Emefiele Forecloses Monetary Policy Tightening to Boost Recovery, Stimulate Growth

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•Says Nigeria not exposed to effects of US policy normalisation, others

•Banking industry NPLs drop 4.85%, lowest in 10 years

•Warns against patronage of loan sharks

James Emejo

The Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, yesterday said the apex bank would not raise interest rate following the policy normalisation being undertaken by some advanced economies such as the United States and the European Union.

The CBN governor said Nigeria did not benefit from those funds which were released into advanced economies during the period of the COVID-19 pandemic in which some found their way into emerging markets.

Ordinarily, such policy normalisation should be of great concern to the Nigerian economy as it would have led to huge foreign exchange (forex) outflows with dire consequence on the economy.

But, Emefiele, while reacting to the development after the two-day meeting of the Monetary Policy Committee (MPC), the first in 2022, further allayed concerns that the monetary authority might possibly react by raising interest rates as well.

This came as the apex bank after its meeting, resolved to leave all monetary policy parameters unchanged in a bid to support the recovery and growth of the economy.

The CBN left the Monetary Policy Rate (MPR), otherwise known as the interest rate unchanged at 11.5 per cent with the asymmetric corridor of +100/-700 basis points around the MPR.

The MPR is the rate at which the CBN lends to commercial banks and often determines the cost of borrowing in the economy.

The MPC also voted to maintain the Cash Reserve Ratio (CRR) at 27.5 per cent as well as the Liquidity Ratio at 30 per cent.

Emefiele, who read the committee’s communiqué, further disclosed that the banking industry Non-Performing Loans (NPLs) had reduced to about 4.85 per cent in December, the lowest in about 10 years.

Also, the CBN governor said Nigerian have no business patronising money lenders otherwise known as loan sharks, adding that the CBN had put in place measures aimed at ensuring that people easily accessed loans from commercial banks without having to influence anybody.

He was reacting to the alleged excesses on the part of loan sharks in recent times.

In November 2021, the Federal Competition and Consumer Protection Commission (FCCPC) had announced that it was partnering the CBN, and other anti-graft agencies to address multiple potentially dubious conducts of certain money lenders who charge extremely high rates of interest, typically under illegal conditions.

Emefiele, however, vowed to deal ruthlessly with the money lenders if caught, stressing that most operated within rural communities.

Nonetheless, the MPC had noted with concern, the slight increase in headline inflation (year-on-year) to 15.63 per cent in December 2021, from 15.40 per cent in November, following seven consecutive months of decline.

He pointed out that the unexpected increase was attributed to both the food and core components, which rose to 17.37 and 13.87 per cent in December 2021 from 17.21 and 13.85 per cent in November, respectively.

The committee, however, expressed confidence in the CBN’s sustained intervention programmes, noting that inflation would continue to abate as food supply improves as the seasonal drive in price development associated with the December festive period was largely contributory to the marginal increase in price levels, and as such, believed that the episode of increase may be temporary.

The committee accessed the balance of risks confronting the domestic economy in the near term as they impact output growth and price stability and noted the unrelenting effort by the monetary and fiscal authorities in mitigating the impact of the virus on the economy.

It observed the continued moderate recovery of the domestic economy but requires further concerted policy effort by both the monetary and fiscal authorities to improve the momentum and strengthen the recovery.

On the pandemic, the MPC reviewed its continued impact on the domestic economy as members collectively agreed that the downside risks were still hindering the recovery. In this light, it commended the efforts of the Presidential Task Force on COVID-19 for procuring vaccines and continuing the drive to ensure that most Nigerians are fully vaccinated.

On price development, the MPC continued to express concerns about the impact of insecurity in farming communities on food inflation, pointing out that whereas headline inflation had been moderating for several months, its recent uptick was associated with increased demand during the festive season.

It therefore believed that prices would return to the downward trajectory given the Bank’s ongoing interventions in the agriculture sector.

The committee applauded efforts of the CBN with the recent launch of the rice pyramids, noting that efforts to increase food supply and stem food inflation were in the right direction.

The MPC, however, reiterated the key role of the federal government in providing the necessary security around the country, and particularly in the farming communities, to ensure that farmers and their produce remain safe, and food supply is both boosted and uninterrupted.

Also, members noted the ongoing debate around the removal of fuel subsidy and suggested a robust engagement with relevant groups in the country, and afterward follow a stepwise and gradual approach, to ensure its moderate impact on cost of transportation and energy for individual, households and firms.

According to Emefiele, committee also noted the need to encourage the take-off of private refineries across the country to provide alternative competitive local supply source and reduce the need for government intervention to manage fuel prices for domestic consumption.

It called for the speedy conclusion of the government gas-powered vehicle conversion scheme and other alternative sources of fuel.

Moreover, the committee noted the rising government debt profile and the concentration of the funding sources and its implications for fiscal sustainability and macroeconomic stability, including its impact on financial system performance and growth.

The MPC urged the government on the need to harness other sources of revenue to reduce its dependence on oil as a single revenue source. In addition, it reiterated the need for government to seek alternative, more viable, and efficient infrastructure financing sources, in order to ease its expenditure burden.

On exchange rate, the committee applauded the CBN’s efforts at maintaining stability over the short term with increasing demand as the economy continues to reopen.

