Emefiele Defends Quantitative Easing, Says CBN is Not Overfunding Govt

• MPC holds policy rate, FX window records $7bn inflow in five months

Ndubuisi Francis in Abuja and Obinna Chima in Lagos

The Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, has defended the Bank’s funding of the federal government through quantitative easing (QE), stating that there was no substance in the claim that the central bank was overfunding the government, on the one hand, and mopping up liquidity through special auctions, on the other.

Emefiele dismissed the claim at the end of the two-day meeting of the Monetary Policy Committee (MPC) of the CBN Tuesday, where the committee for the 14th consecutive month retained the Monetary Policy Rate (MPR) at 14 per cent.

The MPC also retained the Cash Reserve Ratio (CRR) at 22.5 per cent, Liquidity Ratio at 30.0 per cent, and the asymmetric corridor at +200 and -500 basis points around the MPR.
Emefiele, while speaking on the central bank’s quantitative easing, said the CBN remained one of the most transparent in the world and there was nothing illegal about the use of Open Market Operations (OMO) as a means of money supply and control in the economy.

The governor was responding to the observations made by one of the members of the MPC, Dr. Doyin Salami, who had at the July meeting of the committee remarked that the CBN was providing “piggy bank” services to the federal government.

Salami had observed that the CBN’s claims on federal government at N814 billion was twentyfold higher, while the claims of commercial banks rose marginally by 0.4 per cent to N4.6 trillion; 30 per cent increase to N454 billion in CBN’s purchase of government treasury bills; five per cent increase in federal government’s overdrafts to N2.8 trillion; and an increase in the mirror account from N3 billion at the end 2016 to N1.5 trillion in April 2017.

“It is clear that the CBN has provided ‘piggy bank’ services to the federal government. To prevent the effect of continuous and massive injections of cash to fund the federal government showing up in sharply higher inflation and currency weakness, the central bank now applies ‘special auctions’.
“We thus find ourselves at a point where government borrowing from the CBN is ‘neutralised’ by raising the Cash Reserve Requirement (CRR) of banks, thereby limiting private sector access to credit. In other words, the private sector is deliberately ‘crowded-out’.

“It is ironic that the government, in need of tax revenues – having in the first half of the year accumulated its full-year deficit – is constraining the private sector,” Salami added.
However, Emefiele said there was no substance in Salami’s observation, adding that it remained one of the most transparent central banks globally.

According to him, the CBN is not just a banker but an adviser to the federal government and the lender of last resort, pointing out that there was nothing illegal about the issuance of treasury bills, which the bank uses through OMO as an instrument of monetary supply and control.
He noted that the federal government had decided that all its funds should go into the Treasury Single Account (TSA), adding that even in conventional banking, there was nothing wrong for a bank customer to request and overdraw his or her account.

He said at a time of global economic strain, every central bank comes to the rescue of their governments, stressing that there was no truth in the overfunding of government.
On the non-performing loans in the banks, Emefiele said most Nigerian lenders were within the 5 per cent threshold or slightly higher, adding that efforts were being made to do something about the few that had overshot the threshold.

Salami and another member of the MPC, Hassan Balami, at the July meeting had also expressed concern over the high NPLs of what they termed “Four Outlier Banks” with bad loans of over 15 per cent.

Salami, in particular, noted that the four banks cumulate in size to one Systemically Important Bank (SIB), taking the view that “since the failure of any of the SIBs is a source of concern, excluding these ‘Four Outlier Banks’ does not adequately take cognisance of the contagion effect which they could trigger”.

At the end of Tuesday’s MPC meeting, however, the committee decided to retain the benchmark rate at 14 per cent, making it the 14th consecutive month since the policy rate was raised from 12 to 14 per cent in July 2016.

