MPC raises red flags on rising debts

Godwin Emefiele, CBN Governor and MPC Chairman

By UCHE CHRIS

Shun of all the official niceties and financial jargons, this Monetary Policy Committee, MPC meeting would go down as the most remarkable in its frankness and least hope-inspiring with its litany of economic and political woes confronting the country. Unable to down-play the enormity of the challenges facing the economy, the MPC was compelled to admit the obvious by raising the alarm over the economic threats ahead before they happen.

Expectations of a review of the prevailing monetary benchmarks were again dashed after the meeting of the Monetary Policy Committee, MPC, last week, as all he critical indicators remained unchanged. Indications had emerged on the eve of the meeting that the committee had already voted for maintaining the status quo to sustain the present stability in the economy.

Although many people may be disappointed by the outcome of the meeting but Mr Godwin Emefiele, Governor of the Central Bank of Nigeria, CBN, who is chairman of the MPC, provided sufficient reasons and justifications for their decisions. It would be recalled that the MPC has kept rates unchanged since July 2016 and the economy has generally been the worse for it.

According to him, the economy is still too fragile, and election too near to risk any unwarranted changes in the economy which may dis-stabilize the system and disrupt the election. Tightening the system could easily push he economy into another recession and exacerbate the condition in the banking system in respect of non-performing loans.

By going for stability the MPC has wittingly or otherwise voted against growth in the economy with all the social implications for unemployment and poverty. Stability means maintaining the present benchmark Monetary Policy Rates, MPR, (high interest rates) at 14 percent and creating a disincentive to lending to the private sector; pursuit of single digit inflation rate now at 11.8 percent which means tightening liquidity and constrains lending; and defending the naira. Cash Reserve Ratio, CRR, was left at 23 percent.

However, apart from the usual rituals of the economic backgrounds justifying their decisions, Mr. Emefiele made some fundamental calls that point to certain dangers to the economy under this government and most especially the 2019 budget. These include the mounting debt profile of te country now standing at N23 trillion or $75 billion, more than double what it was in 2003 before the Paris Club of creditors granted Nigeria debt relief.

In the 2018 budget the debt service was 69 percent leaving very little room for government to implement its programmes without resort to massive borrowing. Although government had tried to restructure the debt by replacing domestic debt with foreign debts, which have longer mortisation period, the effect is no less burdensome. Government and its experts have justified its debt drunkenness because of its ratio to the GDP, which is at about 14 percent, rather than the more realistic debt to revenue standing at 69 percent.

The second issue is the plummeting foreign reverses of the country which had risen from $27 billion in 2015 to $47 billion in December only to drop to $42 billion by December 2018, because of the CBN’s dogged determination to defend the naira. Thirdly, is the resurgence of inflationary trend, which had over the past two years consistently dropped from the earlier height of 18.6 percent to 11.3 percent at half year in 2018 but has inched up to 11.8 percent by 2018 year end.

Mr. Emefiele also in the communiqué raised the alarm over the increasing political risk in the country especially insecurity in the north east and menace of herdsmen which has put all the investment in agriculture in jeopardy, dragging down the growth of the sector from its previous level of about 4.2 percent in 2017 to the present 1.8 percent. Agriculture still remains the largest employer of labour and the main driver of the GDP, which ended the year at 1.8 percent.

But the real immediate danger to the economy is the foreboding news about the oil price and the budget benchmark which has been a source of debate since it was presented by President Buhari in December. Government projected oil price of $60 per barrel and 2.3 million barrel output per day. But many observers have questioned the rationality of the projections given the volatility in the market since the second half of 2018.

Lending the weight of its voice to the obvious anomaly in the budget estimates, the MPC, which is the monetary policy organ of the CBN faulted the government projections predicting oil price level for the year of $50 per barrel, which will be $10 short of the budget benchmark. This will be a major setback for the economy as the budget is thrown into disarray.

Consequently, the government would be forced to increase its borrowing propensity, which has almost double official debt in just three years. This will worsen the already bad situation in the equity market, which MPC admitted dropped by 13.6 percent in 2018 and about two percent in 2019. Also increased government borrowing crowds out the private sector from accessing much needed credit as government debt instruments offer greater security and lower risks.

According to the MPC, credit to government in 2018 grew by 33.4 percent against the projected target of 7.4 percent, while that to the private sector was 13 percent against a 22 percent target. Also the forthcoming election, MPC says, constitutes a political risk, which has led to a massive capital flight, and this may not abate with the victory of the incumbent president, as his apparent disdain for due process, rule of law and judicial pronouncements raise red flag in the international system.

However, it was no all gloom. The MPC pointed to some positive developments such as stability in the foreign exchange market, stable macroeconomic indices, reduction in the non performing loans of deposit money banks, and the projected GDP growth rate put at two percent by the IMF and the CBN, and 2.2 percent by the World Bank respectively.

“Reduction in NPL banks is positive and makes the sector healthy. Also more payment to local contractors will further facilitate the reduction. To tighten liquidity will aggravate the NPL situation and dampen growth”, it said.

Mr. Abayomi Ajayi, Research analyst with Investment One Financial Services, believes, the decision was largely on the back of a potential increase in inflationary pressures.

“Concerns around inflation in 2019 is fueled by possible price adjustments in electricity tariffs, fuel and the exchange rate.

“Even tho the MPC unanimously decided to maintain the status quo, I believe the apex bank will still continue to keep a tight lid on system liquidity through OMO auctions and maybe inclined to maintain the relatively high interest rate environment.”

Mr. Moses Ojo, Head, Research and Business development, Pan-African Capital Ltd, agrees. “The retention of policy rate was due to stability in the foreign exchange market and the sluggish increase in inflation. The marginal increase in inflation in December 2018 was due to increase in food inflation.

“The threat of surge in inflation as a result of expected election-related spending has been downgraded by the low level of spending ahead of the election.

“Therefore, as long as foreign reserves are not lower than about $38 billion the CBN will continue to intervene in the foreign exchange market. Other factor that may elevate inflation pressure in the months ahead is the implementation of the proposed minimum wage.”