes up their price and so reduces their yields, as the price of a bond is indirectly proportional to its interest rate. In doing so, the central bank effectively decreases other interest rates in the economy which should, in turn, stimulate growth. For example, the reduction in corporate bond rates will reduce the cost of borrowing for businesses and spur investment.

The ABP is similar to QE in that the scheme lowers the borrowing costs of the agriculture sector without tampering with the MPR and driving inflation higher. So although its interpretation of QE is as funny as it is bizarre – though the apex bank has never compared the two policies – it is in line with a greater dependence on unconventional monetary policy.  

Beating Around the Bush

While the ABP is a step in the right direction in terms of reducing Nigeria's reliance on food imports, it lacks the urgent medical treatment Nigeria currently craves. Directly targeting the causes of the recession is the best short-term policy a central bank can pursue. The US mortgage market crippled financial markets and triggered the financial crisis, so the US Federal Reserve responded by using QE to buy mortgage-backed securities to wash out these toxic assets and restore liquidity.

Nigeria's recession didn't come about because farmers weren't producing enough rice. There are urgent and fundamental economic failings that cheap credit to farmers will not fix. These range from a fiscal dependence on oil revenue to a hazardous road network, and an inefficient exchange rate system. What happens when the farmers want to import machinery to process tomatoes but poor electricity or dollar shortages instead force them out of business?

CBN may be able to provide consistently cheap credit, but it does not have the capacity to provide training or infrastructure. It must keep its eye on the ball and not lose sight of its core mandate. The first step would be moving towards a more transparent and healthy exchange rate system. Only when such moves are made will the ABP really bloom. 

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