Again, Emefiele Urges FG to Pay Contractor Debts to Stimulate Economy

• Urges prompt economic diversification due to rising protectionism in the West

• MPC retains MPR at 14%

James Emejo in Abuja and Obinna Chima in Lagos

For the umpteenth time, the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, yesterday prevailed on the federal government to quickly assess the extent of its indebtedness to local contractors and develop a framework for securitising the debts in order to settle its outstanding domestic contractual obligations across the economy.

He said the debts, which had accumulated over time, had slowed business activities of contractors, most of whom are indebted to the banking system, thus compromising the integrity of the financial system.

He also advised the banks to commit to greater surveillance and deployment of early warning systems in managing the banking system.

Emefiele’s appeal came as the 10-member board of the Monetary Policy Committee (MPC) yesterday voted to retain the monetary policy rate (MPR), otherwise known as interest rate, at 14 per cent.

It further left banks’ cash reserve requirement and the liquidity ratio unchanged at 22.5 per cent and 30 per cent, respectively, and retained the asymmetric window at +200 and -500 basis points around the MPR.

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

In arriving at its decisions, the CBN governor who read the committee’s communique at the end of its two-day meeting in Abuja, said it assessed the fragile macroeconomic conditions and the strong headwinds confronting the economy, particularly the implications of the twin deficits of the current account and budget deficits, the rise of nationalist sentiments across the West and implications for national elections in France and Germany, as well as the forthcoming referendum in Italy.

He said other considerations included the yet-to-be-unveiled long-term uncertainties of Brexit and expectations of significant shifts in US economic policy.

The committee further reaffirmed the urgency of prioritising the diversification of the economy given the emerging gloomy protectionist outlook of the global economy.

Emefiele said the committee further evaluated the impact of its July and September 2016 actions on the macro-economy, noting that while foreign exchange inflows into the economy had improved significantly in July and August, it declined after the September MPC meeting, leading to rising inflation and increasing negative real interest rates.

However, outflows significantly dropped, lending credence to the propriety of the decisions of the July and September MPC meetings, he added.

The MPC also reiterated the limitations of monetary policy in reversing the current stagflationary condition in the economy, which it traced to supply and demand shocks.

Members stressed the need for a robust and more keenly coordinated macroeconomic policy framework that would restart output growth, stimulate aggregate demand and rein in inflationary expectations.

Consequently, the MPC commended efforts at resuscitating planning, noting the progress made in developing the medium-term economic recovery plan.

The central bank governor also admitted that banks are currently facing different risks, but said the risks are not peculiar to the economy and surmountable.

He said: “As a result of the current challenges being faced in the global economy, all agents in the financial system are facing tremendous risks. Normally, in any economy, when there’s a slowdown or recession, naturally, financial institutions particularly banks would face certain risks: risks of NPLs rising and different other risks.

“And what that does is that it imposes on the regulator a greater challenge to ensure that it strengthens its prudential guidelines to ensure that the banks and particularly depositors are protected.

“So I’m saying Nigerian banks, like other banks in other climes, are facing risks but those risks are surmountable and the CBN is doing its best to ensure those risks don’t crystallise to a point where we begin to talk about depositors risking their deposits.”

He added that rumours about the risk in the banking system were overtly elevated, adding that “these are risks faced by any banking or financial system in any clime today that is facing the challenges arising from the global challenges”.

Emefiele also took time to address allegations that the CBN was planning jail terms for people keeping dollars and may even confiscate foreign currencies in domiciliary accounts.

According to the governor, “That allegation is untrue and let me seize the opportunity to reiterate that it is untrue and there’s nothing in our existing foreign exchange regulations that says people should be jailed or their dollars confiscated.

“But I am aware, because just today I was told the Nigerian Law Reform Commission is looking to review the exchange rate regulations just like they normally will from time to time. The Law Reform Commission is an agency of government that has a responsibility to review all laws in the country from time to time, depending on the exigencies of time.

