Godwin Emefiele, CBN Governor


In a bid to reflate the economy, which has been hard hit by the impact of the coronavirus pandemic and significant drop in oil price, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) reviewed the benchmark interest rate also known as the Monetary Policy Rate (MPR) downward to 12.5 per cent for the first time in 14 months.

Many analysts had expected the Committee to retain all rates since the country was battling stagflation with inflation rate accelerating for the 8th consecutive months to 12.34 per cent in April and the economy expanding 1.9 per cent in March.

Explaining the reason for its decision for cut interest rate, the MPC Chairman and Governor, CBN, Godwin Emefiele, said it considered the need to strike a balance between supporting the recovery of output growth while maintaining stable price development across inflation, the exchange rate and market interest rates.

“To this end, the Committee noted that the Cash Reserve Requirement (CRR) was recently adjusted upwards as a means of tightening the stance of policy. In its response to the COVID-19 pandemic, however, the Bank reduced interest rates associated with all CBN interventions from 9 to 5 per cent. Increasing MPR at this stage will thus be counter-intuitive and will result in upward pressure on retail market rates,” he noted.

The Committee held the Cash Reserve Ratio (CRR) at 27.5 per cent and Liquidity Ratio (LR) at 30 per cent with the asymmetric corridor around the MPR retained at +200/-500bps.

Boniface Chizea, Managing Consultant, BIC Consultancy Services Limited in his review of the MPC’s decision to adjust the MPR downward said, “What the unfolding scenario portends is that citizens should brace up for a spike on the rate of inflation which had already been on the uptick as substantial liquidity is being injected into the economy as a result of the quantitative easing.

“By this move, it is clear that focus on the rate of exchange particularly with regard to the attractiveness of investments to Foreign investors is for once not a major thrust of policy. Well, at least we now have some movement in the critical indices as opposed to the fact that they have remained sticky for a long time now. It is important that we witness focused implementation so that the expectations of a reflated economy will be achieved in the not distant future.”

Bismarck Rewane, Managing Director, Financial Derivative Company, while commenting of the MPC’s decision on Channels TV, he argued many countries have reviewed their benchmark interests to signal they are in the accommodative mode, in response to the impact of the COVID-19 of the global economy.

He noted that Nigeria has a peculiar case as it is struggling with accelerating inflation and economic slump simultaneously.

“We have a stagflation situation right now with a threat of a recession. There is no doubt in my mind that there will be negative growth in the second quarter,” he opined.

The government has taken several measures to alleviate the twin impact of the coronavirus pandemic and low oil price on the country’s economy- Nigeria has recorded almost 9,000 COVID-19 cases and 259 deaths as of May 28 and Brent oil price has shed 48 per from $66 per barrel on December 31, 2019, to $34.30 as of May 29, after dipping to $21.44 in April.

The government was forced to reviewed downward from N10.59 trillion to N10.523 trillion and cut the oil benchmark price further to $20 per barrel from $30 after earlier slashed it from $57 per barrel in response to the significant drop in oil price.

The Federal Government has also gotten the approval of the Senate to borrow $5.5 billion from multilateral institutions to help reflate the economy.

Meanwhile, the Manufacturing and non-Manufacturing Purchasing Manager’s Indices (PMIs) declined significantly to 42.4 and 25.3 index points, respectively, in May 2020, compared with 51.1 and 49.2 index points in March 2020 after 36 consecutive months of expansion, while the non-Manufacturing PMI contracted for the second consecutive month, indicating that confidence in the economy has reduced due to the five weeks total lockdown of economic activities in the country.

After easing the lockdown on May 4, the government imposed an 8 pm to 6 am curfew and ban on interstate travel across the country to curtail the spread of the coronavirus.

However, the MPC said though Non-Performing Loans (NPLs) ratio decreased to 6.58 per cent at end-April 2020 compared with 10.95 per cent in the corresponding period of 2019 due largely to recoveries, write-offs and disposals, it expressed confidence that the current monetary and fiscal policy measures would further strengthen investor confidence.


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