Rising from its meeting last week, the Monetary Policy Committee of the Central Bank of Nigeria (CBN) maintained the tight monetary policy stance it took in July, maintaining the benchmark interest rate.
In essence, the monetary policy rate (MPR) was retained at 14 per cent same as the cash reserve requirement for banks which was left at 22.5 per cent. Likewise, liquidity ratio was left at 30 per cent and the asymmetric window was retained at +200 and -500 basis points around the MPR.
Same as at its meeting in September, the decision to hold the MPR had been favored by all 10 members of the MPC. Analysts had not expected much either as the challenges of the Nigerian economy though getting more aggravated remained mostly the same. Inflation had continued to rise, reaching 18.3 per cent in October.
In the same vein, the country had continued to slip further into recession as data released by the National Bureau of Statistics in August showed that the economy slipped into recession following a second consecutive contraction in the second quarter of the year as domestic output contracted by 2.06 per cent.
The latest release by the NBS last week showed that real income actually worsened in the third quarter as output contracted further by 2.24 per cent relative to its level in the previous and corresponding quarter of 2015. The non-oil sector grew by 0.03 per cent, driven by agriculture which grew by 4.54 per cent, following the 0.38 per cent contraction in Q2 2016.
The CBN Governor, Godwin Emefiele at the end of the September MPC meeting had noted that the country is Currently undergoing stagflation which according to him was a very difficult economic condition with no quick fixes, “having been imposed by supply shocks, culminating in twin deficits: fiscal and current account.”
To him, policy framework must be re-engineered urgently to provide a lever for reversing the negative growth trend. While the imperative for ensuring financial system stability remains, he reiterated the fact that monetary policy alone cannot move the economy out of its present condition
Recognizing the fact that monetary policy had been “substantially burdened since 2009” and “stretched” the Committee said it understood the complexity of the challenges facing the economy and the difficulty of arriving at an optimal policy mix to address rising inflation and economic contraction, simultaneously.
Evaluating the impact of its July and September 2016 actions on the macro economy, the MPC noted that while foreign exchange inflows into the economy had improved significantly in July and August, it declined after the September meeting, leading to rising inflation and increasing negative real interest rates. However, outflows significantly dropped, lending credence to the propriety of the decisions of the July and September MPC meetings.
Having reiterated the limitations of monetary policy in reversing the current stagflationary condition in the economy, which it traced to supply and demand shocks, members of the MPC stressed the need for a robust and more keenly coordinated macroeconomic policy framework that would restart output growth, stimulate aggregate demand and rein in inflation expectations.
Overall, members called for an enrichment of fiscal and other sector initiatives and interventions towards resolving the growth challenges in the economy in order to promptly revive confidence in the economy.
Available data and forecasts of key economic variables indicate that the outlook for growth and inflation in the medium term continues to be challenging. Growth is expected to remain less robust given the absence of sufficient fiscal space while the current tight stance of monetary policy and improved agricultural harvests are expected to contain further price increases and moderate price expectations as the trend has already revealed.
According to analysts at Cowry Assets Management Limited, rising inflationary trend which is mainly from cost push factors; in particular, foreign exchange shortage, continues to portend low economic growth prospects. “Businesses should expect to see lower margins due to the fact that they may not be able to fully transfer rising input costs to the final consumer. In addition, rising cost of living will continue to erode disposable income of consumers, resulting in little incentive for lower income earners to save.
“On the other hand, both local and foreign portfolio investors would have an incentive to invest in high yield short term government debt. On their part, the fiscal authority will seek to source longer term debt from offshore markets due to their relatively cheaper cost. We expect the fiscal authority to complement monetary counterpart by fast-tracking key socio-economic reforms that will improve ease of doing business and help boost productivity which is necessary to spur economic growth.”