MPC Retains MPR at 14%, Urges Savings to Guard Against Oil Price Shocks

• Wants contractors’ debts paid to reduce NPLs

Ndubuisi Francis in Abuja and Obinna Chima in Lagos

The reconstituted Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) rose from its first meeting this year and retained key monetary policy rates, keeping the Monetary Policy Rate (MPR) at 14 per cent, the Cash Reserve Ratio (CRR) at 22.5 per cent, Liquidity Ratio (LR) at 30.0 per cent, and the asymmetric corridor at +200 and -500 basis points around the MPR.

The committee also observed the increasing monetisation of oil proceeds as evident in the recent growing Federation Account allocations to the three tiers of government, relative to disbursements in 2017, and urged the fiscal authorities to initiate strong stabilisation programmes and freeze the growth in its aggregate expenditure and FAAC distributions in order to create savings.

This, the committee said, was needed to stabilise the economy against future oil price-related shocks.
Briefing journalists at the end of the MPC meeting in Abuja Wednesday, the CBN Governor, Mr. Godwin Emefiele, said in reaching its decision to retain the rates, the committee appraised the potential policy options in terms of the balance of risks.

“The committee also took note of the gains made so far as a result of its earlier decisions, including the stability of the foreign exchange market, the moderation in inflation rate as well as the restoration of economic growth.

“The committee was, however, concerned about the fiscal distortions associated with absence of buoyancy between GDP growth and tax revenue, and urged the fiscal authorities to deploy appropriate corrective measures to address this phenomenon.

“The committee was of the view that further tightening would strengthen the impact of monetary policy on inflation with complementary positive effects on capital flows and exchange rate stability. Nevertheless, it could potentially dampen the positive outlook for growth and financial stability,” Emefiele said.

However, the committee, he added, was of the view that loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing. This may, however, lead to a rise in consumer prices, generating exchange rate pressures on the currency in the process.

“The committee also believes that loosening could worsen the current account balance through increased importation. On the argument to hold, the committee believes that key macroeconomic variables have continued to evolve in a positive direction in line with the current stance of macroeconomic policy and should be allowed more time to fully manifest.

“In consideration of the foregoing, the committee decided unanimously by a vote of all members present to retain the Monetary Policy Rate (MPR) at 14.0 per cent alongside all other policy parameters,” he said.

After its last meeting in November 2017, the MPC could not form a quorum to sit in January 2018 due to the refusal by the Senate to confirm new nominees of President Muhammadu Buhari after some members of the committee had completed their tenures and retired.

The MPC has retained the MPR at 14 per cent since July 2016 when it was increased by 200 basis points from 12 to 14 per cent, while also retaining the CRR at 22.50 per cent and LR at 30 per cent as well as the asymmetric window at +200 and -500 points around the MPR.

Emefiele disclosed that the committee noted the continuous positive outlook of the economy based on the manufacturing and non-manufacturing purchasing managers’ index (PMI) which stood at 56.7 and 57.2 index points respectively in March, indicating expansions for the 12th and 11th consecutive months.

According to him, the committee was of the view that the effective implementation of the Economic Recovery and Growth Plan (ERGP) by the federal government and quick passage of the 2018 budget will continue to enhance aggregate demand and confidence in the Nigerian economy.

The committee, he added, also noted with satisfaction the gradual return to macroeconomic stability as reflected in the third consecutive quarterly growth in real GDP in the fourth quarter of 2017.

“It also noted the continued moderation in all measures of inflation as well as sustained stability in the naira exchange rate and urged the central bank to sustain the stability to avoid a mission drift.

“In particular, the committee welcomed the narrowing of the exchange rate premium between the BDC (bureau de change) segment and the Investors’ and Exporters’ (I&E) window of the foreign exchange market.
“Overall, the committee noted that the recovery of the economy was strengthening, in view of the return to growth of the services sector. As the fiscal sector continues to settle its outstanding liabilities, it reduces its domestic debt profile, thus increasing the liquidity of the banking system,” he stated.

The CBN governor said notwithstanding the general improvement in macroeconomic conditions, the committee noted the rather slow pace of moderation in food inflation. It also took note of the potential risk of a pass-through from rising global inflation to domestic prices, he added.

