As MPC Meets Monday, Recession, Rising Inflation to Top Agenda

• Analysts advocate retention of MPR at 12 %

Kunle Aderinokun

Coming at a time the federal government admitted that the economy was ‘technically in recession’, the 251st edition of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meeting which begins monday will dwell on measures to halt the gradual slide into recession and rising inflation.

Discussions at the MPC meeting are also expected to dwell on the appraisal of the newly introduced flexible forex policy, energy shortages on productivity and effect of pipeline vandalism on revenue accruing to the treasury. More importantly, the forecast of the International Monetary Fund (IMF) that the Nigerian economy would contract by 1.8 per cent this year and the subsequent admission by the Minister of Finance, Kemi Adeosun, that the economy was ‘technically in recession’, are issues that would preoccupy tomorrow’s MPC meeting.

Rising inflation, economic analysts observed, has been a source of concern to policy makers. Just last week, the National Bureau of Statistics (NBS) announced 16.6 per cent as the figures for the June consumer price index (CPI), which measures inflation. This month’s CPI, an 11-year high, represents 0.9 per cent rise from 15.58 per cent of the previous month and the increase marked the fifth time this year inflation has climbed.

As part of measures to halt the upward trend, analysts are canvassing for the retention of monetary policy rate (MPR), the benchmark interest rate, at 12 per cent.
The MPC had at its meeting in May retained the MPR at 12 per cent with the asymmetric corridor at +200basis points and -700basis points and also left the cash reserve requirement (CRR) and liquidity ratio (LR) unchanged at 22.50 per cent and 30 respectively

According to analysts at FSDH Merchant Bank Ltd, “Looking at the macroeconomic developments in the economy, we expect that the MPC members will vote to maintain the MPR, CRR and LR at the current levels.
“However, complementary fiscal measures are required to restore investors’ confidence and pull the economy out of recession.”

The analysts explained: “There are arguments to support an increase and a hold in rates when the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meets on July 25-26, 2016. Meanwhile, there is no argument in support of rates cut given the current economic situation.

“The impending recession in the Nigerian economy supports a hold in rates at the current level while the fiscal measures to reflate the economy are implemented.”
The FSDH analysts noted that the Nigerian economy was moving towards a recession as “economic activities have significantly slowed down.”

“The GDP contracted by 0.36 per cent in Q1 2016, compared with the growth of 2.11 per cent in Q4 2015. The Nigerian economy faces risks from shortage of foreign exchange and weak consumer demand. We expect a higher level of contraction in Q2 2016, when the National Bureau of Statistics (NBS) releases the Q2 2016 GDP figure on August 25, 2016.”

They, therefore, believed that “the impending further contraction in the GDP was the major risk the economy faces at the moment, and a hike in the MPR will worsen the outlook. A hold decision with complementary fiscal expansionary measures should stimulate the economy.”
The FSDH analysts also noted that, “the pressure on the external reserves remained unabated since the last MPC meeting in May 2016.

According to them, “The external reserves have not received the anticipated boost from the adoption of a flexible exchange rate policy in June 2016. The external reserve is still strongly dependent on oil earnings, which has been inadequate because of the output shortfall. The 30-day moving average external reserves declined marginally by 0.49 per cent from US$26.48billion at the last MPC meeting to US$26.35billion as at July 18, 2016. We expect the MPC to adopt a hold decision.”

Similarly, analysts at Dunn Loren Merrifield Asset Management Ltd suggested that the MPC retain the MPR at 12 per cent.
According to them, “Ahead of the meeting of the Monetary Policy Committee (MPC) slated for the 25th and 26th of July 2016, we are of the opinion that the body is likely to maintain the status quo.

“We are of the view that a further hike in MPR will be insufficient in itself to spur foreign inflows given liquidity concerns of the interbank foreign exchange market. This is in addition to the ‘neutral’ mode adopted by most foreign investors as the naira is anticipated to inch towards what is being considered to be its fair value.
Whilst we believe that a gradual reduction in interest rate is expedient for investment and economic growth, we envisage that the committee will retain the MPR at 12.00 per cent.”

The DLM analysts noted: “Pending the release of the nation’s gross domestic product estimates by the National Bureau of Statistics in the coming month, weakened fundamentals suggests that fragile growth will be sustained in the second quarter. We forecast a further contraction to c.-1.00 per cent in 2Q2016 – hitting new historical lows – from -0.36 per cent in the first quarter of the year. Our forecast is primarily driven by the various shocks transmitted from energy shortages, significant price hikes, lower productivity, low industrial output, scarcity of foreign exchange and depressed consumer demand among others. This likely contraction will officially signal an economic recession.

