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Weighing CBN’s Pursuit of Price Stability in 2012

31 Dec 2012

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Obinna Chima examines the impact of the Central Bank of Nigeria’s monetary policy on the economy and the money market in 2012
 
Since the current leadership of the Central Bank of Nigeria (CBN) was constituted, they have not hidden their desire to achieve single-digit inflation in the country.

To this end, the banking sector regulator has continued to pursue policies aimed at achieving price stability and this was reinforced in 2012.
Generally, price stability policies are aimed at preserving the purchasing power of the naira. When prices are stable, people can hold money for transactions and other purposes without having to worry that inflation would eat away at the real value of their money balances.

In order to achieve this, the apex bank maintained tight monetary policy conditions throughout the year. This resulted to the sustenance of high double-digits interest rates as well as increased mop up of excess liquidity through its Primary Market Auction of Treasury Bills as well as open market operations (OMO).

Although inflation rates stubbornly remained around double-digits throughout the year, the exchange rates stability recorded and the accretion in external reserves were indication of the effectiveness of the central bank’s policy.

Nevertheless, the CBN Governor, Mallam Sanusi Lamido Sanusi, also cited economic uncertainties, weak recovery in advanced economies, concerns about inflationary pressure, crude oil and commodity prices in the international market and fears of fiscal spending as some of the factors that influenced the liquidity management office’s decisions during the year.
 
Inflation
As stated earlier, the composite Consumer Price Index (CPI), which is used to gauge inflation in the country, hovered around the double-digits band throughout the year, thus defying the CBN’s restrictive monetary policy measures.

The CPI opened the year with the 12.6 per cent it attained in January 2012. The lowest figure the index which is used to measure the general increase in prices, was the 11.3 per cent it achieved in September, and the highest was 12.9 per cent in June. The latest CPI figure for November was 12.3 per cent.

The National Bureau of Statistics (NBS) had blamed the rise in inflation on higher prices in both the food and core indices. It also noted that the hike in food prices was occasioned by the impact of recent flood which ravaged parts of the country, thereby limiting production capacity.

“The higher food prices continue to reflect the impact of recent floods on the production of farm produce, the resulting difficulty of moving food products to markets across the country,” the bureau had explained.
Group Managing Director/Chief Executive Officer, First Bank Nigeria, Mr. Bisi Onasanya, insisted that double-digit inflation rate would continue to distort economic growth.

According to him, as long as the base interest rate is lower than inflation rate, then the country would not be able to achieve positive interest rate.
He added: “You will not be able to attract foreign investors and it means that the yield is negative. To the extent that we are still not able to bring inflation rate down, the interest rate regime of the CBN today is still supportive and it is still in order.

“I believe that the numbers (inflation) would slightly go up higher than it is today, maybe in the first quarter and let’s see what happens in the second quarter. If that pattern emerges and becomes a trend that we can say has come to stay, it would be difficult and dangerous for anybody to propagate that interest rates should come down.

“When inflation rate becomes lower than it is today, it therefore forces the central bank to bring down interest rate. You shouldn’t take interest rate alone in isolation and say you want to bring it down, that would be very academic and can distort the entire system.”

External Reserves
The Nigeria’s external reserves were bullish this year as they climbed on the back of high oil prices and exchange rate stability.
Specifically, the reserves derived mainly from the proceeds of crude oil sales improved by a total of $11.272 billion this year to $44.257 billion as at December 24, 2012. The current position of the forex reserves represented an increase by 34 per cent, compared to the $32.985 billion it was as at January 3.

Managing Director/Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, last week forecast that the stability recorded by the naira will strengthen the external reserves to $47 billion in the first quarter of 2013.

However, the current position of the reserves fell short of the $50 billion target that was set by the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala.

Nigeria’s external reserves had peaked at $62 billion in 2008 before the global financial meltdown.
To Sanusi, it is important not to be complacent as well as to recognise that there are dark clouds in the horizon. Therefore, he stressed the need to continue building the fiscal buffers.

“We need to go into a period of strong and serious fiscal restraints and consolidation. We must continue to build up external reserves and protect the economy from external shocks and focus on the strength and resilience of the banking system. We are building buffers for the economy in the event of an external shock,” he added.