“The launch of the Food Security Council by the federal government to improve food sustainability is a step in the right direction.

“Members, however, expressed confidence that the tight stance of monetary policy would continue to complement other policies of government in addressing some of the structural issues underlying the stickiness of food prices.

“The committee noted that at 14 per cent, the policy rate was tight enough to rein in current inflationary pressures. The committee, therefore, reaffirmed its commitment to price stability conducive to sustainable and inclusive growth,” Emefiele said.

On non-performing loans (NPLs) in the banking sector, the MPC called on the government to pay off its huge contractor debts, adding that this would address a sizeable portion of the NPLs.
Responding to questions from the media, Emefiele put the NPLs at between N2.7 trillion and N3 trillion.

“We have been very clear about this, with the size of contractor debts in the region of N2.7 trillion and because these debts are unpaid to the contractors, they are unable to service or pay back their loans at the banks and that is why we seized the opportunity of this communiqué to talk about it so that these debts can be paid.

“The central bank itself stands ready to accord some form of liquidity status to some of these debts and through that mechanism we believe the NPLs will recede and then the banks can now continue to play their role which is to catalyze growth and support credit delivery to the Nigerian economy,” he said.

On the reconstituted MPC, Emefiele thanked President Muhammadu Buhari for nominating the new deputy governors of the central bank and members of the MPC, and also conveyed his appreciation to the Senate for confirming them.
The CBN governor formally introduced the new deputy governors to journalists as Mrs. Aisha Ahmad and Mr. Edward Lametek Adamu and the trio of Prof. Adeola Festus Adenikinju, Dr. Robert Asogwa and Dr. Aliyu Rafindadi Sanusi as new members of the MPC.

He said the retention of the policy rates had nothing to do with their being new on the job, explaining that they underwent an intense induction programme and were fully apprised of their responsibilities.

Market Analysts React

Speaking on the decision by the MPC to hold the rates, a senior economist at London-based Exotix Capital Christopher Dielmann said he was not surprised by the action, adding that a rate cut was unlikely to occur until the rate of inflation has declined close to 12 per cent.

“However, we suspect political considerations will play a major role in MPC decision-making, with the incumbent regime keen to lower the cost of borrowing and spur growth as we move nearer to the February 2019 general election.
“This view is strengthened by the high level of reserves and inflation falling faster than growth is rising,” he added.

Dielmann observed that the MPC’s decision to leave rates unchanged was clearly driven by the high and persistent inflation, which has plagued the country since 2016.

“It is clear that in the eyes of the MPC, inflation concerns outweigh the worries about the stagnant recovery of growth since the 2016-2017 recession.

“As we have written in the past, we do not envy the position that the Nigerian MPC is currently in, in that it is being tasked with fighting stagflation – high unemployment (perhaps as high as 20%), as a result of stagnant growth, and high inflation.

“Ultimately, these challenges will not be fixed through the MPC’s decisions alone and will require vast structural changes across the economy. Given the reality of this situation, it is not surprising that the MPC elected to hold rates constant to allow the directional trends in both growth and inflation to continue to move towards desired levels,” he said.

The Chief Economist for Africa at Standard Chartered Bank Razia Khan said it may be that the MPC decided to wait to confirm the deceleration in headline inflation before it cuts its policy rate.

According to her, the MPC remains concerned about the relative stickiness of food price inflation in Nigeria, notwithstanding weak demand, weak economic performance, and weak credit growth.
Khan, however, anticipated further MPR easing over the course of the year, noting that maintaining forex stability was paramount for now.

“The CBN will not do anything that is perceived to endanger this. The hope appears to be that the federal government steps up to deal with contractor arrears, which will help lessen NPLs in the banking system.
“Given that the 2018 budget is unlikely to be passed before May, and given that implementation of the budget may take even longer, weak money supply growth remains a key concern.

“Notwithstanding the improvement in oil earnings, downside risks to the outlook for the Nigerian economy still predominate. The CBN will try to counteract this through its targeted provision of subsidised credit to certain sectors, at below-inflation interest rates, in line with what it calls its ‘development objective’.

“We believe, however, that the longer-term strengthening of Nigeria’s monetary and banking framework would be better served by greater reliance on the MPR itself as a signal of monetary policy intent,” she said.