CBN Battles Recession, Raises COVID-19 Facility to N300bn


•Retains MPR at 11.5%

•Emefiele links high parallel market FX rate to people engaged in bribery

By James Emejo

Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, yesterday said the bank would raise its COVID-19-targeted facility from N150 billion to N300 billion in order to accommodate more Nigerians in a bid to cushion the impact of the pandemic that has pushed the nation’s economy into its second recession in five years.

Emefiele added that the parallel market cannot be used to determine the true value of the country’s currency, as the value of the naira can only be determined by forces of demand and supply, explaining that the parallel market rate is high mainly because of the illicit activities of people using the dollar for bribery.

He told reporters in Abuja after the Monetary Policy Committee (MPC) meeting that the doubling of the CBN’s COVID-19-targeted facility to N300 billion seeks to spur consumer spending and accelerate recovery from the COVID-19- induced recession.

The apex bank, arising from its two-day meeting of the MPC, the last in 2020, resolved to leave all monetary policy parameters unchanged in continued efforts to stimulate economic growth.

The CBN retained the Monetary Policy Rate (MPR) otherwise known as interest rate at 11.5 per cent with the asymmetric corridor of +100/-700 basis points around the MPR. It further retained the Cash Reserve Ratio (CRR) at 27.5 per cent as well as the Liquidity Ratio at 30 per cent.

The MPR is the rate which the apex bank lends to commercial banks and often determines the cost of funds.

Emefiele said increasing the targeted credit facility will, by boosting consumer spending, stimulate output and ensure that all the six geopolitical zones benefitted from the palliative.
He said: “We have been advised or nudged on by the MPC that given that this had been very impactful positively, that the CBN should do more.

“We have been told that we have to increase it not just from the N140 billion to N150 billion that it is now, but increase it to about N250 billion to N300 billion to accommodate more people that have not accessed this facility.

“But we do insist that this must be done in a way that it goes round because we found out that some zones are more represented in the country than others.

“But understand that a zone like North-central, where we have predominantly Abuja, or South-west, where you have predominantly Lagos, would certainly have a larger share.

“The important thing is that we want to use this as an opportunity to see what can be done to boost consumer spending for our people and also see to it that output is stimulated positively for the good of our people.”

He, however, reinforced his call for diversifying the economy to end reliance on crude oil and save the country from exogenous shocks often arising from volatility in oil prices.

He said it was high time the country went back into agriculture for economic sustainability amidst current efforts to steer it out of the second recession.

The CBN governor also expressed optimism that the country will exit the recession as early as the first quarter of 2021 as well as begin to witness improved output by the fourth quarter of 2020.

He said: “Base on data available to the MPC from the CBN, we are somewhat cautiously optimistic that indeed, if we continue doing what we are doing, that there is a likelihood that we would see some little positive output numbers during the fourth quarter of 2020.

“But I can say with some level of certainty as well that during the first quarter of 2021, we would exit the recession.”

According to him, the bank will continue to boost support for agriculture, industry and manufacturing to stimulate job creation as well as moderate inflationary pressures.

He added that despite the economic contraction in Q3, Nigeria’s performance was better than some other economies which recorded double-digit contraction in growth compared to the country’s 3.62 per cent.

Emefiele, who read the MPC communiqué, said the committee noted that inflation continued to be driven by supply side disruptions arising from the COVID-19 pandemic and other legacy factors, particularly the security challenges in parts of the country; increase in food prices and the recent hike in pump price of petrol and electricity tariff.

The committee emphasised the need to address structural supply side issues putting upward pressure on the costs of production and unemployment.

The CBN called on the federal government to make efforts to procure COVID-19 vaccines to surmount the public health crisis and pave the way for a broader macroeconomic recovery.

The MPC noted that the economic contraction had bottomed out, since it moderated significantly from -6.10 to -3.62 per cent in the third quarter of 2020.

It said: “This was so because both the monetary and fiscal authorities had anticipated the impending recession and had put measures in place for its quick reversion.

“Some of these measures include the Economic Sustainability Programme by the federal government and other CBN facilities targeted at households, small and medium enterprises (SMEs), youth empowerment, and reduction of unemployment.”

The committee also urged the federal government to maintain its initiatives targeted at reducing unemployment, particularly among the youths, citing the recent #EndSARS protests and ensuing agitation by hoodlums as potentially disruptive to output growth in the country.

The MPC, however, reiterated its support for the various development finance initiatives of the CBN to stimulate production and reduce unemployment and “further encouraged the bank to intensify its efforts by increasing funding to more beneficiaries so as to boost consumer spending and accelerate recovery from recession.”