The MPC also retained the CRR at 22.5 per cent, Liquidity Ratio at 30.0 per cent, and the asymmetric corridor at +200 and -500 basis points around the MPR.
In arriving at the decision, the CBN governor said the MPC took note of the gains achieved so far as a result of its earlier decisions, including the stability in the foreign exchange market and the moderate reduction in inflation.
According to him, the option was whether to hold, tighten or ease, adding that these were subjected to extensive debate.

“As in previous meetings, although tightening would help rein in inflationary expectations and strengthen the stability in the foreign exchange market, the committee felt that it would further widen the income gap, depress aggregate demand and adversely affect credit delivery to the private sector.

“The committee also noted that tightening may result in the deposit money banks re-pricing their assets and loans, thus raising the cost of borrowing and therefore heightening the already weak investment climate and non-performing loans.

“With respect to loosening, the committee believed that although while it would make it more attractive for Nigerians to acquire assets at cheaper prices, thus increasing their net wealth, and therefore stimulate spending as confidence rises, it nevertheless felt constrained that loosening at this time would exacerbate inflationary pressures and worsen the exchange rate and inflationary conditions,” he said.

Emefiele added that the committee also felt that loosening would further pull the real rate deeper into negative territory as the gap between the nominal interest rate and inflation widens.
He continued: “On the argument to hold, the committee believes that the effects of fiscal policy actions towards stimulating the economy have begun to manifest, as evident in the exit of the economy from 15 months recession.

“Although still fragile, the fragility of the growth makes it imperative to allow more time to make appropriate complementary policy decisions to strengthen the recovery.
“Secondly, the committee was of the view that economic activity would become clearer between now and the first quarter of 2018, when growth is expected to have sufficiently strengthened and gains in receding inflation very obvious.

“The most compelling argument for a hold was to achieve more clarity in the evolution of key macroeconomic indicators including budget implementation, economic recovery, exchange rate, inflation and employment generation.”

In consideration of the headwinds confronting the domestic economy and the uncertainties in the global environment, Emefiele noted that the committee decided by a vote of six to one to retain the MPR at 14 per cent alongside all other policy parameters.
“In arriving at this hold decision, the MPC commits to employing maximum flexibility to guide the economy on the path to optimal growth.

“Consequently, six members voted to retain the MPR and all other parameters at their current levels, while one member voted to lower the MPR to signal an ease to the current stance of tight monetary policy.
“However, overall, majority of the members expressed a strong commitment to policy flexibility that would allow the committee to promptly take the necessary actions that would promote overall macroeconomic stability and engender sustainable growth,” he explained.

Emefiele observed that the Nigerian economy exited the recession in the second quarter of 2017, with a modest positive short to medium-term outlook, resulting largely from deliberate macroeconomic stimulus and a stable naira exchange rate.
He stressed that inflationary expectations also appeared anchored on the strength of the prevailing tight monetary policy stance.

The MPC, he said, noted headwinds still confronting the optimistic global growth prospects to include: recent developments on the Korean peninsula; the damage to infrastructure caused by Hurricanes Harvey, Irma and Maria; the lull in Brexit negotiations; and the normalisation of monetary policy by the U.S. Fed, which is expected to trigger global capital flow reversals.

“Other challenges include the continued slow pace of recovery in global oil and other commodity prices and China’s reduction in uptake of global commodities.

“In addition, the committee noted the tepid global inflation momentum, implying that continued monetary policy normalisation could be injurious to global growth prospects.
“The uptick in global inflation persisted, but moderated, in response to rising oil prices, continued accommodative monetary policy in the advanced economies; and currency appreciation in some emerging markets and developing countries,” Emefiele said.

On developments in money and prices, he said the committee noted that money supply (M2) contracted by 11.06 per cent in August 2017 (annualised), in contrast to the provisional growth benchmark of 10.29 per cent for 2017.
The contraction in M2 was largely due to the contraction of 18.42 per cent in other assets net (OAN) in August 2017.