“Whilst a recovery is expected towards the end of the fiscal year,” the DLM analysts said, “we highlight that this expectation is largely hinged on the deployment of fiscal stimulus to spur growth.”
They noted that this supports the argument for policies directed towards a positive and stable macro environment conducive for growth.

Noting that the headline inflation for June 2016 came in at 16.48 per cent, representing an increase of 90bps from 15.58 per cent recorded in the preceding month, they said higher electricity rates, energy prices and imported items remain key drivers of inflationary pressures seen during the month.
“We re-iterate that until the underlying drivers of the upward price movements are addressed, raising rates will be counterproductive.”

Holding the same position with those at FSDH and DLM, analysts at Time Economics, also advocated retention of the MPR. “We do not expect the Monetary Policy Committee of the Central Bank of Nigeria to tighten rates when its meets next week in response to the latest CPI data. Having left rates unchanged in her last policy meeting in May and followed up with the introduction of a flexible exchange rate regime on June 23rd, we think the Committee will likely see through short term inflationary pressures and focus more on growth. Efforts will be directed towards combating recession and returning the economy to a positive growth trajectory.

“Secondly, even as we expect benchmark interest rates to remain unchanged in the face of rising inflation, we do not think the decision hurt bank earnings very significantly since, typically, lending rates being charged by the banks tend to be inflation adjusted,” they said.

Likewise, the Director-General, West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, expected “the MPC to leave all rates the way they are and allow the implementation of robust fiscal policy with monetary policy playing an accommodating role for now.”
Particularly, Ekpo said he expected “the MPC to x-ray the economy within the context of the present recession.”

“Inflation is now 16 per cent hence it is unlikely for the MPC to raise the monetary policy rate. The so-called Forex market framework would be examined to access the impact so far. The new forex regime has increased speculation and raise the level of uncertainty so the price stability function of the apex bank remains a challenge. The recession is of a special time – insufficient demand and structural. If the recession persists then monetary policy may become ineffective. Fiscal stimulus is necessary to cushion the adverse impact of the recession.

“It may be too short a time to alter the new Forex framework. It may necessary to wait for a while to assess its impact,” he explained.
For former Managing Director of Guinness Nigeria, Seni Adetu, these are incredibly difficult times in Nigeria, economically.

Adetu said: “All the macro indices that support economic growth are going in the wrong direction – export earnings, foreign exchange, inflation, etc. There is such massive deterioration of our external reserves that investor confidence which has been waning over the last couple of years is maintaining that worrisome trend. It is disturbing to see that the adoption of a flexible exchange rate policy has not yielded any appreciable benefit in curtailing the erosion of our currency value, and worse still the gap between the “official” rate and parallel market remains wide, in spite of the best effort of the CBN.

The formal announcement this week by the Minister of Finance that the economy is in recession has perhaps heightened the tension amongst local and foreign investors desperate to better understand the direction of our economy.

“Against this backdrop, the Monetary Policy Committee members have their work cut out this week. I expect that the challenges around currency rate and availability, or lack thereof and the run-away inflationary trends will be of immense focus. I do not necessarily expect they will vote to change the MPR or CRR, but they should have some interesting discussion around the liquidity ratio, I suppose. However, whatever they do, they should be looking to provide some assurance to the investing and consuming communities.”

According to him, “Nigerians, especially manufacturers, are counting on the Monetary Policy Committee to intervene by pulling the required policy levers needed to safeguard the Naira from further depreciation. Without the right policy intervention, the Nigerian economy faces risks of bigger shortage of foreign exchange and weaker consumer demand.”

However, the Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, held a contrary view.

According to him, “The current situation is that of liquidity tightening on both the side of the monetary authority and the fiscal authority. Although, there are other reasons for the high inflation, it is clear that liquidity surfeit is not one of them. Rather it appears that lack of funding for domestic production and the lack of infrastructure and support structural reforms are the culprits.”

He further stated that: “While the fiscal authority appears helpless in resolving the infrastructural challenges, the monetary authority could help with easing the general economic pressure through monetary accommodation. It would therefore be nice to see a reduction in the MPR at the next MPC meeting.”