Analysts view the outcomes of Tuesday meeting of the Monetary Policy Committee of the Central Bank of Nigeria as a balance between quick gains and sustainable development, write Ndubuisi Francis and Olaseni Durojaiye
There have been mixed reactions to the decision of the Monetary Policy Committee of the Central Bank of Nigeria not to tinker with the key policy rates 14 consecutive months after they were reviewed upwards. Many had wished that the MPC embarked on a gradual easing of the monetary policy, considering the waning headline inflation, some level of stability in the exchange rate on the back of improved liquidity, and the marginal positive growth in real Gross Domestic Product, as recorded in the second quarter of 2017.
But for some analysts, the MPC is on track by retaining the policy rate in view of the fragile growth recorded in the second quarter.
The MPC had by a majority vote of six members to one decided to retain the Monetary Policy Rate at 14 per cent. It also retained the Cash Reserve Ratio at 22.5 per cent, Liquidity Ratio at 30.0 per cent, and the asymmetric corridor at +200 and -500 basis points around the MPR.
In arriving at the decision, the CBN governor, Mr. Godwin Emefiele, who read the communiqué of the meeting, said the MPC took note of the gains achieved so far as a result of its earlier decisions, including the stability in the foreign exchange market and the moderate reduction in inflation. According to him, the option was whether to hold, tighten or ease. He added that these were subjected to extensive debate.
Emefiele explained, “As in previous meetings, although tightening would help rein in inflationary expectations and strengthen the stability in the foreign exchange market, the committee felt that it would further widen the income gap, depress aggregate demand and adversely affect credit delivery to the private sector.
“The committee also noted that tightening may result in the deposit money banks re-pricing their assets and loans, thus, raising the cost of borrowing and, therefore, heightening the already weak investment climate and non-performing loans.
“With respect to loosening, the committee believed that although while it would make it more attractive for Nigerians to acquire assets at cheaper prices, thus, increasing their net wealth, and therefore stimulate spending as confidence rises, it nevertheless felt constrained that loosening at this time would exacerbate inflationary pressures and worsen the exchange rate and inflationary conditions.”
He added that the committee also felt that loosening would further pull the real rate deeper into negative territory as the gap between the nominal interest rate and inflation widens.
He said, “On the argument to hold, the committee believes that the effects of fiscal policy actions towards stimulating the economy have begun to manifest, as evident in the exit of the economy from 15 months recession.
“Although still fragile, the fragility of the growth makes it imperative to allow more time to make appropriate complementary policy decisions to strengthen the recovery.
“Secondly, the committee was of the view that economic activity would become clearer between now and the first quarter of 2018, when growth is expected to have sufficiently strengthened and gains in receding inflation very obvious.
“The most compelling argument for a hold was to achieve more clarity in the evolution of key macroeconomic indicators, including budget implementation, economic recovery, exchange rate, inflation and employment generation.”
In consideration of the headwinds confronting the domestic economy and the uncertainties in the global environment, Emefiele noted that the committee decided by a vote of six to one to retain the MPR at 14 per cent alongside all other policy parameters.
According to him, “In arriving at this hold decision, the MPC commits to employing maximum flexibility to guide the economy on the path to optimal growth.
“Consequently, six members voted to retain the MPR and all other parameters at their current levels, while one member voted to lower the MPR to signal an ease to the current stance of tight monetary policy.
“However, overall, majority of the members expressed a strong commitment to policy flexibility that would allow the committee to promptly take the necessary actions that would promote overall macroeconomic stability and engender sustainable growth.”
Emefiele observed that the Nigerian economy exited recession in the second quarter of 2017, with a modest positive short to medium-term outlook, resulting largely from deliberate macroeconomic stimulus and a stable naira exchange rate.
He stressed that inflationary expectations also appeared anchored on the strength of the prevailing tight monetary policy stance.
He said the MPC noted headwinds still confronting the optimistic global growth prospects to include recent developments on the Korean peninsula; the damage to infrastructure caused by Hurricanes Harvey, Irma and Maria; the lull in Brexit negotiations; and the normalisation of monetary policy by the U.S. Fed, which is expected to trigger global capital flow reversals.
The committee also applauded the exit of the Nigerian economy from recession but observed that the growth remained fragile. It expressed the hope that complementary fiscal and monetary policies would sustain the growth momentum.
The committee further expressed satisfaction with the gradual, but consistent decline in inflation, noting, however, the substantial base effect in addition to the continuous improvement in the naira exchange rate across all segments of the foreign exchange market; and considerable improvement in foreign capital inflow.
It equally welcomed the steady implementation of the 2017 budget, especially, the capital component of the budget, and urged increased momentum in expenditure directed at the growth-stimulating sectors of the economy in order to reduce youth unemployment and restiveness.
The committee, however, expressed concern about the sustained pressure on food prices, noting risks posed by floods, strikes and insurgencies in various parts of the country to food production and distribution.
Regarding the tepid turnaround in economic activities in the second quarter of 2017, the committee emphasised that the employment gains of recovery were still minimal, noting that a number of important job elastic sub-sectors were still weak and may require more fiscal support to regain traction.