“But we’ve not been contacted regarding some of the clauses that are included in the review that is being conducted by the Law Reform Commission, and I can state here categorically that if we are contacted or whenever it becomes an issue for discussion, we would advise against clauses that forbid people from keeping their dollars, or a law that says people should be jailed for keeping foreign currency.

“I repeat there’s nothing in our current extant foreign currency regulations that says people would be jailed or their foreign currencies will be confiscated. I advise people to stop listening to rumour mongers.”

He further defended the ongoing crackdown on Bureau de Change (BDC) operators by security agents for transacting businesses illegally, stating: “First, the foreign exchange regulation in Nigeria today forbids trafficking in currency – we should just underscore that point.

“You cannot stand on the street and traffic in currency. So we know that the security agencies have a right to enforce the laws. And as long as the law says you cannot traffic currency on the streets, you are supposed to be in your office conducting your business, then you will have to adhere to that.

“And if you don’t adhere to that, the security agencies will arrest you. Black marketers are illegal foreign exchange dealers and so we don’t consider, in our own assessment, people who want to go underground and conduct illegitimate business.

“If you are conducting a legitimate business, you should be free to operate your business not under the table but in an open market and nobody will harass you.”

In the macroeconomic outlook, however, the CBN governor expressed concern that available data and forecasts of key economic variables showed that the outlook for growth and inflation in the medium-term continues to be challenging.

He said: “Growth is expected to remain less robust given the absence of sufficient fiscal space while the current tight stance of monetary policy and improved agricultural harvests are expected to contain further price increases and moderate price expectations as the trend has already revealed.”

Commenting on the outcome of the MPC meeting, the Chief Economist, Standard Chartered Bank, Razia Khan, said there was little surprise from the meeting.

Khan welcomed the clarification on the rumours that have gripped Nigeria in recent days relating to the Law Reform Commission’s review of FX regulations, noting however that while the clarification was important for confidence, broader macroeconomic challenges remain.

“With the current shortage of FX clearly having a detrimental effect on growth, there is little evidence of any meaningful policy initiative that might be able to resolve this,” she added in a note.

A former bank CEO, Mr. Okechukwu Unegbu, in his comments, welcomed the decision of the MPC to leave all the key monetary policy tools unchanged, saying doing otherwise might not augur well for the economy.

“This is the end of the year, we are expecting the 2017 budget and the 2016 budget has not been fully implemented, so tampering with the monetary policy rate could cause some distortion in the market,” Unegbu who is currently the chief executive of Maxifund Securities Limited said.

He however stressed the need for the central bank to allow the interplay of demand and supply to determine the true value of the naira on the interbank FX market.

To analysts at Cowry Assets Management Limited, they noted that the rising cost of living would continue to erode disposable income of consumers, resulting in little incentive for lower income earners to save.

“On their part, the fiscal authorities will seek to source longer term debt from offshore markets due to their relatively cheaper cost. We expect the fiscal authorities to complement monetary counterpart by fast-tracking key socio-economic reforms that will improve ease of doing business and help boost productivity which is necessary to spur economic growth,” Cowry Assets added.

Also, analysts at the Time Economics Limited pointed out that the combination of a slowing economy and rising inflation had put the MPC in a quandary, saying any change to the MPR intended to solve one of these problems would have exacerbated the other.

“MPC’s earlier rate increase during its July meeting has been partially successful in slowing the increase in inflation. However, the slight uptick in the rate of increase in inflation from September to October concerned the MPC slightly.

“Since it is still too early to say conclusively if this increase means that inflation is starting to pick up again, we believe that a major factor in the MPC’s decision to maintain the status quo was a desire to properly examine the November and December inflation figures.

“Giving themselves a few more months to observe the direction of inflation in the country will allow the MPC to determine if the trend has reversed in favour of a rising rate of increase in inflation or if this month’s increase was just an anomaly,” Time Economics said.