CBN Cuts MPR to 12.5%, Upbeat Nigeria Will Head Off Recession

Godwin Emefiele
Godwin Emefiele
  • Disburses N107bn in intervention funds
  • Emefiele calls for gradual reopening of economy

Obinna Chima, Nume Ekeghe in Lagos and James Emejo in Abuja

The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), thursday caught market analysts off guard as it resolved to reduce the Monetary Policy Rate (MPR), otherwise known as interest rate by 100 basis points, from 13.5 per cent to 12.5 per cent.

It also expressed its confidence that given the measures being put in place by both the monetary and fiscal authorities, the country would head off the recession that had been predicted by multiple institutions.
The committee, however, left other monetary instruments unchanged, including the cash reserves ratio and liquidity ratio at 22.7 per cent and 30 per cent respectively.

The reduction in interest rate came despite mounting inflationary pressure.

The last time MPC adjusted MPR was in March 2019, when the rate was reduced from 14 per cent to 13.5 per cent.
Speaking at the end of the meeting in Abuja, CBN Governor, Mr. Godwin Emefiele, who read the committee’s communiqué, expressed confidence that Nigeria may escape a recession if concerted efforts are sustained to stimulate output.

Emefiele said the apex bank had so far disbursed a total of N107.45 billion out of the N100 billion health sector intervention fund, the N1 trillion for the agricultural and manufacturing sectors as well as the N50 billion for households and SMEs.

He emphasised the need for the federal government to gradually work towards reopening of the economy in line with the recommendation of the Presidential Task Force on COVID-19 and advice received from medical experts.
He added that efforts must be directed at saving not only lives but also livelihoods.

According to him, reopening the economy would enable the resumption of economic activities necessary to stimulate growth, hasten the pace of recovery and restore livelihoods, particularly to the vulnerable.

He based his optimism in the measures so far implemented to reduce the impact of COVID-19 on the economy as well as recent improvement in crude oil prices and reduced pressure on the government’s reserves.

He said: “The performance of the loan to deposit ratio policy, which was introduced in July 2019, showed that total credit increased by N3.1 trillion or 20.45 per cent, with manufacturing, retail and consumer loans, general commerce and agriculture, as major beneficiaries.

“The committee recognised that under the N100 billion healthcare sector intervention fund, the bank has approved and disbursed N10.15 billion for some projects, for the establishment of advanced diagnostic and health centres and the expansion of some pharmaceutical plants for essential drugs and intravenous fluids.

“As part of the N1 trillion intervention targeted at the agric and manufacturing firms, the bank has further disbursed N93.2 billion under the real sector support fund to boost local manufacturing and production across critical sectors. This consists of over 44 greenfield and brownfield projects.

“The bank has also approved N10.9 billion to 14,331 beneficiaries under the N50 billion targeted credit facility for households and SMEs out of which N4.1 billion has been disbursed to 5,860 successful beneficiaries. The committee directed management to reach out to the banks to encourage them to disburse the funds to the priority sectors of the economy, so as to stimulate aggregate demand and create more jobs in the country.”

MPC also urged the government to remain focused on the implementation of the revised 2020-2022 Medium Term Expenditure Framework as the basis for sustainable fiscal policy.

On prices, the committee expressed concern about the heightening inflationary pressure attributed to a combination of monetary and structural factors.

It said while price stability remained the bank’s primary mandate, it expressed the need for a balanced approach in supporting growth in the face of rising domestic prices.

The committee also urged the federal government to continue exploiting options of partnership with the private sector to fund investment in infrastructure as this would aid employment generation, support production and boost output growth.

It reiterated the potentials for both direct, foreign and domestic investments to support growth in key sectors of the economy, including Nigerian auto manufacturing, aviation and rail industries.

The committee also said on the backdrop of the various stimulus packages and increased credit at lower interest rates, the impact of the COVID-19 would be relatively less severe than had earlier been expected and the reversal in growth deceleration would become more optimistic.

The committee commended the bank’s role in the effective oversight of the banking system evidenced by the relative stability in key financial soundness indicators and systemic resilience of the banking sector in the face of severe external shocks.

On the choice before the committee, MPC observed the weakening of the global macroeconomic environment due to the adverse impact of COVID-19 and drop in crude oil prices, which have resulted in negative output in most economies.

MPC also felt that the logical expectation is that to ensure that the global economy reverses from the recession timely, policy makers must take actions that would necessarily stimulate growth and recovery.

On the decision by MPC to loosen monetary policy, Emefiele said holding MPR constant might slow down the trajectory of the weakened economy compared with a loosening stance, thereby slackening output growth.

He said whereas MPC was concerned that excess liquidity engendered by loosening might overshoot the economy’s absorptive capacity and accelerate inflationary pressures, it felt that given the slow rate of acceleration of inflation, the accommodative stance would stimulate aggregate demand and supply in the short term
However, reacting to MPC’s decision to reduce MPR by 100 basis points, some analysts who commended the apex bank, said for the move to be effective, there was a need to also slash CRR.

According to them, reducing the rates and still holding on to CRR may not make the desired impact the apex bank was hoping to achieve in the economy.

Speaking on ARISE NEWS CHANNEL, the broadcast arm of THISDAY Newspapers, the Chief Executive Officer of Cowry Asset Management Limited, Mr. Johnson Chukwu, said: “My initial thought was that MPC was going to retain all the benchmark rates and that if they were going to adjust any of the rates, they were going to adjust the cash reserve ratio.

“At 27.5 per cent, it denies the banks the ability to lend. So, by adjusting MPR from 13.5 to 12.5 per cent, as long as the banks don’t have the liquidity to lend, that objective may not be achieved.

“My thought is that given the uptick in the inflation rate, given the pressure on forex rate, monetary policy would now have to balance the need to cement the economy and I think they are using a lot of development finance initiatives by granting concessionary loans to several sectors of the economy.

“So, the challenge I have now is that without the appropriate liquidity, the banks would still not be able to lend because the primary objective of bringing down MPR is to ensure the banks drive credit into the system, but with CRR at 27.5 per cent, where would the banks get the liquidity to lend.”
He urged MPC at its next meeting to consider reviewing CRR.

“With the high CRR, it would be difficult for the banks to accede to the expectation of the central bank that MPR would lead to an increase in credits in the system,” he added.

The Head of Research, Afrinvest West Africa Limited, Mr. Abiodun Keripe, said cutting MPR would not have so much impact on the economy because its transmission effect was low.

“As a result of that, a lot of people are not going to be bullish and the market would be very bullish on the back of 100 basis points.

“The outcome of this meeting signals that the economy is facing the risk of recession and some monetary policy stance is being taken. By and large, I don’t think this would have so much impact on the economy,” he stated.
Prof. Uche Uwaleke of Nasarawa State University and former Imo State Commissioner for Finance, described the decision by MPC to cut the benchmark interest rate as a demonstration of CBN’s sensitivity to the need to stimulate the economy and enable it to withstand the negative impact of COVID-19 as well as the drop in oil revenue.

“Having signalled an intention to adopt an accommodative stance in favour of growth, CBN should put in place measures to ensure that it translates to lower lending rates by the banks to the real sectors of the economy,” he added.