Published On: Sun, Jul 29th, 2018

CBN: No life line to economy


As the Central Bank of Nigeria (CBN) continues to keep a tight rein on domestic money supply while keeping policy rate at 14 per cent per annum, operators in the real sector of the economy have continued to groan in frustration. A slow growth in domestic consumer spending and shrinking opportunities for domestic borrowing has conspired to keep manufacturers and retailers in deep financial waters. At its recent Monetary Policy Committee (MPC) meeting last week the CBN refused to yield to demands of a growing number of economists that interest rates be reduced. 

For the eleventh consecutive time over a period of two years the banking sector regulator has kept its benchmark policy rate at 14 per cent an asymmetric corridor of between +200 basis points (bps) and -500bps, the country’s widest spread, which was set in July 2016. The Bank also kept the market Cash Reserve Ratio (CRR) unchanged at 22.50 per cent and the Liquidity Ratio at 30.00 per cent.

Mr. Godwin Emefiele, CBN Governor, who chaired the Committee meeting, explained that the MPC considered the threat posed by the United States planned hike in interest rates to curtail that country’s emerging inflation worries, which could lead to capital flight from Nigeria as international portfolio and hedge fund managers take a vote for safety as rising US rates become more attractive. Nigeria is yet to recover from the massive sell off by portfolio investors when US Federal Reserve jacked up monetary policy rate by 0.25 per cent to a target range of 1.5 per cent to 1.75 per cent in March.

“The MPC deliberated on the rise in food inflation, impact of the expected liquidity from expansionary 2018 FGN budget and rising FAAC disbursement in the second half of the year along with the build-up in pre-election year spending. The Committee strongly the option of tightening believing that tightening would curtail the threat of a rise in inflation, even as the injection from the fiscal authorities would still provide the economy with substantial liquidity. Notwithstanding the deceleration in headline inflation, the current double digit inflation rate remains above the Bank’s 6-9 per cent target range. In addition, the Committee was of the view that tightening would help stem the tide of capital flow reversals in the face of sustained monetary policy normalization in the US. This, the Committee believed would rein-in inflationary pressure and moderate inflation rate to single digit, increase real interest rate, build investor confidence with attendant positive impact on capital inflows and further stabilize the country’s exchange rate,” he further noted.

“I think they are still making a mistake. They are doing a thing that is not impacting the target, which is inflation. And at the same time it is not helping the other arm of the economy, which is unemployment. Personally, I think they should drop the rate, even if there is an election cycle, which they think would fuel inflationary political spending. This is a short-term issue. I think they should drop interest rate to encourage investment, which would hopefully help the unemployment situation in the country. That is the human face of policy. You first want to create jobs and come back and fight inflation. They are not helping liquidity in the system. There should be more liquidity in the system,” argued Prof. Leo Ukpong,  a Financial Economist and Dean, School of Business, University of Uyo.

He argued that the Central Bank should be more worried about the broad base economy. “Whatever they are doing with their numbers is not helping the average low and middle income Nigerian.”

Nigeria’s unemployment rate stood at 18.80 per cent in the third quarter of 2017, while rate of jobless youths was put at 33.10 per cent, underpinned by massive layoff by many corporate organisations during a recent 18 month recession, which the country experienced between 2016 and 2017.

Economist, Bismarck Rewane

Meanwhile, the organised private sector is still grappling with liquidity as credit to the private sector contracted by 0.04 per cent, annualised to -0.08 per cent in June 2018, in contrast to the provisional annual benchmark of 5.64 per cent.

The target of the CBN has always been to get inflation to single digit, so that they would have something to boast about, noted Dr. Adi Bongo, Economist and faculty member, Lagos Business School.  “In an economy such as ours, inflation is not necessarily an evil. When you inject money into the system, you expect inflation to accelerate. Liquidity is very bad in Nigeria and they are still fighting inflation. They are not helping matters,” he maintained.

Inflation rate slowed down 11.23 per cent in June, lowest in the last two and a half years. But the CBN is targeting inflation rate of 6-9 per cent by the end of 2018.

“As an industrialist, I would have advocated for a reduction in MPR. But going by global indicators, especially oil market, which is Nigeria’s strength, based on that I will subscribe to the decision of the MPC to hold.

“In the short run we can say the economy would suffer for it. But we all know that the economy is just trying to stabilize and grow. Let’s have a sustained growth before tinkering with indices like the interest rate. If we tinker with these indicators, it may affect the economy in the long run,” Mr. Olusola Ayodele, Chief Economist, Nigerian Employers Consultative Association (NECA) told Business Hallmark.

For Bismarck Rewane, Economist and Managing Director, Financial Derivative Company Ltd, it was wise for the MPC to be boring, because lowering interest rate would further exacerbate negative features of the country’s fragile economy. He argues that a rate hike or a rate freeze won’t deter foreign portfolio investors from pulling out their funds due to the thick uncertainty accompanying the run up to the 2019 general elections.

The Nigerian Stock market which appreciated 42 per cent in 2017, has declined -16.97 per cent in the last six months and -4.96 per cent year-to-date as portfolio investors continue to cash out from the equities market.

However, the country foreign exchange market has been stable since the apex bank introduced the Nigerian Autonomous Foreign Exchange (NAFEX) window in April 2017, dollar selling for N361 in the I&E Window. The stability was buoyed by improved oil prices which empowered the CBN to sustain its intervention in the market.

The International Monetary Fund (IMF) in its  World Economic Situation and Prospects report mid-2018 released in June projected Africa would grow by 3.6 per cent in 2018 and 3.9 per cent in 2019, marking an upward revision since December. “The improvement largely reflects stronger prospects in some of the region’s largest economies—Nigeria and Egypt. Per capita income growth, however, remains very weak, estimated at 1.1–1.3 per cent in 2018–2019, and insufficient to alleviate poverty in the absence of dramatic declines in income inequality. Growth in Nigeria remains subdued, but recent improvement reflects terms-of-trade gains, recovering oil production, greater foreign exchange availability and more solid non-oil growth, driving an upward revision to the forecast for West Africa,” it stated.

The Nigerian economy expanded 1.9 per cent in the first three months of 2018, and the government expects it to grow to 3 per cent at the end of the year.

The Committee expressed the opinion that is was not oblivious to the constraints infrastructure deficit and poor real sector access to funds pose to job creation as it devises new measures  to encourage deposit money banks (DMBs) to increase the flow of credit to the real economy. According to the Committee, “In addition, as a way of incentivise deposit money banks to increase lending to the manufacturing and agriculture sectors, a differentiated dynamic cash reserves requirement (CRR) regime would be implemented, to direct cheap long term bank credit at 9 per cent, with a minimum tenor of seven (7) years and two (2) years moratorium to employment elastic sectors of the Nigerian economy. Details of this framework are being worked out by the Banking Supervision, Monetary Policy and Research Departments of the Bank and would be released soon,” the CBN assured in its communiqué.

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