• Expresses concern over budget implementation as bank retains key policy rate
Ndubuisi Francis in Abuja and Obinna Chima in Lagos with agency report
The Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, has explained that the CBN’s role in the 9Mobile’s (formerly Etisalat) debt crisis was aimed at safeguarding the interest of over 20 million subscribers and more than 4,000 employees of the network operator.
Emefiele said CBN’s intervention alongside the regulator in the telecommunication sector – Nigeria Communications Commission (NCC) – was worth the while, considering the ripple effect not doing so would have had on major stakeholders in particular and the economy as a whole.
Fielding questions from journalists after briefing them on the outcome of the meeting of the bank’s Monetary Policy Committee (MPC) in Abuja Tuesday, Emefiele said with a subscriber base in excess of 20 million and a workforce of more than 4,000, any likely adverse impact, directly or indirectly, would have been enormous to bear by the subscribers, workers and their dependants.
“It’s important that we don’t just allow any creditor to hurt any other stakeholder,” he said, adding that the NCC had observed that the attempt by the creditors to take over the telco was going to jeopardise the interest of the over 20 million subscribers and more than 4,000 workers.
“That was why the NCC, supported by the CBN decided to intervene,” Emefiele said, noting that the intervention had been positive.
According to him, 9Mobile has not only retained its subscribers but also the entire workforce while the company’s operations have continued and revenue sustained.
He stated that the interim board would not exceed 180 days as efforts were underway for a new investor to acquire the company.
The governor further disclosed that 9Mobile’s revenue was stable and it made N16 billion in June, adding that the advisers – Citi and Standard Bank – appointed by the telecoms firm would organise a tender to request proposals from prospective investors, but did not provide a timeline how longer the investor sale would take.
On the outcome of the MPC meeting, Emefiele said the committee decided to retain key policy rates, with the Monetary Policy Rate (MPR) still at 14 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent, Liquidity Ratio at 30.00 per cent, and the asymmetric corridor at +200 and -500 basis points around the MPR.
Emefiele said although changing the rates might have some positive effects, various reasons were responsible for the retention of the policy rates.
“The MPC thinks that easing at this point would signal the committee’s sensitivity to growth and employment concerns by encouraging the flow of credit to the real economy. It would also promote policy consistency and credibility of its decisions.
“Also, the committee observed that easing at this time would reduce the cost of debt service, which is actually crowding out government expenditure.
“The risks to easing, however, would show in terms of upstaging the modest stability achieved in the foreign exchange market, the possible exit of foreign portfolio investors as well as a resurgence of inflation, following the intensified implementation of the 2017 budget in the course of the year.
“The committee also reasoned that easing would further pull the real interest rate down into negative territory,” he said, pointing out that the argument for holding was largely premised on the need to safeguard the stability achieved in the foreign exchange market, and to allow time for past policies to work through the economy.
“Specifically, the MPC considered the high banking system liquidity level, the need to continue to attract foreign investment inflow to support the foreign exchange market and economic activity, the expansive outlook for fiscal policy in the rest of the year, the prospective election related spending which could cause a jump in system liquidity, etc,” the governor explained.
He said the MPC welcomed the move by the fiscal authorities to engage the services of asset-tracing experts to investigate the tax payment status of 150 firms and individuals in an effort to close some of the loopholes in tax collection, in order to improve government revenue.
“However, the committee expressed concern about the slow implementation of the 2017 budget and called on the relevant authorities to ensure timely implementation, especially of the capital portion in order to realise the objectives of the Economic Recovery and Growth Plan (ERGP).
“The MPC believes that at this point, developments in the macro-economy suggest two policy options for the committee: to hold or to ease the stance of monetary policy,” he said, adding that available forecasts of key macroeconomic indicators point to a fragile economic recovery in the second quarter of the year.
“The committee cautioned that this recovery could relapse in a more protracted recession if strong and bold monetary and fiscal policies were not activated immediately to sustain it.
“Thus, the expected fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries, all expected to drive the growth impetus for the rest of the year must be pursued relentlessly.
“The committee expects that timely implementation of the 2017 budget, improved management of foreign exchange, as well as the security gains across the country, especially in the Niger Delta and North-eastern axis, should be firmly anchored to enhance confidence and sustainability of economic recovery.
“The committee identified the downside risks to this outlook to include weak financial intermediation, poorly targeted fiscal stimulus, and absence of structural programme implementation,” he stated.
According to Emefiele, notwithstanding the improved outlook for growth, the committee assessed the implications of the uncertainties arising from the continued normalisation of monetary policy by the U.S. Fed and the implications of a strong dollar, the weak recovery of commodity prices, and the uncertainty of U.S. fiscal policy.
“The committee similarly evaluated other challenges confronting the domestic economy and the opportunities for achieving economic growth and price stability in 2017.
“The committee expressed satisfaction with the gradual but consistent decline in inflationary pressures in the domestic economy, noting its substantial base effect, continuous improvement in the naira exchange rate across all segments of the foreign exchange market, and considerable signs of improved investments inflows,” he added.
Emefiele said the committee also attributed the moderation in inflation partly due to the effects of the relative stability in the foreign exchange market, stemming from improved management, which promoted increased inflows.
“Against this backdrop, the committee reiterated its commitment to sustain and deepen flexibility in the foreign exchange market to further enhance foreign exchange flow in the economy.