“Similarly, M1 contracted by 12.25 per cent in August 2017 (annualized) to -18.37 per cent. Net domestic credit (NDC) contracted by 0.14 per cent, annualised at -0.20 per cent, driven majorly by net credit to government, which also contracted by 1.05 per cent against the programmed growth of 33.12 per cent.
“Credit to the private sector, however, grew marginally by 0.07 per cent in August 2017, compared with the provisional benchmark of 14.88 per cent,” the governor stated.
Money market interest rates, he added, oscillated in tandem with the level of liquidity in the banking system, as the average inter-bank call rate which opened at 18 per cent on July 26, 2017, closed at 7 per cent on August 31, 2017.

The committee, he said, noted the continuing improvement in Nigeria’s external reserves position and the equities segment of the capital market, adding that the foreign reserves position grew to US$32.9 billion at the close of business on September 25, while the All-Share Index (ASI) rose by 7.20 per cent from 33,117.48 on June 30 to 35,504.62 on August 31.

“Market capitalisation (MC) improved by 6.90 per cent to N12.24 trillion from N11.45 trillion during the same period. Relative to end-December 2016, capital market indices rose by 32.10 and 32.30 percent, respectively, reflecting growing investor confidence due to improvements in foreign exchange management.

“Total foreign exchange inflows through the Central Bank of Nigeria (CBN) rose by 1.98 per cent in August 2017, compared with the previous month. Similarly, total outflow increased by 7.03 per cent during the same period as a result of increased international remittances, inclusive of public sector and JVC payments, which rose by 58.59 per cent in the period under review,” Emefiele said.

The MPC, according to him, observed the trend towards convergence between the rates at the bureau-de-change (BDC) segment of the FX market and the Nigeria Autonomous Foreign Exchange (NAFEX) segment, as well as the stability of the exchange rate at the inter-bank segment of the FX market during the review period.

“Similarly, the committee noted the success of the Investors’ and Exporters’ window (I &E) of the foreign exchange market and traced this not only to foreign investor confidence but also to the zeal and commitment of Nigerian exporters who have demonstrated preference for the window to the parallel market.

“The committee observed that the I&E window has increased liquidity and boosted confidence in the market with over US$7 billion inflow in the last five months.
“The committee will continue to introduce policies that will improve the confidence of foreign investors in the country’s macroeconomic management regime,” he said.

Mixed Reactions Trail MPC Outcome

Reacting to the outcome of the MPC meeting, financial market experts Tuesday expressed divergent views on the decision of the committee to keep all its tools unchanged.
To the CEO of Financial Derivatives Company Limited, Mr. Bismarck Rewane, the outcome of the meeting was widely expected.

But considering the situation in the economy, Rewane urged the central bank to begin to see itself as a stimulant, rather than an institution that is reactive.

“It is about the timing and not about the action itself, while the action should be the stimulant. That is, what we want is an action that would change the outcome and not the timing.

“It is time for the central bank to take a more proactive, rather than a reactive stance. But they made it clear in their statement that they would maintain flexibility of policy in between the meetings.
“So I am optimistic that they would do something. They can move the direction of interest rates, rather than just moving the policy rate,” Rewane said.

Ecobank Nigeria’s analyst, Mr. Kunle Ezun, however, welcomed the outcome of the meeting, saying more time should be given for the fundamentals in the economy to strengthen before a shift in the monetary policy stance.

He listed these fundamentals to include the exchange rate, inflation and interest rate.
“Basically, the outlook is that we should begin to see a drop in MPR to support growth. But as long as we know that the growth we have today is still very fragile and needs more reinforcement, it will be too early to begin to drop the interest rate because there is no stability yet around the exchange rate and inflation rate is still very high,” he said.

Ezun further said that by its decision, the MPC was able to show its level of independence to foreign investors, thereby enhancing confidence.

“Ordinarily, going by political pressure, one would have thought the MPC would have dropped the MPR today. But the fact that they have remained consistent to say it would be too early to reduce the rate, is going to reinforce the level of independence of the MPC,” he explained.