Members of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) on Tuesday dashed analysts’ expectations and voted, for the seventh straight time, to retain benchmark rates as against easing money to reflate the economy still struggling with a fragile growth rebound.
The members retained the Monetary Policy Rate (MPR) at 14.0 per cent, Cash Reserve Ratio (CRR) at 22.5 per cent, the Liquidity Ratio at 30 per cent, and also left the Asymmetric corridor around the MPR at +200 and -500 basis points.
Godwin Emefiele, CBN Governor said the most compelling argument by members who voted 6:1 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.
“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 the fifteen-month 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,” Emefiele told a press conference after the meeting.
He said the Committee was also 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.
In arriving at its decision, the CBN took note of the gains so far achieved as a result of its earlier decisions; including the stability in the foreign exchange market and the moderate reduction in inflation, creating possible options of whether to hold, tighten or ease. “These were subjected to extensive debate,” Emefiele stated.
The Committee further expressed satisfaction with the gradual, but consistent decline in inflation, noting, however, the substantial base effect in addition to the continuous improvement in the naira exchange rate across all segments of the foreign exchange market; and considerable improvement in foreign capital inflow.
And as in previous meetings, the committee members argued that although tightening would help rein in inflation expectations and strengthen the stability in the foreign exchange market, 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 it would make it more attractive for Nigerians to acquire assets at cheaper prices, increase their net wealth, and therefore stimulate spending as confidence rises, it was constrained that loosening at this time would exacerbate inflationary pressures and worsen the exchange rate and inflationary conditions.
The Committee also felt that loosening will further pull the real rate deeper into negative territory as the gap between the nominal interest rate and inflation widens.
On the outlook for financial stability, the CBN is concerned that despite the banking sub-sector’s resilience, the weak macroeconomic environment has continued to impact negatively on the stability of the sub-sector.
Responding to BusinessDay concerns on rising Non-Performing Loans, Emefiele said, “We the regulator came out with prudential guideline and said the maximum level would be 5 percent. And I can tell you that the majority of the banks still hover around percent or just a little above five. A few of them, no doubt have gone beyond five and we are working with them, we are analyzing their risk asset portfolio towards ensuring that this is corrected.
“We must also understand that indeed, we are doing the best possible to ensure that the banking stability that we so badly desire remains sustained.
“He assured that the CBN is alive to its responsibilities on this matter, assuring that it will continue to ensure that there is a sustained banking sustainability.
Speaking further on the outcome of the meeting, governor Emefiele, citing available data and forecast of key macroeconomic variables, projected a relatively positive outlook, predicated on existing policy initiatives including the Economic Recovery and Growth Plan ERGP of the federal government.
According to him, other potential drivers of economic recovery include, the expected increase in government revenue arising from favourable crude oil prices, stable output, and general improvements in the non-oil sector, especially, agriculture, industry and construction.
He was also hopeful that the intervention by the CBN in the real sector is expected to continue to yield positive results in terms of output and lower consumer prices.
But he warned of some downside risks to the overall short- to medium-term positive outlook for the economy, including, flooding which displaced farming communities and political agitations. On the external front, the hawkish policy stance in the United States, rising geo-political tensions and sluggish output recovery in the Euro-area and Japan, which he said could slow-down the momentum of global output growth, with significant spillovers to emerging markets and developing countries, remains a threat to Nigeria.
The CBN is also concerned that the employment gains of recovery were still minimal, noting that a number of important job elastic sub-sectors were still weak and may require more fiscal support to regain traction.
With a 0.55 percent growth in the second quarter of 2017, Nigeria exited its worst recession in 25 years, but there are strong warnings that the economy remains too fragile and could slump even deeper if pragmatic steps are not taken to consolidate gains.
The apex bank therefore called for an increased implementation of the capital component of the budget 2017 Budget for the growth-stimulating sectors of the economy order to reduce youth unemployment and restiveness.
But the finance ministry said on Tuesday that the federal government has till date, released a total of N336bn from the 2017 Budget to Federal Ministries, Departments and Agencies (MDAs) for funding of capital projects in the first quarter of 2017.
Analysts say the release nine months into the year is still quite low considering the N2.24tn (including capital in Statutory Transfers) which the federal government has planned as Capital expenditure for 2017.
The ministry’s confirmation, is however, coming three months after the finance minister, Kemi Adeosun said in June that the government was going to release an immediate N350 billion to sustain capital implementation.
The ministry said in a statement that the balance of N14bn is still being processed, pending resolution of some formalities within the agencies concerned.
The government had admitted that the implementation of the 2017 Budget in the first quarter of the year was very challenging as macroeconomic conditions, though improving, remained under stress.
According to details of the releases, Power, Works and Housing received the largest allocation of N90 billion; followed by Defence and Security which got N71 billion; while Transport got N30 Billion. Agriculture received N30 Billion of the capital releases while got Water Resources got N12Billion. Other sectors combined, received a total sum of N103 Billion.
Adeosun said the prioritization of the release of available funds was made in accordance with the objectives of the Economic Recovery and Growth Plan (ERGP). She said, in 2017, the Federal Government will continue to focus on capital expenditure spending on priority sectors to stimulate economic activities and job creation.
“Despite fiscal constraints, the Federal Government was able to fully cash-back the budgeted capital releases so far made, which is a reflection of the current administration’s commitment to economic development”, the Minister said.
Onyinye Nwachukwu, Abuja
