Food products on display
For the fourth time in a row, the Monetary Policy Committee of the Central Bank of Nigeria has left the Monetary Policy Rate unchanged at 12 percent, an action described as a hedge against the possibility of rising inflation, reports Festus Akanbi
Economic analysts have continued to give insight into the decision of the Monetary Policy Committee of the Central Bank of Nigeria to leave the Monetary Policy Rate unchanged at 12 per cent last week. Apart from keeping the policy rate on hold for the fourth time in a row, the central bank also maintained the +/-200 basis point corridor around the base rate.
It also left the cash reserve ratio and minimum liquidity ratio at 8 and 30 per cent respectively, with the possibility of tinkering with them, should economic and financial conditions warrant doing so in the near term.
In his explanations at the end of the MPC meeting last week, CBN governor, Sanusi Lamido Sanusi, listed factors such as the slowdown in global economic activities, lower crude oil prices, low domestic oil output, mild inflationary trends and slow credit growth as considerations for the hold on the policy rate.
Sanusi predicted that the very dark clouds gathering over the global economic recovery in 2012 would surely further impact Nigeria’s oil-dependent domestic growth. CBN’s position, he added, is that the tolerable level of inflation in recent times – it was 12.9 percent in April – coupled with slow credit growth being experienced in the economy did not show any urgent need to further tighten the monetary policy rate, with Sanusi noting that loosening it would have little impact on GDP growth in current conditions.
Nigeria’s economy was expected to expand at a slower rate of 6.5 per cent this year, down from 7.4 percent in 2011 due to disruptions to oil production and ongoing weakness in developed countries that buy crude from Nigeria.
“This confirms a disturbing and uninterrupted trend of decline going back to Q1 2010,” Sanusi said. “Crude oil production was estimated to have declined by 2.32 per cent in quarter one 2012. Non-oil GDP growth was (also) much lower...” this coupled with the imminent increase in electricity tariffs, which he noted may lead to inflationary pressure.
Renaissance Capital, an international financial advisory firm, noted that the last time Nigeria’s growth was this low was during the global crisis. “The growth slowdown in 1Q12 was deeper than the 6.5-7.0 per cent we had anticipated. This slowdown, which was due to slower non-oil growth and the continued contraction of the oil and gas sector, explains the growth slant of Monetary Policy Committee statement. It appears that internal dynamics, particularly the January 2012 petrol price hike of about 50 per cent, had a pronounced impact on economic activity in 1Q12.”
It added, “Nigeria’s growth engine, the non-oil sector, grew at a slower rate of 7.9 per cent YoY in 1Q12, compared with 8.7 per cent YoY in 1Q1. This was largely due to slower growth of crop production and wholesale and retail trade.
Similarly, the CBN governor attributed to the fall in GDP growth to lower agricultural output, justifying the decision of the committee not to lower the policy rate. Sanusi said, “Interest rate movements would not be effective in stimulating growth under such circumstances,” adding, “At this point in time, the trajectory of prices is more dependent on fiscal than monetary policies, sluggish growth in credit, a stable exchange rate and benign month-on-month inflation do not suggest a need for further tightening.”
The MPR has remained constant for eight months in order to tighten liquidity while monitoring economic developments in the short to medium term. The rise in inflation from sources such as the country’s deficit fiscal position, the phased removal of the subsidy on petroleum products and full implementation of the national minimum wage across the country, according to a publication of BGL Research, has made it difficult for the committee to commence the reversal of tightening.
Other reasons for the CBN’s wait-and-see posture on the policy rate, according to BGL, include the expected cost-push inflationary impact on the basic food (wheat and rice) import prohibition policy of the government due to commence fully on July 1, 2012. The need to continue to support the naira exchange rate and accretion of external reserves as well as the need to attract and retain foreign investment were also central to the decision by the committee to retain the MPR at 12 per cent.
Time to Rethink Monetary Policy?
However, BGL believes the situation has called for easing of the monetary policy of the CBN, explaining that the sustained lag effects of protracted monetary tightening and attendant crowding out effect of government borrowing on private sector credit and investment are central to the slowdown of the economy.
“Given the other structural constraints to investment such as infrastructure and power inadequacy and policy issues, the attendant high hurdle rate facing real sector (value adding) investment has resulted in a decline in investments, both existing and potential.
The financial investment and advisory firm stressed the need to reflate the economy as a result of the obvious slowdown in growth, the crowding out effect of high interest rates, sluggish monetary aggregates, and the sustained weakness in the global economy.
In his response to THISDAY enquiries last week, chief executive, GTB Securities Limited, Mr. John Ogar said economic growth should over-ride inflation-targeting as an objective of the monetary policy at this stage in the economic cycle of the country. “Globally, there is concern of slowing growth, and policymakers and central bankers are pursuing policies that support economic growth. The CBN should not be the exception.
“The high policy rate of 12 per cent, though it has contributed to the growth in our foreign exchange reserves, and moderated the pressure on the exchange rate, but it has been at the expense of growth and the crowding out of the private sector as a driver of economic performance.
