By Charles Abuede
- But weak economy offers no room to manoeuvre policy rates, say experts
As the Central Bank of Nigeria (CBN) Monetary Policy Committee meets Monday the 21st of September, to deliberate on a number of indices which will help it to decide whether to hold or tweak policy rates, on account of current economic realities facing the nation, as well as the global economy, investors, analysts and other wider stakeholders in the economy, are anxiously keeping vigil and looking out for possible surprises from the government banker.
The broad expectations, though, of many analysts spoken to by Business A.M. for this story are that the MPC does not act hawkish but maintains the status quo while holding all parameters, as the rates will be of little or no use in reversing the current course of events which has since left the CBN in a dilemma, giving the MPC little room to manoeuvre on rates.
They draw attention to the fact that, noteworthy, inflation appears to have now found comfort in the economy of the earth’s most populous black nation and Africa’s largest by gross domestic product (GDP), which audaciously leaves the policy committee little or no room to manoeuvre policy rates as pressures from inflation already stand in the way.
Outside of inflation, there are also a number major points that are likely to get in the heads of committee members as they meet, and they represent points that analysts and investors believe can enable us draw a line on the possible outcomes we can expect to emerge from the decision room in the face of current economic realities.
In the heads of MPC members will include:
- The nation’s apex bank is still on the route to unifying the exchange rates across various windows as a conditionality for Nigeria obtaining a loan from international lenders such as the IMF and the World Bank;
- The recently announced increase in the bank loan-to-deposit-ratio (LDR) to a maximum of 80 per cent from the initial 65 per cent in the 2020/2021 FY policy framework;
- A reduction in the interest rates on savings deposits to 1.25 per cent from the initial 3 per cent, which is hinged on the annual policy rates;
- The ban on official forex allocation for the importation of maize, foods and fertilizer as directed by the federal government;
- External reserves, which have fallen below the threshold as required by the CBN Act of 2007 and the fact that Nigeria is technically experiencing stagflation on the ground that inflation rate rose to 13.22 per cent, the highest since October 2016, the rate of unemployment rose to 27.1 per cent in 2020, the government’s external debt is on the rise and the economy recording a constriction by a negative 6.10 per cent, according to the recent GDP figures from the National Bureau of Statistics (NBS).
In the face of all these consideration, the question many ask is how can the MPC find any window to get out of the gas chamber? Many say it is not possible, hence the expectation of vigil they are keeping for the MPC to spring surprises.
Many economic analysts, however, told Business A.M. that any possibility the MPC has to thinker on rates lies on its outlook on the external sector. But with the call to float the naira, the tradition of pegging the policy rate in such manner as to attract foreign portfolio investments (FPI) and foreign direct investments (FDI) inflows may not hold, a counter argument is offered.
Uche Uwaleke, professor of capital markets at the Nasarawa State University and a fellow of the Institute of Chartered Accountants of Nigeria (ICAN), told this newspaper that the MPC will take a stance to maintain the current status quo as the effect of tightening may lead to difficulties in the economy recovering, adding that, on the other hand, if loosened, may pose a downside risk to inflation becoming heightened.
Uwaleke said: “The fact is that the weakened state of the economy due, in part, to the negative impact of COVID-19, leaves the CBN in a dilemma. I think the monetary policy rates will be of little or no use in reversing the current course of events.
“Further tightening of monetary policy through an increase in MPR should be ruled out clearly due to the negative growth GDP trajectory. Taking that path will further worsen the downturn in economic activities and make recovery a lot more difficult.
“On the other hand, the option to lower the MPR from 12.5 per cent will be discredited given inflation rate of 13.22 per cent and downside risks to inflation now heightened following the increase in the pump price of fuel. Also, lowering the MPR will further drag real returns into the negative territory and has the potential of exerting pressure on the forex market and by extension the value of the naira.”
In a related development, reactions continue to trail the observed turn of events in which the CBN appears to have ditched one of its overarching goals – moderating inflation – and has taken on a full developmental financing role, a forte which should, ordinarily, be heavily driven by the fiscal policy actors in government. Similarly, driving price moderation through the MPR has since also been ditched in favour of achieving a good naira exchange rate through the dog-fight defence at all costs, including using the once robust external reserves in the trenches of the battle.
Consequently, economic analysts say Nigeria’s external reserves position is key to resolving the issues bordering on the recent decline in the reserves, though, the nation’s susceptibility to crude oil receipts has largely contributed to external reserve mirroring oil price movements. This is further compounded by an inefficient exchange rate determination mechanism that has dampened export growth and weakened foreign investment flows.
Ayo Teriba, a leading Nigerian economist with a doctorate, and the chief executive officer of Economic Associates, told Business A.M. that if the apex bank continues failing in finding ways to ameliorate the issue of falling reserves to thresholds, the issue of rates in this scenario will continue being futile. According to the economist, dealing with the problem of reserves shortages, which is an underpinning factor for exchange rate stability, is the only policy imperative.
“Talking about rates, in the face of foreign reserves shortages, remains as futile as it was at the last MPC meeting. Finding ways of raising foreign reserves to thresholds that will adequately underpin exchange rate stability is the only policy imperative now. If you continue to fail on that you will continue to fail on everything else. That is the bitter truth,” Teriba said.
Regardless of the dilemma faced by the monetary authority, just like its contemporaries in developed climes, the decision by the CBN’s MPC today can be advised on the premise that it sustains and ensures the effective implementation of the heterodox measures already introduced to strengthen the asset quality and financial soundness of the nation’s banking sector as well as the overall economy.
In spite of the above, it may just be imperative to understand that the tradeoff between inflation and lower rates are often the main factors that might influence setting policy rates to either a tightening or loosening position. What are the experts’ utmost expectations from the Monday scheduled MPC meeting?
An economic expert who spoke with Business A.M opined that he is indifferent on the outcome as the apex bank is in a tight room of rising inflation, unemployment figures, weakening naira in the currency market, and Nigeria being regarded to be experiencing stagflation against the backdrop of the coronavirus pandemic and amongst other factors.
“I have little or no expectations from the forthcoming MPC. It is going to be business as usual (either they slash off 0.5 percentage points from the MPR or they add 0.5 percentage points to it). It is a dilemma for the CBN, because, slashing the MPR further would help to revive already muted growth but the fear that it would increase prices or lead to capital flight, which will in turn, add further pressure on the naira, could cause the MPC to keep the rate constant,” the analyst revealed.
Uwaleke, who holds similar opinion, opined that: “Unlike other Central Banks, the MPC of the CBN cannot afford to loosen monetary policy at this time in a bid to support growth. Rather, I expect the committee to advise the CBN to continue to use unconventional measures such as the LDR and various interventions to support economic growth, without compromising its primary mandate of price stability”.
According to the professor, “I have no doubt that the MPC will have some pieces of advice for the federal government, especially in the area of tackling insecurity in the country, which has affected food production and led to rising inflation given that much of the inflationary pressure, according to the NBS, has come from the food component.
“Against this backdrop, I expect that the MPC will maintain the status quo and hold all the policy parameters,” he stated.
Frontpage September 11, 2019