Emefiele Signals Interest Rate Retention as MPC Meets Monday

•  OPEC: More Nigerian, Libyan oil needed as demand picks up

Obinna Chima in Lagos and Christopher Isiguzo in Enugu with agency report

With the inflation rate still hovering at above 16 per cent, the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, has said the bank would be failing in one of its key mandates if it cuts the Monetary Policy Rate (MPR) at this time.

The comment by Emefiele, which came just as the CBN’s Monetary Policy Committee (MPC) commences its 257th meeting Monday, signals the likely outcome of the meeting.

But Emefiele has just one vote at the meeting, even though he chairs the committee, which has operational independence in setting the interest rate.

Since the last MPC meeting in May, sustained positive developments have continued to support confidence and signal that the economy is at an inflection point.

The CBN governor spoke during a speech he delivered at the weekend titled, “The Dilemma of Monetary Policy and Exchange Rate Management in a Recession: Potential Options for Nigeria,” at the Second Homecoming series of the Economics Department of the University of Nigeria, Nsukka (UNN).

He disagreed with those pushing for a rate cut as a path to growth, noting that high inflation was inimical to economic growth.
“Interest rates reflect not just the cost of capital but also the cost of doing business, and so we need to also look at interest rates from the perspective of the lender.

“Given that most banks have to individually provide security, power, and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high-interest rates,” he explained.

However, he assured Nigerians that the CBN would continue to rely on moral suasion to encourage commercial banks to be more considerate in interest charges on customers.

Speaking on developments in the Nigerian economy, Emefiele traced the current economic challenges to external factors such as the slide in the prices of crude oil, as well as internal factors such as underinvestment in domestic productive capacity, decayed infrastructure and the challenge of persuading deposit money banks in the country to channel credit to the real sector.

These challenges, according to him, prompted the CBN to fashion out an appropriate exchange rate strategy to achieve price and financial system stability and restart growth.

To address the observed challenges, he noted that the CBN introduced policies at both the management and MPC levels targeted at stabilising the economy.

He made particular reference to efforts made by the bank in checking the further depletion of Nigeria’s external reserves in the face of dwindling accretion and increased demand for foreign exchange.

Emefiele disclosed that the CBN had to make the foreign exchange market flexible and prioritise the most critical needs for foreign exchange.

According to him, the central bank had to restrict access to the forex market for 41 commodities, which he said the bank saw as being an unnecessary drain on the country’s reserves.

Noting that the CBN had been unjustly castigated for taking actions in the best interest of the economy, the governor said the bank would not be deterred from its objective of setting the economy on the path of sustainable development in the medium to long-term.
Emefiele said with sustained efforts by not just the CBN but also the fiscal authorities in the country, the nation’s economy would bounce back sooner rather than later, and urged Nigerians to keep hope alive as the growth indicators were becoming encouraging.

According to him, in view of the global shocks, the nation officially slipped into a full-blown recession after the second quarter of 2016 when the gross domestic product (GDP) contracted by 2.06 per cent.

“The growth indicators are there for us to see. In January 2017, inflation was 18.8, now inflation is down to 16.10 per cent. By the fourth quarter of 2016, growth was -1.72 per cent, in the first quarter of 2017, growth had improved to -0.52 per cent which means we’ve seen an improvement in growth by 1.2 per cent, if we see another 1.2 per cent growth in the second quarter, we are out of the recession,” he said.

Continuing, he expressed dissatisfaction over the preference for consumption by many Nigerians, cautioning that Nigerians could not continue to rely on other countries for products that could be produced locally.

As a way out, he emphasised the need for the country to invest in basic infrastructure such as roads, bridges, airports, railways and information technology, adding that the country also needed to explore opportunities in public private partnerships for opportunities in infrastructure projects that could offer lucrative returns to investors and help drive economic growth across Nigeria.

Using Norway as an example, Emefiele, who received the award on National Development as a distinguished alumnus of the Department of Economics of the university, said the country with a population of six million people is also an oil producing country like Nigeria, but it did not abandon its agriculture, especially fishing where it has a comparative advantage.

He said Norway instead saved its oil revenue in its sovereign wealth fund, which he currently put at over $900 billion, pointing out that it was from its savings that it developed its infrastructure.

Emefiele also stressed the need for fiscal policies to target improved productivity of labour and an increase in the disposable income of workers.

He suggested that fiscal policies could consider ways of stimulating household consumption and business investments.

Citing agriculture as the largest employer of labour in Nigeria, he said the CBN, working with the relevant ministries and agencies, has contributed greatly to revamping the sector through its Anchor Borrowers’ Programme (ABP) and other agricultural interventions.

Particularly, he said the bank had committed about N29 billion to the ABP with active participation in 24 states of the federation.
Other policy options listed by the CBN governor included: exploration for more revenue, the pursuit of non-oil exports, and enactment of import-reducing policies that will encourage Nigerians to look inwards and discourage the importation of items that can be produced in Nigeria.