Reacting to the outcome of the MPC meeting, a professor of finance and Head of Department of Banking and Finance, Nasarawa State University, Keffi, Dr. Uche Uwaleke, said, “Having held the policy rate at 14 per cent since July last year under a tight monetary policy regime in an effort to tame high inflation and stabilise the exchange rate, I had thought it was time to signal a gradual easing of monetary policy, considering the waning headline inflation, some level of stability in the exchange rate on the back of improved liquidity, and the marginal positive growth in real GDP recorded in the second quarter of 2017.
“Other factors remaining the same, lower MPR is expected to translate to reduced lending rates by the banks, increased access to funds by the real sector, cheaper cost of capital for firms, leading to more job opportunities.”
According to Uwaleke, “An accommodative monetary policy stance at this time is also expected to reduce the high cost of debt service by the government, which has been crowding out public spending.
“Unfortunately, however, other factors are hardly ever the same. The positive macroeconomic indicators witnessed in recent times are still fragile and vulnerable to oil price shock.
“The Q2 GDP growth was chiefly driven by the oil sector. Similarly, improvement in capital importation was more from the highly volatile portfolio investment. Also, retreating headline inflation is partly accounted for by baseline effect. Besides, at 16.01 per cent (August) the inflation rate is significantly higher than the upper band of 9 per cent set by the CBN.”
He stressed that the “real interest rate in the economy is negative since the rate of inflation is higher than the policy rate and so bringing down the MPR will further pull interest rate into the negative territory, which will not augur well especially for foreign investments.”
Uwaleke noted that cognisance should equally be taken of the uncertainty in the global environment, especially, the normalisation of interest rates in the United States, which has the effect of strengthening the dollar with adverse consequences for the economies of developing countries, as well as the seemingly complicated Brexit negotiations.
“Therefore, taken together, it does appear that the balance of risks is in favour of not tinkering with the policy configuration for the time being to give some more space for the policies to work. It bears repeating that the primary mandate of the CBN, as spelt out in the CBN Act of 2007, is to maintain price and exchange rate stability.
“The decision to hold the rates is dictated by this obligation. Complimentary fiscal policies are, therefore, required to bring about full employment and inclusive growth. To this end, the implementation of the 2017 budget, especially the capital component, in line with the government’s Economic Recovery and Growth Plan should be pursued with vigour,” the university don argued.
In his own reaction, the chief executive officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, pointed out that the outcome of the meeting was widely expected. But considering the state of the economy, Rewane urged the CBN to begin to see itself as a stimulant, rather than an institution that is reactive.
He said, “It is about the timing and not about the action itself, the action should be the stimulant. What we want is an action that would change the outcome and not the timing.
“It is time for the central bank to take a more proactive, rather than a reactive stance. But they made it clear in their statement that they would maintain flexibility of policy in between the meetings.
“So I am optimistic that they would do something. They can move the direction of interest rates, rather than just moving the policy rate.”
An economist with the Nigerian Economic Summit Group, Rotimi Oyelere, said, “The Monetary Policy Committee of the Central Bank of Nigeria was cautious with its decision on key monetary aggregates of which the Monetary Policy Rate is the most critical. The cautious position was in the light of our domestic economic peculiarities as well as the perceived global economic uncertainty.”
Oyelere said, “We cannot rush to adjust interest rate downward just because the economy grew by 0.6 per cent in the second quarter when the inflationary pressure is yet to significantly abate and employment gains of economic growth is yet to consummate.
“Moreover, since March 2016, real interest rate has been in the negative territory due to the high inflation but the interesting thing is that the key variables of production, prices, investments, and exchange rate have somewhat found an equilibrium. Hence, the fallout was increased inflows of Foreign Portfolio Investment, Foreign Direct Investment, and remittances among others into the economy. Any downward adjustment to the MPR at this time would trigger monetary disequilibrium, diminish confidence in the economy, and probably reverse recent gains.”
Oyelere, however, believed that the liquidity ratio of 30 per cent should have been reviewed downward to boost banks’ liquidity and facilitate more credit.
“I think the liquidity ratio at 30 per cent is high and should be adjusted downward to boost banks liquidity and allow further creation of credits. Even at the subsisting lending rate, most banks have reached their deposit-to-loan threshold and, therefore, hamstrung to grant credits to businesses. This they do in a bid to meet the liquidity targets,” he stated.
Another analyst, Wilson Erumebor, argued that reducing rates at this point may have negative effect on exchange rate as it could trigger capital outflows and reduce foreign inflows, which are both crucial in ensuring exchange rate stability.
Erumebor stated, “This policy decision seems more reasonable given the importance of exchange rate and its influences on all other economic variables. Nigeria cannot afford another foreign exchange crisis, as the external reserves of US$32 billion does not provide adequate buffer for the CBN to intervene for a long period. Therefore, ensuring continuous growth in the reserves as crude oil price and the economy continues to recover, while leaving interest rate unchanged was a favourable decision for the MPC.
“However, the downside to the current high interest rate is the high debt servicing costs for the federal government and high lending rate to businesses, which is currently around 30 per cent. In addition, there is the high interest rate on government securities, bonds and treasury bills, which crowds out lending to businesses and stifles growth. Under the current interest rate regime, many businesses cannot achieve high growth and much-needed expansion, given the high operational costs.”