Godwin Emefiele and Kemi Adeosun

Confronted with a double-digit inflation, coupled with retarding economic growth and volatility in the forex market, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) met last week following which the apex bank announced the tightening of its monetary policy. In this report, Kunle Aderinokun and Olaseni Durojaiye present analysts’ views on the outcome of the meeting

In a bid to respond to the rising inflation and retarding growth, as well as tackle the volatility in the forex market, the Monetary Policy Committee of the Central Bank of Nigeria (CBN) rose from its two –day meeting and decided to tighten monetary stance.

Specifically, the MPC has raised MPR by 100 basis points from 11.00 per cent to 12.00 per cent and raised CRR by 250 basis points from 20.00 to 22.50 per cent. It, as well, retained liquidity ratio at 30.00 per cent; and narrow the asymmetric corridor from +200 and -700 basis points to +200 and -500 basis points.

The CBN, in taking decisions, reasoned that the balance of risks is tilted against price stability. This, the committee pointed out, was consequent upon its assessment of relevant internal and external indices.

According to the CBN, “the Committee remains committed to price stability across the range of consumer prices, exchange rate and interest rate, which is fundamental to reviving economic growth and employment generation.”

“In the meantime, the bank would continue to leverage its development finance policy to support critical sectors of the economy. The MPC also stressed the need to sustain, deepen and speed up reforms designed to ensure focused coordination of monetary and fiscal policies,” added the apex bank.

Market watchers and economic analysts have however, expressed divergent views on the decisions. While some described the decisions as unexpected as they argued that the economy at this period needs stimulation and not tightening of monetary policy, others believed that the decisions were influenced by the latest data on inflation from the National Bureau of Statistics.

Many contended that that the outcome of the latest meeting was inconsistent with the decisions that were reached at its previous meeting as the committee appeared to have chosen to manage inflation rather than economic growth.

Lamenting that the decisions were incapable of stimulating growth in the economy, Chief Executive Officer (CEO) of Heritage Capital Markets, Chidi Ajaegbu, noted that the solution to easing pressure on the naira was to devalue just as he argued that even with the arguments against devaluation, devaluation will attract foreign investors.

“If you look at the highlight of the outcome of the meeting, I think they have only scratched the surface of the main issue, raising interest rates amounts to discouraging further borrowing and trying to mop up liquidity from circulation.

I totally disagree with all these short term measures or approach and I also strongly believe that the way to ease pressure on naira is devaluation. It is nothing to be emotional about, “ he concluded

“The argument people are presenting against devaluation is that we are not producing anything and so we have nothing to benefit from a devalued naira. But the other side of the argument is that when you devalue it becomes an incentive for foreign investors to come in. It is clear from all indication that the current official exchange rate of 197 and 199 is artificial; the dollar currently sells for about 300 to 325 in the market place so there is need for a deliberate policy to realign with what is obtainable at the market place. What the current forex policy is creating is a panicky situation which will further put pressure on the naira,” stated the immediate past president of Institute of Chartered Accountant of Nigeria (ICAN)

In his own reaction, Director General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, expressed displeasure at a return to a regime of fiscal tightening adding that it was disappointing that the committee did not extensively debate the forex issue confronting the country at the moment.

“That’s not the kind of policy choice that we deserve now. All the economy indicators are showing that the economy is slowing down; growth has declined to 2 per cent. There is a lot of contractions, this not a time to tighten; it is time to stimulate the economy. There is increase in electricity tariff, high inflation, high cost of production; why add a higher interest rate to the burden?

“It is also not good that there was no major discussion on foreign exchange; that is not good enough. There was only a partial mention of forex. We expected that the committee will deliberate on the issue in the light of current realities especially as more and more companies are closing shop and disengaging their work force,” he added.

Analysts at Financial Derivatives Company Ltd, led by its Managing Director, Bismarck Rewane, hold the same view.

According to them, “the failure to adopt a market oriented forex policy will still leave the currency vulnerable to speculative attacks in the near term. So politically volatile is the forex debate that even the president yesterday said that he believes that Nigeria’s external imbalances were temporary.”

