Pulling the Rate Cut Trigger in Pandemic Battle


By Obinna Chima

The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) last week caught market analysts off guard as it slashed the Monetary Policy Rate (MPR) from 13.5 per cent to 12.5 per cent.

The decision, which was in line with the mood adopted by most central banks across the globe since the outbreak of the COVID-19 pandemic, is expected to support measures already taken by the federal government to enable the country to navigate through the economic slowdown caused by the pandemic.

The cut, which came 14 months after the MPR was last adjusted, signaled the committee’s resolve to pursue an accommodative monetary policy stance that will inject liquidity into the Nigerian economy despite the persisting currency and inflationary pressures.

It is also expected to translate to a reduction in the cost of credit and positively impact productivity.

“Central to the committee’s consideration were the impact of the COVID-19 pandemic and the oil price shock and there likely short to medium-term consequences on the Nigerian economy,” said the CBN Governor, Mr. Godwin Emefiele.

Currently, the Nigeria’s economy is in a state of extreme distress with major economic indicators looking grim amidst increasing vulnerabilities.

For instance, Nigeria’s oil revenue target fell by N125.52 billion in the first quarter of 2020 to N940.91 billion. The shortfall was due to the double whammy of the headwind caused by the pandemic and the slump in oil price due to a sharp drop in demand and the price war between the two powerful crude oil producers, Russia and Saudi Arabia.

Similarly, recent data from the National Bureau of Statistics (NBS) showed that inflation rate in the country hit a two-year high at 12.34 per cent (year-on-year) in April 2020, compared to 12.26 per cent in the preceding month.

Even though the country’s Gross Domestic Product (GDP) grew by 1.87 per cent (year-on-year) in real terms in the first quarter of 2020 (Q1 2020), there have been predictions that the economy is heading towards a steep recession.

The Minister of Finance, Budget and National Planning, Mrs. Aisha Ahmed, acknowledged recently that the country’s economic situation might worsen as she projected that the GDP might contract by 8.94 per cent this year.

However, there are reasons to cherish a glimmer of hope that things may not turn out that bad. The MPC members opined that despite the gloomy economic outlook, a faithful implementation and utilisation of all the stimulus packages already announced by the CBN, which included concessionary rates, loan restructuring, and targeted loans to agriculture, manufacturing and health sectors and measures put in place by the fiscal authorities, would produce the desired impetus needed to propel economic recovery in Nigeria.

With respect to output, the committee urged the federal government to continue exploring options for partnership with the private sector to fund investments in infrastructure. This, according to the MPC’s members, would aid employment generation, support production and boost output growth.

The committee also reiterated the need for both direct foreign and domestic investments that would support growth in key sectors of the economy, including Nigerian automobile manufacturing, aviation and rail industries.

Emefiele believes strongly that the country might escape a recession as the federal and state governments begin to ease the lockdown and take actions to get businesses revving again, get the health sector bustling again and get farmers tilling the ground again.

“So, while we are trying to save lives, we must also save livelihoods. One way to do that is that we must reopen the economy. We must get the manufacturing plants back again and we must begin to see the fumes coming out from the rooftops of the manufacturing companies.

“If we don’t, the unprecedented unemployment that will result from factories and manufacturing plants that are shutdown can be so unprecedented that we would have hurt livelihoods as a result of the lockdown. But we must take the protocols from our health experts,” he explained.

Therefore, the country, more than ever needs to see increased interaction between the fiscal and monetary policy authorities in order to overcome the present macroeconomic headwinds. In addition, the government will also need to provide the required support to the real sector to enable them remain in business and ensure that purchasing power and consumer confidence are strong.

The central bank must also be aggressive in its Anchor Borrower Scheme (ABP) and if possible, scale up the intervention to see that more agricultural produce are accommodated and that more states benefit from the scheme.

Other opportunities in the agricultural value chain should also be explored to improve the country’s capacity to export agricultural produce.