“The committee, however, noted the protracted effects of high energy and transportation costs as well as other infrastructure constraints on consumer price developments and expressed hope that government will fast-track its reform agenda to address these legacy issues.
“The committee noted that while responding to the current tight monetary policy stance, inflation still had a strong base effect which is expected to wane by August 2017,” the CBN governor said.
He stated that against the backdrop of the outlook for the domestic and global economy, the enthusiasm around the base-effect which reduced inflationary pressures and the continuous relative stability in the naira exchange rate, there was the need to maintain cautious optimism, given the potential ramification of a major deviation from the existing policy path.
“The committee is not unmindful of the high cost of capital and its implications on the still ailing economy, which arguably necessitates an accommodating monetary policy stance.
“The MPC expressed concern over the increasing fiscal deficit estimated at N2.51 trillion in the first half of 2017 and the crowding out effect of high government borrowing.
“While urging fiscal restraint to check the growing deficit, the committee welcomed the proposal by the government to issue sovereign-backed promissory notes of about N3.4 trillion for the settlement of accumulated local debts and contractors arrears.
“The committee, however, advised the management of the Bank to monitor the release process of the promissory notes to avoid an excessive injection of liquidity into the system thereby offsetting the gains so far achieved in inflation and exchange rate stability,” he disclosed.
Mixed Reactions Trail MPC Decision
Commenting on the outcome of the MPC meeting, market analysts expressed divergent views over the decision to leave all the key monetary policy tools unchanged.
London-based Chief Economist, Africa, Standard Chartered Bank, Razia Khan, said there was little surprise in the decision of the MPC to keep all its key monetary rates unchanged.
She noted that although inflation had decelerated, the MPC commentary still suggested that it might be substantially due to a base effect, which may not be long-lasting.
According to Khan, what was noteworthy about the MPC outcome was: “First, the rhetoric around the economic recovery has changed very subtly. It is no longer seen as something that might happen on autopilot.
“Risks to the 2017 recovery are seen to be more substantial. There are ongoing concerns about the weakness of financial intermediation.
“Fiscal stimulus is viewed by the MPC to be relatively untargeted. There are concerns about the scale of the FG deficit. Recovery will not be without its risks.
“Second, the unanimous ‘hold’ decision of the May MPC meeting has now given way to a 6-2 vote in favour of maintaining the current monetary policy stance.
“The debate on the MPC is growing, with at least two members seeing room for a more accommodative policy.
“Our base case remains for Nigeria’s policy rate to be kept on hold at 14 per cent through to the end of 2017, even as year-on-year inflation decelerates further.
“This will be necessary in order to support the nascent NAFEX forex regime, especially with the pledge to cap Nigeria’s oil output at 1.8million barrels per day.”
Khan observed that stabilising the economy requires ongoing confidence in the availability of forex, saying that given external pressure, the only way to achieve this would be for a modest real tightening of the policy stance.
“Given the policy choices open to the CBN, reaffirming its commitment to macroeconomic stability is the most pro-growth intervention that the CBN can make.
“The issues in Nigeria’s financial system and real economy have been well-flagged. There is no basis for the belief that easier monetary policy from the CBN will somehow have a meaningful effect on debt service costs (the loss of credibility might even raise the risk premium on Nigerian debt, driving higher interest rates over time).
“Nor will easing now do much to lift private sector credit growth, when there are bank-specific issues that must be dealt with.
“In our view, the MPC was correct to avoid the temptation to ease policy prematurely,” she added.
The Director General of the West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, said the MPC did “the correct thing to have left the interest rate unchanged”.
According to Ekpo, “Right now, we are in a recession and monetary policy cannot do anything. What we need now is more of a fiscal stimulus and there should be no delay in policy implementation. We need structural reforms now.”
However, Ekpo advised that once the economy comes out of recession, the central bank should concentrate on using monetary policy to enhance growth instead of fighting inflation.
But the Chief Executive Officer of Financial Derivatives Company Limited, Mr.. Bismarck Rewane, expressed a contrary opinion, saying that what the MPC did was to maintain a tightened monetary policy stance at a time when the economy needs liquidity to stimulate activities.
Although Rewane acknowledged the risk of inflationary pressure, he argued that the MPC ought to be more audacious.
According to him, the MPC could have signalled its intention to start easing monetary policy by either reducing slightly the CRR or restrain its squeeze on liquidity.
“If you are dealing with protecting the naira, then maintaining the status quo would be considered to be an option. But if you really want to deal with growth, then there would have been the need to directionally show that you want to move in that direction.
“If you say you can’t do anything at this point, then at what point are you going to do something? Then there is no clarity on that,” he added.
Reacting to the comment by the WAIFEM boss that monetary policy has reached its limit, Rewane insisted: “But monetary policy cannot cannibalise fiscal policy.
“What you have now is that you are cannibalising fiscal policy. Fiscal policy should be growth oriented and pro-cyclical. The MPC decisions are counter-cyclical.
“So monetary policy cannot be counter-cyclical because what is needed as a stimulus to improve economic activities is a pro-cyclical stance.
“However, the central bank has said there are risks, and I agree. But there is a need for the central bank to be clear as to where must inflation get to before they start the easing process? We cannot be left in the air.
“So what they have done is to leave a certain amount of monetary policy uncertainty as to when the direction of interest rate would change.”