Concerns over Inflation, Economic Growth

Nume Ekeghe highlights the issues raised by members of the Monetary Policy Committee and recommendations on the way forward

The Monetary Policy Committee (MPC) of the Central Bank (CBN) of Nigeria rose from its last meeting in May, 2023 raising benchmark interest rate to record high, as part of measures to curb the rising inflation in the country.

Anticipatory of the impact of the removal of subsidy on the already galloping inflation, the MPC raised the monetary policy rate to 18.5 per cent. Whilst this had not halted the rising inflation, industry experts posited that the rate of increase had slowed down over time

According to Deputy Governor, Financial System Stability, CBN, Aisha Ahmad, previous rate hikes are already yielding some results, albeit slowly.

In her personal statement at the meeting, Ahmad noted that month-on-month inflation numbers depict a decline in the rate of inflation acceleration as rate of month-on-month increase in headline inflation declined from 8.6 per cent in February to 2.9 per cent in March 2023.

“This position is also buttressed by counterfactual evidence presented by staff research reports which indicated that inflation could have risen to 30.48 per cent in April 2023 without the aggressive rate hikes by the MPC, “She said.

Members of the MPC had raised concerns of the impact of the rising inflation on the economic growth of the country, just as it noted that although the contractionary stance, which it had maintained in its past meetings, was slowing growth.

Economic Activity

On his part, the CBN Deputy Governor, Adamu Lamtek, in his statement noted that the country’s economic activity expanded in Q1 2023 by 2. 31 per cent. 

He said, “although much lower compared with 3.52 per cent recorded in the preceding quarter, the decline needs to be viewed against the backdrop of seasonality, the cash crunch in February/March and tighter monetary conditions. In-house staff projections suggest a lift in subsequent quarters. 

“Other indicators of economic activity like the purchasing managers’ indexes (PMIs) lend credence to the optimism around growth in the coming quarters. Though the volume of new credit is slowing on account of the prevailing monetary policy direction, the stock of credit up to May 2023 remained considerably high. In essence, the outlook for economic activity continues to be positive, offering room for monetary policy tightening to contain inflation pressures.”

Another member of the MPC, Festus Adenikinju noted that overall annual growth for 2022 was 3.10 per cent, down slightly from 3.4 per cent recorded in 2021.

“Non-oil sectors of services and agriculture expanded by 6.66 per cent and 1.88per cent, respectively, while industry contracted by -4.62 per cent. However, quarter on quarter, real gdp (Q-o-Q) grew by 10.99 per cent in Q4 2022; showed that the non-oil sector grew by 12.55 per cent, while the oil sector contracted by -14.93 per cent. Information and Communications contributed 1.57 per cent to the real GDP growth in Q4, 2022, followed by Trade 0.71 per cent and Crop Production 0.59 per cent. Mining and Quarrying contributed -0.6 per cent. Oil production decreased to 1.00mbd in April 2023 from 1.27mbd in March 2023 due to pipeline vandalization and technical issues. Oil price also declined in the world market, further compounding the woes in the petroleum sector.

 “The external account recorded an overall balance of payments deficit position of $1.11 billion in Q4, 2022. The goods account recorded a surplus of $2.8 billion in Q4, 2022. The services sector deficit narrowed by 22.7per cent to $3.13 billion. Service payments for the transport, insurance & pensions and telecommunication sector fell in the review period. The primary income deficit narrowed by 34per cent to $2.26 billion due to a fall in repatriation of dividends. As of May 17, 2023, the gross external reserves stood at $35.19 billion.”

He added, “The gross external reserves position at end-April 2023 could provide 6.46 months cover of import of goods and services or 8.88 months cover of import of goods. With regard to the fiscal sector, both the government revenue and expenditure underperformed in January and February 2023. FG retained revenue stood at N1,133.53 billion, lower than the pro-rata target of N1,840.85 billion.

“This was due to the underperformance of FAAC receipts, gross independent revenue. In the same vein, total FGN expenditure as of February 2023, was N2,225.01 billion, 40.63per cent lower than the budget estimate of N3,637.86 billion. The shortfall came mainly from allocation for debt service and capital expenditure. Overall budget deficit reduced by -39.26per cent in the first two months of 2023. The underperformance of the budget is especially felt in the capital expenditures, thus impacting negatively on economic development.

“The soft fiscal situation of the FGN drives up public debt which rose by 16.92per cent between December 2021 and December 2022. This further worsened debt service payments and increased the rise of debt sustainability. The high debt service/revenue ratio is a threat to macroeconomic stability and the growth of the economy.”

Money Supply

On money supply, Lamtek noted that growth in money supply was yet to be adequately curtailed, at least to the benchmarks for the year. According to him, in addition to tightening the stance of monetary policy to slow credit creation, a fiscal orientation tailored towards reducing public sector borrowing requirements would be immensely helpful.