Meanwhile, in arriving at its decision to hold monetary policy rates at current levels, Emefiele said the committee focused not only on price stability, but also on the need to speedily take actions to exit the recession.

He said the MPC was faced with options around whether to tighten the stance of policy to address rising price levels recognising its primary mandate of price stability; to ease to support output recovery; or to hold to allow existing policy initiatives to permeate the economy.

He said: “The committee noted that although the appropriate response to rising inflationary pressure would be to tighten the stance of policy in order to moderate upward pressure on prices, it nevertheless, felt that doing this would exert downward pressure on the recovery of output growth.

“The committee also felt that tightening would negate the bank’s desire to expand credit to the real sector at affordable terms, not only to boost production but also to increase consumer spending. To the committee, tightening was, therefore, not the appropriate response at this time.

“With the economy, whereas MPC felt that government spending and bank’s expansionary stance would be desirable to support recovery and guide the economy out of recession, it felt loosening would trigger excess liquidity and worsen the inflationary pressure. MPC also felt that excess liquidity may impact demand pressure and fuel further depreciation of the naira.

“On balance, the MPC was of the view that although all three options offer some benefits to the economy, the hold option was desirable at this meeting. Based on these factors, members voted in line with the most pressing need towards reversing the recession and achieving medium-term macroeconomic stability.
“In view of the foregoing, the committee decided by a unanimous vote to retain all parameters.”

Emefiele Insists Naira Determined By Market Forces

Emefiele has also said the parallel market cannot be used to determine the true value of the naira as the value of the naira can only be determined by forces of demand and supply.

Describing the black market as tainted, he said it only accounted for five per cent of total foreign exchange market share and can’t determine the worth of the naira.

He was reacting to recent statements by some analysts that the current official exchange rate should be about N480 to the US dollar, using the parallel market rate.

Rather, he said the official rate hovered between N380 and N387 at NAFEX.

Reacting to questions from journalists during the MPC meeting that the naira may currently be overvalued according to some experts, Emefiele expressed disappointment that analysts who ought to know chose to mislead Nigerians.

Reacting to calls for further devaluation of the currency, Emefiele said Nigeria had depreciated its currency this year by 28 per cent, describing it as “a whopping depreciation compared to depreciation in some countries.”

He said: “And indeed, I heard some analysts talking about the parallel market, saying that the exchange rate is at N480. I want to say this that it is unfortunate and even unfair that even analysts who are supposed to know will play with numbers and begin to determine the exchange rate of our currency using parallel market rates.

“For the information of everybody, parallel market, as we know and from the data that we have, is a shallow market in Nigeria with not more than five per cent of market share.
“Parallel market, and quote me, is a tainted market in Nigeria – where people who desire to deal in illegal exchange transactions, including sourcing of FX cash for purpose of offering bribe, corruption, that is where they deal.

“And that is where people who are supposed to understand the implication of this on economic activity on our country begin to go to television and say our exchange rate is N480.

“This is very unfortunate that this is the way those who are supposed to know try to bend numbers in this country. Parallel market is a market where people who don’t want to provide documentation to support their transactions deal in and cannot be a basis to determine the value of our currency.

“Everybody knows and it is accepted the NAFEX market, which is predominantly the I&E window is the market that should be used to determine the value of our naira.

“As far as we are concerned today, the NAFEX ranges from between N380 going to N386, N387 and we have been very open on the market price determination factors in that market.

“The central bank has no hand in the price determination in that market and in any case, when people say that it should depreciate, the currency should depreciate.”

According to him, India has depreciated its currency by nine per cent; Indonesia by four per cent; South Africa by nine per cent; Russia by 22 per cent; Nigeria by 24 per cent; Brazil by 28 per cent; Turkey 33 per cent and Argentina by 35 per cent.

He described the calls for naira depreciation as misplaced.

“I do not understand what and how people who are supposed to know will begin to crave for further depreciation of the currency. But we are saying even if the currency is overvalued, shouldn’t we go through a step-wise process where the shock can be less felt than those who are supposed to know how this works begin to create panic in the market by saying that the exchange rate of Nigeria is N480? It is very unfortunate.

“But on our side, we will continue to insist that the exchange rate is determined by forces of demand and supply in the NAFEX market. We do not agree that the determining factor for the exchange rate in Nigeria for our currency should be based on a market that is tainted; a market where people go to offer bribes.

“You can imagine, you can pay any price to buy foreign exchange to pay a bribe. We are not going to be a party to that and we would continue to say this to anybody who cares to listen,” he added.