For MPC, It’s Time for Bold  Fiscal, Monetary Policies

The Monetary Policy Committee of the Central Bank of Nigeria ended its fourth meeting for the year Tuesday with concern about a number of issues that could reverse the positive economic indicators posted in recent times if not urgently addressed. Ndubuisi Francis reports

Even before the Monetary Policy Committee of the Central Bank of Nigeria met between Monday and Tuesday, analysts had predicted that the monetary authority would retain the key policy rates, based on prevailing macroeconomic variables. And at the end of the day, they did not disappoint bookmakers.

The MPC still retained the Monetary Policy Rate at 14 per cent, Cash Reserve Ratio at 22.5 per cent, Liquidity Ratio at 30 per cent, and the asymmetric corridor at +200 and -500 basis points around the MPR. The committee said in consideration of the headwinds confronting the domestic economy and the uncertainties in the global environment, it decided by a vote of six to two to retain the MPR at 14 per cent alongside all other policy parameters.

 

Unchanged Parameters  

Explaining why the MPC retained the policy rates, the CBN governor, Mr. Godwin Emefiele, said although changing the rates might have some positive effects, various reasons accounted for the retention of the policy rates. Emefiele said, “We know that low interest rate will make it easy for people who want to borrow money to borrow at low rates. We know it will inject liquidity into the system but we are saying that inflation at 18.8 per cent and even today at 16.1 per cent is still considered very high in the light of studies that have been conducted.”

According to him, “There are acceptable models for computing the inflation threshold and these models have computed inflation threshold for Nigeria at a range of between 10 per cent to 12 per cent. What that means is that when inflation rises above 12 per cent, no matter the action that you take to stimulate growth, it will retard growth.”

He said the authorities “need to look at how we reverse the trend in inflation and we’re happy that we have done so from 18.8 per cent to 16.1 per cent and we are hopeful that it will continue to trend downwards and as this is achieved, we also believe that there is a need to ease rate and also bring interest rate down.”

According to him, easing the interest rate at this point or reducing interest rate will push the real interest rate to the negative territory, which is a disincentive to investment.

He explained, “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.” 

Emefiele pointed out that the argument for retaining the policy rates was 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.

 

Inflation 

The MPC said it was particularly concerned about the unremitting pressure from food inflation, but hopeful that the situation would ease off in the third quarter as harvests begin to manifest. 

Citing the National Bureau of Statistics, the committee noted that headline inflation (year-on-year) declined for the fifth consecutive month in June 2017, to 16.10 per cent, from 16.25 per cent in May, and 18.72 per cent in January 2017. 

It stated, “Core inflation moderated to 12.50 per cent in June from 13 per cent in May 2017 while the food index rose marginally to 19.91 per cent in June from 19.27 per cent in May 2017. This development was traced to intermittent attacks by herdsmen on farming communities, sporadic terrorist attacks in the North-east and other seasonal farming effects.” 

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 forex flow in the economy. 

The MPC, however, noted the protracted effects of high energy and transportation costs as well as other infrastructural constraints on consumer price developments and expressed the hope that government will fast-track its reform agenda to address these 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.

Key Concerns 

The committee 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 and improve government revenue.  However, it 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.

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.  

However, it pointed to worrying signals, noting that available forecasts of key macroeconomic indicators point to a fragile economic recovery in the second quarter of the year, and therefore cautioned that “this recovery could relapse in a more protracted recession if strong and bold monetary and fiscal policies are not activated immediately to sustain it.”

It advised that 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 MPC warned that the economy was fragile and might relapse into a protracted recession, citing the N2.5 trillion budget deficit recorded by the federal government in six months, among others as major threats to a fragile economic recovery.

“The MPC noted the widening fiscal deficit of N2.51 trillion in the first half of 2017 and the growing level of government indebtedness and expressed concern about the likely crowding out effect on private sector investment.

“While urging fiscal restraint to check the growing deficit, the committee welcomed the proposal by government to issue sovereign-backed promissory notes of about N3.4 trillion for the settlement of accumulated local debt and contractors arrears.”

The committee also expressed concern over the slow implementation of the 2017 budget, but commended the improved management of foreign exchange, as well as security gains across the country, especially, in the Niger Delta and north-eastern axis. It, however, admonished that this should be firmly anchored to enhance confidence and sustainability of economic recovery.  It also identified weak financial intermediation, poorly targeted fiscal stimulus and absence of structural programme implementation. 

The committee expressed satisfaction with the gradual but consistent decline in inflationary pressures in the domestic economy, noting its substantial base effect, continuous improvements in the naira exchange rate across all segments of the foreign exchange market, and considerable signs of improved investments inflows. 

According to the MPC, “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 is 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 also noted the liquidity surfeit in the banking system and the continuous weakness in financial intermediation, but agreed on the need to support growth without jeopardising price stability or upsetting other recovering macroeconomic indicators, particularly the relative stability in the foreign exchange market.”

 

Reactions

 Mixed reactions have trailed the MPC position since Tuesday, with London-based Chief Economist, Africa, Standard Chartered Bank, Razia Khan, saying there is little surprise in the decision of the MPC to retain all its key policy rates. Khan said, although inflation had decelerated, the MPC position still suggested that it might be substantially due to a base effect, which may not be long-lasting.

She stated, “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 on-going concerns about the weakness of financial intermediation.”

For the director-general of the West African Institute for Financial and Economic Management, Professor Akpan Ekpo, the MPC did “the correct thing to have left the interest rate unchanged”.

Ekpo said, “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, the WAIFEM director-general advised that once the economy came out of recession, the central bank should concentrate on using monetary policy to enhance growth instead of fighting inflation.

Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, expressed a divergent view, arguing that what the MPC did was to maintain a tightened monetary policy stance at a time when the economy was yearning for liquidity to stimulate economic activities.

Although Rewane acknowledged the risk of inflationary pressure, he argued that the MPC ought to be more audacious.