Nigeria: As Monetary Policy Reaches Its Limits

25 September 2019

Obinna Chima writes on the need for the federal government to develop initiatives to rejuvenate economic activities as monetary policy appears to have reached its limit at this point in time

Last weekend, nine out of eleven members of the Monetary Policy Committee (MPC) met to evaluate developments in the global and domestic economies and examined the outlook for the rest of the year.

At the end of the meeting, the committee decided to retain the Monetary Policy Rate (MPR) at 13.5 per cent and also retained the asymmetric corridor of +200/-500 basis points around the MPR. In addition, they retained the Cash Reserve Requirement at 22.5 per cent and the Liquidity Ratio at 30 per cent.

The MPR is the rate at which the CBN lends to commercial banks and it often determines the cost of fund in the economy.

The central bank in recent weeks have clearly revealed a gradual shift towards a hawkish stance along with the increase in short term rates at primary auctions in August 2019, triggering a flattening of the yield curve.

In arriving at its decisions, the CBN Governor, Mr. Godwin Emefiele, who read the committee's communique at the end of its two-day meeting in Abuja, explained that in its considerations regarding the policy options to adopt, the MPC as usual, felt compelled to review the options of whether to tighten, hold or loosen.

According to him, the committee noted the positive moderation in inflation, though slowly from 11.08 per cent in July to 11.02 per cent in August 2019. Emefiele, pointed out that given that this was still above the target range of 6-9 per cent, and considering the pressure on reserve accretion caused by the relatively weak crude oil price, the MPC felt the imperative to tighten. On the contrary, he said the committee was of the view that doing so in the midst of a fragile growth outlook would increase the cost of credit, and further contract investment and constrain output growth.

"On loosening, the committee felt that this would result in increased system liquidity and hence, heighten inflationary tendencies in the economy. In particular, the MPC was of the view that loosening would drive growth in consumer credit but without a corresponding adjustment in real sector output.

"The committee was also convinced that increased liquidity and interest rate moderation would result in exchange rate pressures as money supply rises. As regards the option to hold, the MPC opined that the option requires a clear understanding of the quantum and timing of liquidity injections into the economy, before deciding on possible adjustments to the stance of monetary policy.

"The committee was also of the opinion that retaining the current position of policy offers pathways to appraising the effects of the suit of heterodox monetary policy to encourage credit delivery to the real sector, especially in the light of the subsisting implementation of the Loan-to-Deposit Ratio policy," he added.

The MPC meeting came exactly 16 days after the National Bureau of Statistics (NBS) revealed that Nigeria's Gross Domestic Product (GDP) growth rate slowed to 1.94 per cent (year on year) in real terms in the second quarter of the year (Q2 2019), compared to the 2.10 per cent (revised from 2.01 per cent) in the preceding quarter.

According to the GDP Report for Q2 2019, the Q2 estimate represented -0.16 percentage point contraction of the economy.

However, compared to the corresponding quarter of 2018 (Q2 2018), which recorded a growth of 1.50 per cent, the growth observed in Q2 2019 indicated an increase of 0.44 per percentage points.

Owing to this, analysts have advised the federal government to urgently evolve practical strategies to stimulate growth in key sectors of the economy.

According to them, monetary policy appears to have reached its limits, even as they stressed that the economy was in dire need for fiscal push to once more be on the path of growth.

To analysts at Afrinvest, the decision to hold rather than cut rate meant that the CBN would continue its unconventional approach to monetary easing.

"We expected sustained pressure on the banks to boost lending as the September 30, 2019, deadline for meeting the minimum LDR of 60 per cent looms. "Similarly, we expect CBN's development financing interventions to be expanded to support growth. In our opinion, there is a need to go back to convention by restoring the relevance of the MPR as a policy instrument necessary for guiding monetary policy.

"We suspect that the need to retain and attract foreign investors to the fixed income market has prompted the tightening stance.

"This is important as the CBN intends to maintain exchange rate stability in the face of declining external reserves, which has been prompted by a weak current account balance and slowing portfolio flows," the firm added.

But Senior Research Analyst at FXTM, Lukman Otunuga, pointed out that while central banks across the world were easing monetary policy in the face of decelerating global growth and trade uncertainty, the CBN left interest rates unchanged at 13.5 per cent.

It noted that given how economic growth remains sluggish and inflation eased to a 43-month low in August, the conditions are ripe for the CBN to turn on the stimulus taps to float the Nigerian economy.

"While the prospects of rising oil prices amid geopolitical tensions could lend some support to the nation, the short-term benefits will be overshadowed by core themes weighing on the nation.

"Should trade disputes, volatile oil prices and unfavorable global conditions continue exposing Nigeria to downside shocks, the CBN could be forced to turn on the monetary policy life support to prevent the economy from flattening," he added.

In their assessment of the MPC decision, analysts at Lagos-based CSL Stockbrokers Limited, expressed concern about the likely impact of the minimum wage implementation, adjustment in the exchange rate for computing duty on imports and the refund by subnational governments of bail-out funds to federal government on inflation.

Furthermore, they pointed out that the recent plan to ban food import from accessing forex from the CBN windows would likely increase inflationary pressures in the coming months; while expected rise in VAT rate would put pressure on the demand side, limiting the downward trend in the elevated price index.

"Therefore, we retain our forecast of no change in MPR over 2019 and we see scope for further implementation of a tighter monetary policy via liquidity in the medium-term.

"This is premised on the increased reliance on OMO tool by the CBN rather than the less effective MPR.

"From external sector standpoint, the current account balance is expected to deteriorate reflecting drags from rising payments for services and weaker oil prices.

"Additionally, trade surplus is likely to decline due to increasing imports as relatively stable naira will continue to stimulate non-oil import demand," the financial advisory firm added.

Also, Cowry Assets Management Limited, welcomed the decision by the MPC to retain policy rates even as the firm anticipated that the decision not to adjust monetary policy rate downwards - would be complementary to the ongoing efforts to increase credit to the private sector up to at least 60 per cent of banks' customer deposits, "which we feel could spur output growth without jeopardising the slowing inflationary trend."

"In addition, we expect the current interest environment to remain attractive to foreign portfolio investors - in light of accommodative monetary policies in developed markets - as their dollar inflows should help strengthen the local currency," the firm stated.

The Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, called for appropriate policy mix for the sectors that either slowed down or contracted in the GDP report.

He said: "We need to look at those activities that would spur growth in the manufacturing sector. I think one fundamental thing that we must understand is that consumption level is low, so we need to stimulate consumption. This is because without consumption, there won't be manufacturing

"So, the demand level in the economy is very weak, which is why a lot of Nigerians are worried. One of the ways to stimulate consumption at a time like this is through public works. Unfortunately, government is not in a position to fund public works.

Commenting on the performance of the economy, economist and former Director General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, said the weak growth represented a warning signal for the country to evolve urgent measures to stimulate growth.

"It is a warning signal. We need to get our fundamentals right again. It is an indication that different sectors are dropping in their business activities," he said, adding: "Some portfolio investors exited the country to where their returns will be higher and that has been happening since last year."

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