Members of the MPC noted the dwindling proceeds from oil sale, despite rising crude oil prices and stressed the need to address the persistent reduction in remittance of oil revenue to the Consolidated Revenue Fund and urging the NNPC to urgently address this anomaly.

They added that the improved forex supply would thus support the Bank’s demand management strategy in the foreign exchange market and consolidate macroeconomic performance, especially those that promote export, reduce dependence on import and reduce foreign exchange demand pressure.

The MPC welcomed the improvement in foreign capital inflow through diaspora remittances and urged the Bank to further extend the incentive scope to attract more remittances to official channels.

The CBN called on the fiscal authorities to take advantage of InfraCorp, the private sector driven infrastructural vehicle and transfer viable infrastructure projects for consideration by the corporation, saying it would ease pressure on the government.

The committee further commended the CBN’s efforts in ensuring the continued downward trend of NPLs, signifying improving conditions in the banking system and emphasized the need for the bank to closely monitor developments in the sector and swiftly respond to any emerging challenges.

On the decision to hold all policy parameters constant, Emefiele said the committee decided to tow the path after a careful balancing of the benefits and downsides of each policy option.

He said the MPC decided to hold all policy parameters constant, believing that a hold stance would enable the continued permeation of current policy measures in supporting the recorded growth recovery and further boost production and productivity, which would ultimately rein-in inflation in the short to medium term.

However, commenting on the potential threats which policy normalisation posed to the country, the CBN governor said, “It is true normalisation will naturally lead to capital flow reversal particularly for the emerging market and developing economies. Some of those funds that were released into the advanced economies during the period of COVID-19, some of them actually flowed into the emerging markets to boost foreign exchange liquidity in the emerging market.

“But let me say whether you call it fortunately or unfortunately, but I will rather use the word fortunately for Nigeria, when those flows were moving to emerging markets at the time the advanced economies were offering stimulus into their economies, those flows didn’t come into Nigeria.”

He said, “And indeed, about two years ago, what we have been doing is to see to the gradual, systematic and orderly exit of foreign portfolio investors out of the country because they feel that yields are not as high as they expect and they also expect that there should be some more hedging instruments to protect them in case they want to go out.

“You all recall that in the last two years, the MPC adopted a policy of price and monetary stability that is conducive to growth. And if we are talking about price and monetary stability as position of MPC that is conducive to growth, it necessarily means that the CBN had to adopt a somewhat policy of accommodation that brings interest rates to a low level, that would attract borrowers or people who have projects to embark on projects and that’s the reason you would have seen that we have aggressively in the last two years seen an increase in loans whether to households or small businesses, to large companies at no more than nine per cent and for 10 years.”

He said the objective was to boost manufacturing and agricultural output, pointing out that this had been instrumental in reversing the country out of recession and increasing output growth.

Emefiele added that the CBN had also tried everything possible to moderate inflation.

He said, “What am I saying in essence? The funds that would be leaving as a result of policy normalisation from the advanced economies didn’t come to Nigeria and so as they withdraw them, there is nothing to withdraw out of Nigeria because we are not part of that game. So I’d like to assure us that it is not affecting us.

“On the other hand, what caused the policy normalisation in advanced economies is because of rising inflation. And I must say that it is the truth that inflation has attained an unprecedented level in these economies – United States of America, Europe – and I will read some for instance.

“The US inflation attained 7.08 per cent and this seems to be the highest since 1982, unprecedented. The UK inflation attained 4.2 per cent which is the highest since 2010. In the EU area, inflation attained 5.5 per cent and it is the worse since the European Central Bank and the Euro was created.

“So you would imagine that if these are the unprecedented levels of inflation in these economies, they don’t have a choice but to really think of how to aggressively rein in inflation because of the liquidity supply they see in their environment and the need to rein in prices to level that is acceptable because most of those governments are already facing a threat of even losing their next elections as a result of rising prices and inflation.”

He said, “But for us in Nigeria, like I read, our challenge is not just inflation but also growth. And this is a policy we’ve been adopting in the last two years. And if we feel this policy is working well, there is no reason for MPC to begin to contemplate a policy of tightening because we see that we are somewhat moderately tightening the liquidity system through our administrative controls using CRR discretionary powers that we have.

“So that’s the reason the MPC feels that we will continue to do what we are doing now because we believe it is giving us the results that we expect and let not forget that as a result of these policies we have adopted that price and stability have contributed to growth.

“We saw a reversal from recession after two quarters; as a result of the policy stance we have adopted, price stability contributes to growth, we saw inflation moderating consecutively from seven to eight months until we saw inflation uptick in December 2021.

“So MPC thinks what happened in December is temporary but there is a need for us to look at it again and monitor it because we saw in December 2021 both the core and the food trending upwards.

“We would have expected that even food should still be trending downwards but of course we are looking at it and we think that it could be reversed because the harvest for 2021 as very good. But we have noticed a few challenges that we will address over time.”

Emefiele added that, “There is nothing to worry because those countries that are raising rates or even if there are some emerging countries that are following them by raising rates, those economies are indeed facing pressures because they will if they are not already, facing capital flow reversals in their economies.

“So we are not in that game and that is why we are not following them in that direction. We want to remain where we are right now – hold, watch because we believe what we are doing is working well.”