Adenikinju revealed that all domestic components of monetary aggregate rose between March 2023 and April 2023. Monetary Base increased from N15.975 trillion to N17.543 trillion due to increase in currency-in-circulation and reserve requirements. Broad Money (M3) rose by annualized 22.11per cent above the 2023 benchmark, between March 2023 and April 2023.

He added that domestic claims rose by an annualized 50.28 per cent, above the 2023 benchmark of 15.78 per cent. Claims on Central Government (net) rose by the annualised value of 112.05per cent compared with the 2023 benchmark of 19.64 per cent. However, Net Foreign Assets declined by an annualized value of -77.13 per cent, lower than the 2023 benchmark of 38.82 per cent. Major sources of net liquidity to the economy in April 2023 are Net OMO Maturity (N47 billion), FAAC N322 billion, Net Financing (N443 billion) and Net FGN Operations N813 billion.

Interest Rate

On interest rate, Adenikinju said the spread for month-on-month narrowed to 23.02 per cent in April 2023.

“On average, prime lending, maximum lending, and average savings rose between March and April 2023. The average OBB rate month-on-month rose from 14.07 per cent in March 2023, to 17.05 per cent in April 2023. In May 2023, relative to April 2023, Nigerian Treasury Bonds (NTB) rates declined, and there was lower recourse to Standing Lending Facility (SLF) and a decrease in Open Buy Back (OBB) transactions. The Nigerian Exchange Limited (NGX) recorded a bearish performance between February 28, 2023, and May 19, 2023. All Share Index (ASI) decreased by 6.48 per cent. from 55,806.26 on February 28, 2023, to 52,187.93 on May 19, 2023.

“With a higher benchmark interest rate, Ahmad noted that further rate hikes are expected to drive inflation down over the medium term, however, concerted effort is required to confront the host of headwinds impacting on food supply chain, which also have a pervasive influence on domestic prices. Lastly, a rate hike is an important counterbalancing signal to curtail the development of negative inflation expectations, ensuring that the monetary authority is proactively positioned to curb rising prices, “he said.

Financial Stability

Adenikinju noted that financial soundness indicators remain positive and showed that the banking system remains strong, sound, and resilient.

“The capital adequacy ratio (CAR) stood at 12.8per cent in April 2023, still within the prudential requirement of between 10per cent – 15 per cent. Non-performing loans (NPLs) ratio declined from 4.5 per cent in March 2023 to 4.4 per cent in April 2023. Liquidity ratio (LR) rose to 45.3 per cent in April 2023, from 43.8 per cent in March 2023. This is above the minimum 30 per cent recommended by the prudential requirement. 

“Both the Return on Equity (ROE) and Returns on Asset (ROA) increased between March 2023 and April 2023. ROE rose from 21.6 per cent to 22.6 per cent; while ROA increased from 1.6per cent to 1.7 per cent between March 2023 and April 2023, respectively. Interest margins to total operating income declined from 58.1 per cent in March 2023 to 50.5 per cent in April 2023.

“However, operating cost to operating income declined marginally from 70.6 per cent to 70.5per cent between March and April 2023. The high operating cost environment of the banking sector should be addressed. 

“All the measures of banking size, assets, deposits, and credits also rose. Total Assets of the banking industry grew by N16.65 trillion or 25.88 per cent between April 2022 and 2023. Industry credit increased by N4.54 trillion or 17.40 per cent between end April 2022 and end-April 2023. Gross credit has been on an upward trajectory since 2019. Total industry deposits increased by N8.84 trillion or 21.4 per cent between the end of April 2022 and April 2023. The stress tests conducted on the industry show that it can weather the major risks and vulnerabilities in the system.”

Lamtek said, “I do appreciate the legitimate concern for financial stability in the event of a prolonged monetary tightening cycle. However, I see this risk as reasonably controlled given the resilience of the banking system. At end-April, the major financial soundness indicators (FSIs) – capital adequacy (12.8 per cent), non performing loans ratio (4.4 per cent) and liquidity ratio (45.3 per cent) were within their prudential thresholds. 

“Industry earnings ratios have also remained comparatively strong. Nonetheless, there is the need to strengthen macroprudential buffers. In particular, I see the need to build countercyclical capital buffers to further improve industry resilience to future shocks. Overall, I believe that the balance of risks continues to be tilted against price stability.

As such, maintaining a tight monetary policy stance over the short- to medium- term horizon is ideal. In terms of choice of instrument, my preference continued to be the MPR at the May 2023 meeting of the Committee. As more information and assessments become available, it might become feasible to consider other instruments as well.”