To the Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, for the economy to sustain the accretion recorded recently in the external reserve, certain measures must be instituted and consistently maintained by both the federal government and the monetary authorities.

Chukwu listed these measures to include maintaining macroeconomic stability through adherence to the target budget deficit limit stipulated in the Fiscal Responsibility Act; reduction in the proportion of recurrent expenditure in the federal government budget; privatisation/liberalisation of key sectors of the economy such as the oil and gas and power sectors, infrastructure development, among others.
 
 
Key MPC Decisions
The Monetary Policy Committee (MPC) of the CBN met six times in 2012 and adjusted some of its tools during the year. In all, the committee left the MPR and Liquidity Ratio unchanged at 12 per cent and 30 per cent respectively. But the Cash Reserve Ratio (CRR), which was left at eight percent in the first three meetings was raised to 12 per cent at its July meeting and it remained like that till the end of the year. Similarly, the Net Open Position (NOP) was reduced from three per cent to one per cent in July.

The hike in CRR and NOP in July led to severe liquidity drain in the market. In fact, the committee’s decision had forced interbank rates to jump to increase significantly, with overnight lending rate soaring to over 35 per cent. This was further worsened by the sale of treasury bills to mop of liquidity from the system.
The average Open Buy Back (OBB) rate which was at 13.91 per cent in January stood at 10.33 per cent on Friday.

The overall stability in the money market rates was essentially a reflection of the effectiveness of monetary policy implementation. The average maximum lending rate, however, increased from 23.45 to 24.65 per cent during the period while the weighted average savings and term deposit rate stabilised at 5.30 per cent during the period.
 
Treasury Bills and Government Securities
Investment by most banks in the country was tilted more towards treasury bills and government securities because of the perceive risk in the system. This was also because the returns on investment in government securities were much higher than the rate of inflation. As a result of this, lending to the real sector declined as most industrialist and businesses in the country continue to lament the lack of access to credit from the banking system.

To a financial consultant and Chief Executive Officer, B.A Adedipe and Associates, Dr. Biodun Adedipe, banks are profit seeking entities that would always structure their businesses in line with the economy. Thus, he argued that banks would continue to invest in treasury bills and government securities because of the high returns on investment and low risk.

“Lending to Small and Medium Enterprises (SMEs) have its own challenges in an environment where infrastructure is a major challenge. Infrastructure alone is a disincentive for any banker to lend to SMEs. So, for a bank therefore, the focus is how to ensure that depositors’ funds are saved,” Adedipe explained.

According to Adedipe, the more liquidity we have in the system would continue to spur hike in inflation rates.
“What creates problem for the mandate of the CBN is excess liquidity in the system. The implication of excessive liquidity in the system is rise in inflation. Until we align what we do on that side, we are unlikely to get out of the high interest rate regime,” he argued.


He also stated that the CBN ought to have slightly reduced the MPR during the year so as to make banks lower lending rate.
Adedipe: “Ordinarily, the MPR is supposed to signal to the banks the direction the CBN want them to take rates to. It is not so much the magnitude of change, but the direction of change.

“So if MPR trends upward, what it suggests to the banks is that they should move up rates, if it goes downward, even by just 50 basis points, it is a good signal that central bank wants rates to go downward. The central bank should have sent that signal in the course of the year, instead of keeping the MPR at 12 per cent throughout the year.”

He also urged government to initiate policies that would bring about infrastructural renewal and also build new infrastructure. According to him, if that is done, the inflationary pressures created by spending would be compensated for by the gains of improvement in infrastructure.


“If government would spend money, let it be spent on infrastructure. I call it the enabler. The more money we put in infrastructure, the more we are empowered to fight inflation because in that process, you energise economic activities. And the more you produce; you are able to fight inflation,” he insisted.

On his part, Onasanya pointed out that as we move into 2013, it was important to improve on the existing efforts to deepen and diversify the economy.

“The financial sector had a very good year and I believe that with the half year numbers reported by Nigerian banks and the third quarter numbers also, the banking industry has done very well. I think this year has been a year in which the effects of the central bank’s policies came much more to the fore as the impact on the banks was very positive. All banks came out of the red for the first time after the crisis, including the intervened banks,” he added.

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