22 January 2014

Nigeria: Economy - 2014 Will Be a Difficult Year, Says Sanusi

This year will be a difficult one in terms of management of the economy, Central Bank Governor Sanusi Lamido Sanusi has said.

Speaking yesterday at the end of the Monetary Policy Committee meeting in Abuja, Sanusi said some external factors affected the economy negatively last year and there must be some measures to address them this year.

Reading the communiqué No 98 of the MPC yesterday, Sanusi who is also the chairman of the committee, said the global economy is expected to continue recovering from global financial crisis, and growth is projected to accelerate in this year.

The communiqué said most central banks maintained a cautious posture in 2013, retaining or varying policy rates only slightly. The financial markets expect monetary authorities to continue with policies aimed at supporting growth in 2014. In effect, monetary conditions are likely to remain easy in key advanced economies over the short- to medium-term on the back of the forward guidance that monetary authorities in these economies have given, with regard to the conditions that must be met before any change in policy stance comes into effect.

"Emerging markets that were major beneficiaries of cheap money from the fed stimulus could experience financial market instability as tapering begins, although the US authorities have made it clear that they remain sensitive to the impact of their domestic policies on global markets and will therefore aim to minimise disruptions."

Meanwhile, the MPR has expressed concern over the continued depletion of the Excess Crude Account (ECA) which balance stood at less than US$2.5 billion as at January 17, 2014 compared with about US$11.5 billion in December 2012. The CBN governor said now that the excess crude account has been depleted, the pressure on the economy will reduce as there will be no much money to share.

The absence of fiscal buffers had increased the country's reliance on portfolio flows, thus constituting the principal risk to exchange rate stability, especially with uncertainties around capital flows and oil price.

The MPC however noted that the year-on-year inflation remained within the indicative target range of 6-9% in the second half of 2013.

It, however, noted the underlining pressure on core inflation, which may not be unconnected with the widening spread between official and BDC exchange rates.

It said in order to head off the spectre of rising inflation in 2014, concrete actions will be needed to stabilize the currency and minimize the divergence between the two segments of the foreign exchange market.

At the end of the meeting, the members agreed that the Monetary Policy Rate (MPR) remains at 12 per cent +/- 200 basis points and liquidity ratio (LR) at 30 per cent; The MPR is the rate as which the CBN lends to the banks.

Another development at yesterday's MPC was that the Public sector Cash Reserve requirement (CRR) which was increased from 50 per cent to 75 per cent and the private sector CRR retained at 12 per cent. This means that about 75 of the government agencies' deposits will now be warehoused at the CBN.

In August last year, the MPC increased the CRR from 12 to 50 percent which translated to retaining about N1 trillion of government deposit at the CBN.

Experts say the implication of increasing the CRR to 75 from February 4, 2014 is that banks must now look deeper inward to attract deposits from private individuals instead of government deposits.

On the depletion of fiscal buffers, the committee decried the continuous fall in revenue from oil despite stable price of oil and production in 2013.

Although the committee acknowledged output losses due to theft and vandalism, this could not wholly explain the magnitude of the shortfall in revenue. As a consequence, accretion to external reserves remained low while much of the previous savings have been depleted, thereby undermining the ability of the Central Bank to sustain exchange rate stability.

The committee therefore, urged the fiscal authorities to block revenue leakages and rebuild fiscal savings needed to sustain confidence and preserve the value of the naira.

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