…Takes pre-emptive measures to sustain economic growth
…Retains MPR at 14% for 11 consecutive time, CRR at 22.5%
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has advised the Federal Government to take advantage of the increasing oil price at the international market to cut its excessive spending and save more to build ‘fiscal buffer’ against any economic crisis that could arise in the future.
This is even as the MPC on Tuesday voted overwhelmingly to retain the current lending rate – Monetary Policy Rate (MPR) at 14% for the 11th consecutive time to retain key policies indices, adding that the decision would sustain gradual improvement in the economy.
Governor of CBN, Godwin Emefiele, while briefing Finance Correspondents at the end of the meeting on Tuesday in Abuja, said eight out of nine members in attendance voted in favour of holding Monetary Policy Rate( MPR) at 14%, Cash Reserves Ratio ( CRR) 22.5% ; Liquidity at 30% and Asymmetric +200-500 basis points around the MPR.
Emefiele said that decision of the Committee was geared towards shielding the economy from the danger of expansionary spending ahead of the forthcoming general election in 2019, and sustain the current growth.
He explained that a contrary decision to effect cut in lending rate as largely envisaged by analysts could erode modest gains recorded in economy.
Justifying MPC decision, Emefiele said: “In the course of this presentation, we explained that a couple of expansion of fiscal activities that we foresee beginning from around May or June this year informed our decision.
“The committee further noted that loosening could worsen the current account balance through increase in importation, margin lending, lowering of risk evaluation in accessing loans which will drive up loans and likely increase the non-performing loans with potential negative consequences on the stability of the banking industry”.
Emefiele said that there was need to see how all the component of the Gross Domestic Product (GDP) would evolve in the second quarter of 2018 in order to gain greater clarity on the direction of monetary policy.
“The fact that we are still on the 2017 budget, 2018 budget will eventually kick around June or July and there will be acceleration in the rate of spending; and we also expect a lot of election spending.
These indications expectedly, are meant to expand the economy and spur growth which I will say it’s commendable but we also know that those expansionary fiscal measures will gradually lead to inflationary increase and if that happened, it will reverse the gains we have recorded overtime,” he stated.
The MPC also urged government to promptly settle outstanding contractor arrears as earlier promised, noting the improved performance of Deposit Money Bank and observed that the relatively high non-performing loans in the industry was moderating.
The committee considered the forecast of high liquidity injection in the second half of 2018, upward pressure of prices driven largely by substantial expansion of fiscal policy which will arise from the late passage of the 2018 budget, outstanding balance from the 2017 budget and the pre-election expenditure.
Accordingly, the MPC said tightening would ensure the mop up of excess liquidity, mindful that despite the moderation in inflation, the current inflation rate is still above targeted single digit and that real interest rate only turned positive in the review period.
The objective of the policy stand therefore would be to accelerate the reduction in the rate of inflation to single digit, to promote economic stability, boost investor confidence and promote foreign capital flows with complimentary impact on exchange rate stability.
Conversely, the committee believes that raising the interest rate would however depress consumption and increase the cost of borrowing to the real sector.
It advised the CBN to sustain its monitoring apparatus over the money deposit banks to ensure compliance with existing prudential measures and early detection and management of vulnerabilities in the banking sector while ensuring steady flow of liquidity from the Banks to the real sector to further strengthen economic recovery and employment generation.
While admitting that he had previously promised that the lending rate will be reviewed downward as inflation trend downward, Emefiele said reality on ground suggests a hold.
The CBN Governor said, “It is very true that we say until inflation drops to single digit before we take decision on reducing the interest rate, but you will also observe, in the course of this presentation we explained a couple of expansion of fiscal activities that we foresee.
Emefiele said the apex bank will come up with a framework that would be tailored to encourage Deposit Money Banks (DMBs) to lend credit facility to real sector of economy.
“One of the innovative ways the apex bank is going to adopt is to encourage Money Deposit Banks to accelerate credit growth to the real sector of the economy.
“In as much as possible we do not want to go back to the era of process sector lending and sectoral allocation, we would not because that is not supposed to be the intention,
but we will try as much as possible to come up with some decisions that will rate deposit ratio with a level of cash reserves that a bank holds so as to direct a bank or compensate a bank that has done a lot of work in boosting its own deposit ratio through compensating them with CRR and penalise those who prefer to keep liquidity and trade on government security , or direct to those to the exchange market rather than granting loan to the real sector.
“That framework will certainly come up and we will task the relevant authority to work on it and I am optimistic the Monetary Policy Committee will take that decision in the right time”, said CBN governor.
On the currency swap, Emefiele said: “I must say congratulations to Nigeria. After a rigorous almost two and a half years of negotiation with the People’s Bank of China that we eventually struck the deal for a currency swap between Nigeria and China with the intention to boost trade relations between both countries”.
Speaking on the modus operandi of the currency swap, Emefiele said, “It will just operate the way normal Letter of Credit (LC) transaction happened.
For instance, there are some importers from England that will give invoice in Pounds Sterling. If you want to import goods from England or in Europe, they will issue you invoices in Euro as against the dollars if the choices are theirs.”
According to the apex bank boss, under the China -Nigeria deal, “foremen or whatever name to be called by the time the framework is released, we would begging to see based on negotiation with Nigerian suppliers, that Chinese suppliers would begin to issue invoices in local currency.
By the time we conclude the framework, we should see to it that more invoices would be issued on the local currency against the traditional dollar.
I can tell you, it’s going to be positive and I repeat, it’s going to be strongly positive for Nigeria, for Nigerian imports and also for Nigerians, that is what we expect and we would ensure that we achieve that.
“This was a negotiation that was painstakingly done and I am optimistic that Nigerians will reap the positive impact from this and we do expect that by the time the framework is released, and Nigeria will end up being the remedy trade hub in the West African sub region because there are currently only three countries in Africa that enjoy the currency swap deal between China and themselves: South Africa, Egypt and Nigeria.
“So there are a lot of scopes to growth rate, there are a lot of Nigerians to benefit from this arrangement and particularly, not just in Nigeria but also in the West African sub region. We plan to release the framework by next week and the settlement banks have been chosen.
The settlement banks will be Standard Chartered Bank and Stanbic IBTC Bank that is an affiliation of the Bank of China, which will be the correspondent banks at the Chinese ends.
I repeat, the negotiation that has been reached will be positive to Nigeria and whatever comes out from this can never ever be negative to Nigeria.
“The outcome would most likely exacerbate inflationary pressures, cost higher pressure on the exchange rate and as demand for foreign exchange increases and return real rate into negative territory, as nominal interest rate could be less than inflation.
“The reduction in the MPR may not necessarily transmit to lowering market lending rate, on account of high cost of doing business”, the CBN governor explained.