Emefiele also challenged tertiary institutions in the country to focus on research that will boost economic development, just as he assured Nigerians that the CBN would work with relevant stakeholders in the education sector to stimulate research for the overall good of Nigeria.

Emefiele, who is also an alumnus of the institution, expressed concern that the education sector in the country had lost its glory.
He noted that any country desirous of making tremendous growth should focus on its health and education sectors.

While recalling with nostalgia the glorious past of education in Nigeria, particularly at the UNN, when students on campus were fed with poultry products and bread produced in the school, he stressed the need for all stakeholders in the education sector to contribute their quotas to restoring Nigeria to its pride of place in education.

According to him, the CBN, as part of its contribution, has contributed to education through the provision of Centres of Excellence in some universities across Nigeria to encourage world class research and stimulate growth.

Meanwhile, in its comment on the likely outcome of the MPC meeting, Financial Derivatives Company (FDC) Limited said that with headline inflation declining for the fifth consecutive month to 16.1 per cent in June, among other positive economic developments, this would influence discussions at the MPC meeting starting Monday.

While the FDC noted that the inflationary direction and relative stability in the forex market were good news “for an MPC which is under high public scrutiny”, it anticipated further weakness in the influence of the base year effect on inflation dynamics in the coming months.

FDC was of the view that the structural factors were likely to drive inflation.
These structural factors include the interest rate environment, investment appetite in the country, and energy prices, etc.
“Exchange rate gains are to remain a dousing factor to the extent to which inflation will increase. The harvest season is fast approaching and as such, price increases as a result of seasonality are expected to ease.

“The monetary policy committee is to meet this week and it is widely expected that the committee will maintain the status quo.
“However, with five months of inflationary decline, there might be a case for the doves to seek a token gesture from the hawks in the committee in the form of a slight reduction in the CRR to 22.5 per cent per annum.

“That said, it is important to note the inflation and exchange rate risks attendant to the N2.7 trillion promissory issuance scheme of federal government.

“The risks may crystallise if and when holders discount the instruments ahead of maturity,” FDC added.
Afrinvest West Africa Limited, on what to expect from the MPC, said that the meeting, which is the first in the second half of the year, will be coming against the backdrop of a remarkable improvement in domestic macroeconomic variables, although recent developments on the global front offer mixed signals.

“We hold the view that whilst the economy is at a turning point for a positive growth trajectory, monetary policy needs to be deployed with a focus which may require taking painful but critical decisions.

“On a balance of considerations, we analyse that the MPC will maintain status quo and consolidate on recent gains made, especially in improving the liquidity in the foreign exchange market.

“With the MPC likely to face a choice between easing and maintaining the status quo on policy rates, we envisage the committee members will vote to hold all rates constant while consolidating on recent gains in the forex market,” Afrinvest stated in a note.
Also, the chief consultant, B. Adedipe Associates Limited, Dr. Biodun Adedipe, said the economy has not reached a comfortable level for an interest rate reduction yet.

“If the government is spending to expand the economy, that would trigger inflationary pressure and so the CBN recognises that even if you drop the interest rate, they may more or less compound the situation. Dropping the interest rate may trigger fresh inflationary pressure,” Adedipe added.

More Libya, Nigeria Oil Needed

But with oil revenue accounting for about 90 per cent of Nigeria’s foreign exchange earnings, one major area that the MPC would focus on will be the oil market, as oil prices more than any other factor impact the fortunes of the Nigerian economy.

This is just as the Secretary General of the Organisation of Petroleum Exporting Countries (OPEC), Mohammed Barkindo, said Sunday that the oil market would need more crude from Nigeria and Libya as it re-balances at a faster rate in the second half of the year after a slow start.

Compliance with production cuts by members of OPEC is “excellent,” Barkindo told reporters in St. Petersburg, Russia.
Libya and Nigeria are exempt from the cuts and have been boosting production, leading to speculation about whether OPEC will seek to cap their output to help reduce a global glut.

“The re-balancing process may be going on at a slower pace than we earlier projected, but it is on course, and it’s bound to accelerate in the second half,” Barkindo said Sunday.

Demand is expected to grow by 2 million barrels a day in the second half, he said, without specifying if he was comparing that with the same period of 2016 or the first half of this year.

Brent crude prices have declined 15 per cent this year on concerns that growing output in Libya and Nigeria, as well as the U.S., is more than making up for production cuts by OPEC members and other oil producers, including Russia.

According to Bloomberg, Saudi Arabia’s Energy Minister Khalid Al-Falih and Russia’s Energy Minister Alexander Novak are scheduled to attend a meeting in St. Petersburg Monday to discuss the progress of their agreement to trim output.