The analysts argued that “the CBN is expecting an increase in portfolio investment inflows in response to the increase in policy rate,” stating however that, a 1 per cent per annum increase in MPR does not mitigate the possible devaluation risk to portfolio investors.”

“Capital outflows were recorded even when the MPR was 13 per cent per annum and the US Fed rate was 0 per cent. Investors are still uncertain of the country’s exchange rate policy, the big elephant in the room.”

Noting that “the CBN has placed emphasis on stimulating growth through increased lending to the private sector”, he however, stated that “the MPC decided to go along with conventional economic logic, which suggests an increase in interest rates during periods of surging prices.”

To the FDC analysts, “this is an emphatic step taken by the MPC and is a signal of the CBN’s determination to complement fiscal policy in spurring growth.”

For the Macroeconomic and Fixed Income Analyst at FBNQuest Ltd, a subsidiary of First Bank Nigeria Ltd, Chinwe Egwin, “the MPC had two competing policy objectives and they decided to focus on inflation as opposed to growth (MPR now at 12 per cent from 11 per cent).” She now expected that “the committee would wait for at least the next set of inflation data before making a decisive move.”

While predicting that “GDP growth is likely to suffer,” she however, believes that once inflation stabilises, the MPC may attempt to spur growth. Yields on government bonds are expected to trend up.

Also speaking along the same line, Executive Director, Corporate Finance , BGL Capital Ltd, Femi Ademola, said, “considering the current economic situation, the most important issues before the committee were the foreign exchange volatility and stunted economic growth. According to him, “the decline in oil price had impacted the country’s exchange rate that most people are calling for a devaluation. However, the uptick in the oil price in recent days has reduced the pressure while the fact that the oil price is now close to the budget benchmark gives the necessary reprieve.

He therefore made a prescription that “on the growth front, the best approach would be to lower interest rate in order to spur the needed liquidity for growth” but was quick to point out that “the recent increase in inflation rate beyond the single digit and the policy target of 6 per cent – 9 per cent means that there may be need to tighten the monetary policy to rein in inflation.”

Ademola also said due to the varying circumstances, he had expected that the MPC will maintain the interest rate. “However, with the interest in the MPR and the CRR in an attempt to rein inflation, I think the MPC has given up of any possibilities of helping growth through monetary policy,” he posited.

Analysts at Eczellon Capital Ltd led by its chief executive, Diekola Onaolapo, noted that the decisions of the MPC implies that “the monetary authority is now interested in pursuing price stability as a policy objective; this is in contrast to its stance at its September 2015 meeting where the Committee chose economic growth as a policy objective.”

He, however, said, “the decision of the MPC to tighten monetary policy portrays conflicting signals as to the true direction of monetary policy in the Nigerian economy.”

Nevertheless, the analysts said they believed “the decision to hike MPR and CRR would go a long way to moderate liquidity in the economy in anticipation of the spending stimulus from the federal government which is expected to commence next week, other things being equal.”

Just like the FDC analysts, the Eczellon analysts “doubt that the move by the MPC would attract foreign inflows or stem inflationary pressures.

“As for the latter, the key driver for the sharp rise in prices was structural bottlenecks in the economy; while uncertainty around the value of the naira is the primary reason for the current shortage of foreign inflows into the country”

“Thus, until a proper guidance is provided on the nation’s FX policy guidelines, we expect investors to continue their “wait and look” stance on the Nigerian economy.”

Differing from the other analysts, the former Managing Director and Chief Executive Officer of Guinness Nigeria Plc, Seni Adetu, said the MPC decisions were a step in the right direction.

Acknowledging that, “this liquidity tightening approach by the apex bank is aimed at curbing inflation and reducing the pressure on the naira”, Adetu argued that, “the change in MPR is not material enough to cause a significant shift in cash deposits by both local and foreign investors.”

He, however, cautioned that, “the manufacturers that depend on the deposit money banks (DMBs) for their working capital needs, a potential increase in interest rate can further compound their profitability issues, with the result that product pricing considerations are put on the table again. This potentially creates a vicious cycle of another round of increases in inflation.”

Adetu, nevertheless, concluded that, “this is a good step in the right direction, but a lot more interventionist efforts are need to address the forex issues we have today.”