“We have seen private sector businesses (especially the SMEs) unable to access funds at affordable rates, as the banks have continued to fund governments at all levels to the detriment of this critical sector. The two-digit policy rate is an incentive to the banks to keep lending risk-free to the federal government, and only a lowering of this rate to single digit will cause them to deploy their funds into riskier assets and sectors.
“So while inflation fighting as an objective of monetary policy is necessary and should not be ignored, the present economic conditions require a fine balancing of the objectives of macroeconomic growth and inflation. Whilst growth projections for Nigeria in 2012 are relatively healthy, an economy that is reeling under the burden of huge infrastructure deficits, high unemployment, and a real sector that is presently comatose, cannot be good in the long-term.
“Therefore, monetary policy should lean more towards redressing these anomalies and less towards fighting inflation. And the one tool that the CBN can wield effectively to achieve this is to cut the benchmark rate. The Monetary Policy Committee should lean towards this at their next meeting in July, 2012,” he said.
Policy Rate Not to Blame
However, this position was countered by the Regional Head of Research, Africa Global Research, Standard Chartered Bank, Razia Khan who drew a line between Nigeria’s monetary policy and slowdown in some sectors of the economy. She said, “I think it is flawed to assume that the transmission mechanism of monetary policy in Nigeria is sufficiently robust as to be responsible for the slowdown that seems underway. The slowdown is in sectors that do not really depend on bank credit – surely? What is the proportion of bank lending to agriculture – 1 or 2 per cent of all loans?
“The key problem is the weak transmission mechanism of monetary policy in Nigeria. To assume that any slowdown in Nigeria is due to monetary policy alone would be to give the transmission mechanism of monetary policy in Nigeria way too much credit. How much of real sector activity has access to credit in the first place? This is key to understanding whether slightly higher interest rates (which are still very low in real terms) can hope to exert any influence on real activity.”
Khan admitted that a slowdown does seem to be underway in Nigeria, but said “it is really wishful thinking to assume that monetary policy can do anything about it. At the moment, with inflation still expected to climb in year-on-year terms, it would be the wrong time to be easing, as it would call into question the credibility of the central bank.”
She explained that the reasons behind weak growth in Nigeria were unlikely to be a direct consequence of tight policy alone - and the tight policy was necessary to support the FX rate. “Even assuming the CBN were to cut rates – what would happen? Would banks start lending a whole lot more? Probably not. Would fixed income investors exit if they saw the CBN tightening when year-on-year inflation is predicted to rise? Possibly. Would this make it more difficult to finance activity in Nigeria, including government spending? Yes,” she submitted.
The Standard Chartered executive warned, “We need to be careful not to overplay the potential boost to growth from a slightly easier monetary policy – there is a need to be realistic about this.” Explaining that in the long term, the cost of capital was determined by a host of structural factors, Khan said, “The stance of the central bank is unlikely to make much of a difference to this. A little bit of additional liquidity, much of which may do nothing more than feed its way into demand for FX, should never be confused with lasting, transformative growth – the two are quite distinct.”
She maintained that it is very difficult to argue that the poor state of infrastructure in the country had very much to do with the monetary policy stance. “When the MPR was 6 per cent, infrastructure was poor, and with the MPR at 12 per cent, there is still plenty that needs to be done on infrastructure. The best possible stimulus at this point would be to allow for macroeconomic stability – in particular, a stable exchange rate - and conditions that permit deeper, structural reforms to take place. That pretty sums up the best that monetary policy can hope to achieve. It cannot be the solution to the country’s infrastructure problems.”
She believed that a stable macro-economy with a stable inflation backdrop will provide the best hope for attracting the longer-term capital needed to support growth. “There are no short-cuts to achieving this,” she concluded.
In his contribution, group managing director, First Bank of Nigeria Plc, Mr. Bisi Onasanya said the main responsibility of the central bank is to forestall rapid rises in prices and not to prevent general movement in prices. Onasanya said, “The Central Bank of Nigeria’s primary principal objective of ensuring “monetary and price stability” is not so much one of preventing general movement in prices. It is instead one of preventing too rapid rises in prices, and the volatility associated with this. And over the last year and half, we have seen it effectively use the policy rate to hold down prices.
“So whereas a certain amount of inflation is consistent with the high level of growth witnessed in the economy since around 2003, there is no doubt that elevated levels of price changes as we have witnessed recently have downside implications for domestic economic activity. If nothing else, they make planning difficult, and encourage economic actors to frontload decisions.”
The FBN MD observed that with the year-on-year headline inflation closing at 12.9 per cent last month, having risen from 12.6 per cent and 11.9 per cent in March and February, respectively, there is no question that inflation remains a key worry. “The resulting policy trade-off is thus between short-term increases in the policy rate designed to prevent long-tailed increases in domestic prices. We have seen the CBN achieve this balancing act quite successfully over the last planning cycle.
“While there is a case to be made for the effect of rising interest rates on domestic economic activity, this case usually misses other arguments. First, is the salutary effect of positive inflation-adjusted rates on domestic savings mobilisation; and second is that by focusing on putatively high rates, we often miss the much more real structural impediments to the economy achieving higher growth rates.
“While noting these structural concerns, it is important to note also the CBN’s willingness to review its policy options, should economic and financial conditions warrant so in the near-term,” he stated.