Published On: Sun, May 27th, 2018

2019: CBN to tighten money flow


Renewed pressure on the Nigerian foreign exchange market and rising election spending were some of the reasons given by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN)in deciding to retain previous monetary policy benchmark rates. This is the 11th consecutive retention of benchmark rates in the last three years.

The MPC kept Monetary Policy Rate (MPR) at 14 per cent; Cash Reserve Ratio (CRR) at 22.5 per cent; Liquidity Ratio at 30.0 per cent and Asymmetric corridor at +200 and -500 basis points around the MPR, during its second meeting for the year.

While reading the communiqué of the meeting, CBN Governor, Mr. Godwin Emefiele disclosed that the Committee witnessed a high injection of liquidity into the economy between the first and second quarter of the year, upward pressure on prices which was driven largely by substantial fiscal expansion, which in turn was the consequence of the late passage of the 2018 federal budget, the outstanding fiscal spending balance from the 2017 budget and expectations that large pre-election expenditures, could push up inflation.

The Central Bank expressed concern about fresh pressure on the naira, which could threaten to wipe out gains recorded since the introduction of the Investors’ and Exporters’ (I&E) Foreign Exchange Window in April 2017, which has helped stabilize the local currency.

The naira has lost 0.47 per cent of its value in the Nigerian Autonomous Foreign Exchange (NAFEX) Window, otherwise called I&E Forex Window in the last month and it has weakened -0.55 per cent to N365 per dollar at the parallel market on Friday.

A dollar was exchanged for N360.51 at the I&E forex Window on Friday, despite the country’s foreign reserves rising 0.83 per cent in almost a month to $47.75 billion on May 21, 2018, underpinned by increasing oil prices, which stood at $79.88 per barrel at the close of business on Friday.

Activities at the Nigerian forex market have been moderated by the continuous intervention of the apex bank. It injected over $300 million into the market last week.

On Thursday, the Central Bank was urged to further liberalize foreign exchange control by Patrick Chisanga, a Zambian Corporate Governance Consultant. He argued that the easing up of market controls would encourage Foreign Direct Investment flows to the country. Chisanga was of the opinion that the liberalization of the forex market in Zambia 24 years ago has helped the country maintain a sustainable growth in the last 15 years.

Local analysts have insisted that the MPC’s decision to maintain tight monetary policy despite fragile growth, would further stunt the expansion of the real sector of the economy, says Dr. Adi Bongo, faculty member, Lagos Business School.

“I understand their concern about inflation, which has been the monetary authority’s justification for keeping rates high. But I disagree with their position vehemently. ‘’

According to Bongo, ‘’If you look at empirical trend rates, you will see that the economy performed best when rates were low. As rates started getting high, the economy was hurt and GDP started going south,” he posited.

He argued that inflation is a necessary component of any sustainable economic growth, urging the monetary authority to loosen the noose on rates since inflation is on the decline in order to let the economy breathe.

Meanwhile, the MPC noted that with the CBN’s interventions, the current level of oil prices and developments in the global economy, it expects rates to remain stable in the foreign exchange market in the near-term.

“However, the bearish signs in the capital market associated with profit taking activities of investors, call for a careful calibration of policy so as to moderate the trend of capital outflows in an era of monetary policy normalization in the United States. This is given that there are already indications of severe attacks on the foreign exchange markets of some emerging economies,” it mentioned.

The Nigerian Stock Exchange All-Share Index (ASI) dropped -1.06 per cent to end the previous week at 39,323.62 index points, having lost -6.69 per cent in last three months as investors continue to pull out funds ahead of the forthcoming general elections. But the market still maintains a 40.43 per cent year-on-year yield.

The Minister for Finance, Adeosun has been pushing for interest rate cuts, but the monetary authority has maintained that the economy was still too fragile to accommodate rate reduction for now.

However, the CBN governor had hinted that monetary policy rates would be lowered in the course of the year as the economy improves.

CBN data shows that maximum lending rate stood at 31.56 per cent in April, while savings deposit rate was 4.07 per cent during the period.

Also, credit to the private sector decreased -0.78 per cent to N2,244 trillion in March from N2,262.13 in February as many commercial lenders lowered their risk appetite due to rising non-performing loans (NPL) ratio, which currently stands at industry average of 13 per cent instead of the 5 per cent threshold set by the Central bank.

There is an urgent need for the injection of credits into the manufacturing sector to enable the sector expands beyond the 3.3 per cent growth it recorded in the first quarter of 2018, in order to curtail unemployment rate, which stood at 18.80 percent in the third quarter of 2017.

The country’s youth unemployment rate increased to 33.10 percent in the third quarter of 2017 from 29.50 percent in the second quarter of 2017. And over 60 per cent of the Nigerian population is below 30 years.

The CBN has engaged in sectorial injection of funds through intervention programmes such as the Anchor Borrowers Scheme, which has accelerated growth in the agricultural subsector.

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