Report Foresees Interest Rate Hike, CRR Reduction

Dike Onwuamaeze

Proshare, Nigeria’s Economy and Financial Information Hub, has projected that the Central Bank of Nigeria (CBN) would increase rates to curb inflationary pressure on the economy.

It further projected that the decline witnessed in the inflationary trend in September 2021, would continue for most of 2022, predicting that the central bank would raise its monetary policy rate (MPR) from 11.5 per cent to 12.5 per cent by Q2 of 2022.

It also said the apex bank might opt to reduce its cash reserve ratio (CRR) from 27.5 per cent to between 25.5 per cent and 26.5 per cent in order to boost credit expansion and increases economic output.

These projections were contained in the February edition of the Proshare Confidential titled: “2021 in the Rearview, 2022 in the Headlamp: Opportunities and Threats in Nigeria’s Pre-election Year,” which predicted that the country’s GDP would grow at 3.2 per cent.

It predicted that a lower CRR would increase banking system liquidity, reduce interest rates and lower companies’ finance costs, and probably product prices.

But, “cooling inflation rate would encourage higher domestic savings and investments and raise GDP growth rate and employment. A lower CRR would be more effective in stimulating economic growth in 2022 than the raft of monetary interventions in 2021.”

The report, which was released yesterday added: “Tight monetary policy will result in a rise in domestic interest rates and a higher inflation rate; the inflationary knock-on effects would need monetary policy intervention. Unfortunately, weak fiscal policy capacity could upend the ability of the economy to grow GDP in a non-inflationary manner.

“Typically, governments cut taxes at times of slow economic growth, but in 2022 the greater likelihood is that taxes would rise, and the federal fiscal tax net would expand. The new tax approach for the year as the federal government tries to plug the fiscal revenue gap.”

Proshare said in the report that, “the country’s GDP would likely grow at 3.2 per cent in 2022, which would be modest compared to the global GDP growth of 4.1 per cent in the same year, but it would be better than the 0.51 per cent at the end of 2020.

“GDP growth for 2021 would settle at 4.06 per cent, given the base rate effect of negative growth in Q2 and Q3 of 2020 and the modest 0.11 per cent growth in Q4 2020.

“The slower projected GDP growth rate for 2022 would occur within a relatively high inflationary environment (recent inflation was 15.06 per cent in December 2021). The slow projected growth would reflect a negative real GDP growth below the country’s population rate, meaning lower real GDP per person and frailer retail spending in the year

“The slower growth of GDP in 2022 would indicate a modest increase in the various other sectors of the economy except for technology, agriculture and ICT. The fast-moving consumer goods (FMCGs) sector would see lukewarm expansion.”

The Proshare Confidential called for a rethink over the perception of the sustainability of Nigeria’s public debt.

It stated that market analysts appeared divided on the sustainability of the N38 trillion federal fiscal debt positions as at the end of September 2021.

It added that while one school of thought insisted that with a debt to revenue ratio of 76.2 per cent as of November 2021, Nigeria was staring down the barrel of a debt crisis; the other school insisted that at a debt to gross domestic product (GDP) ratio of less than 40 per cent Nigeria’s debt position was manageable.

It, however, noted that the more convincing school was the hawkish school, which believed that debt-to-revenue was a more critical metric than debt-to-GDP.

Proshare added: “Nevertheless, both schools ignore what may be critical to fiscal sustainability, which is the resolution of the debt-to-revenue or debt-to-GDP debate.

“A better approach to looking at the debt situation is to adopt a balance sheet rather than an income statement approach. The result would be that debt would be measured against income-earning assets.

“The new thinking is that Nigeria has piles of assets that do not generate revenue and are considered ‘dead.’ These assets could add to revenue streams to lower the current high debt service to income ratio if revived.

“The Nigerian government seems to be slowly buying into this idea by increasing the number of concessions it approves across different economic sectors. It has started with non-oil mining concessions and new telecommunications licensing (5G networks).

“By reducing the government’s cash outflows (an income statement activity) and increasing asset concessions (a balance sheet cash inflow activity), the fiscal balance would improve quickly as projects would be funded by private capital rather than public sector debt (suggesting project and venture finance opportunities in 2022).

“Adopting this approach would increasingly reduce the crowding-out effect of government bond and bill issues on private credit to the domestic capital and money markets. As far as 2022 goes, interest rates and inflation will remain high as the fiscal policy managers struggle to tackle the growing debt bulge.”