| Monetary Policy |    2197 VIEWS  |
| Monetary Policy | |
| 2197 VIEWS | |
 |
Friday,
January 24, 2019 / 06:15 PM / Central Bank of Nigeria/
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The Monetary Policy Committee (MPC) held its 27th meeting, the first in fiscal 2020, on the 23rd and 24th of January, 2020. The Meeting held in an environment of sluggish global economic recovery and financial market vulnerabilities, and tepid domestic growth. The Committee appraised these developments and the outlook for the first quarter of 2020, as well as the rest of the year. All the Eleven (11) members of the Committee were in attendance.
Global Economic Developments
The
headwinds that characterized the global economy in 2019 showed signs of
moderation, giving way to improved prospects for economic recovery in 2020.
Consequently, global output is projected to grow by 3.3 per cent in 2020 from
2.9 per cent in 2019. The downside risks to the global outlook, include: broad
slowdown in the advanced economies; resurgence of financial stress in the
Emerging Markets and Developing Economies (EMDEs); rising geo-political
tensions in the 2 Middle-East; and extreme weather conditions in some regions.
Output growth across major advanced economies, remains fragile, due to weak
recovery in manufacturing activities and sluggish rise in global trade.
Consequently,
growth in the Advanced Economies is projected to slow to 1.6 per cent in 2020,
from 1.7 per cent in 2019. With most EMDEs facing brighter prospects, output
growth is expected to recover to 4.4 per cent in 2020 from 3.7 per cent in
2019. The major impetus for this recovery is expected to come from India,
Brazil and Russia. In most advanced economies, inflation remained below their
long-run targets, reflecting weak aggregate demand in the Euro Area and Japan,
as well as moderating wage growth in the US, despite the robust job
performance. Central Banks in the advanced economies are thus, expected to
continue with monetary accommodation into the medium term. In the EMDEs,
however, inflation prospects remain mixed, with some economies facing stronger
upside risks than others.
Domestic Economic Developments
Real
Gross Domestic Product (GDP) continued to improve, although slowly. It grew to
2.28 per cent in the third quarter of 2019, compared with 2.12 and 1.81 per
cent in the preceding and corresponding quarters of 2018, respectively. The
improvement in growth was driven, largely, by the performance of the oil
sector, which grew by 6.49 per cent, while the non-oil sector grew by 1.85 per
cent. Staff projections estimate real GDP in Q4 2019 and Q1 2020 at 2.20 and
2.35 per cent, respectively.
The
Manufacturing and Non-Manufacturing Purchasing Managers' Indices (PMI) grew
further in December 2019, for the 33rd and 32nd consecutive months, to 60.8 and
62.1 index points, respectively. The optimism in growth prospects in Q1 2020,
and the rest of the year, is anchored on the enhanced flow of credit to the
private sector, to improve manufacturing activities, and financial and exchange
rate stability. In addition, the Bank's continued intervention in Agriculture,
and Small & Medium Scale Enterprises (SMEs) is expected to boost growth.
Identified headwinds to growth, however, include; uncertainty in the oil
market, high unemployment, rising public debt and security challenges across
the country.
The
Committee noted the continued uptick in headline inflation (year-on-year) in
December 2019 to 11.98 per cent, from 11.85 per cent in the previous month. The
increase in inflation, which was anticipated, was largely attributable to
increase in both the food and core components, by 14.67 and 9.33 per cent in
December 2019 from 14.48 and 8.99 per cent in November, respectively. The
increase in the food component reflects largely seasonality effect and the
impact of the continued insurgency in some food producing areas of the country.
Although,
Staff forecasts suggest a short-term upward trend in prices, the Committee
believes that the Bank's continued intervention in the real sector is expected
to increase domestic production and lower prices in the medium-term. 4 The
Committee observed that broad money supply (M3) grew by 6.22 per cent
(year-to-date) in December 2019. Aggregate Credit (Net) similarly grew to 27.33
per cent in December 2019, from 23.12 per cent in the previous month. This was
largely attributed to an increase in Credit to Government, which grew to 92.95
per cent in December 2019, from 72.36 per cent in the previous month. Credit to
the Private Sector also grew to 13.61 per cent in December 2019, from 12.82 per
cent in the previous month.
Consequently,
sectoral distribution of credit between end-May 2019 and end-December 2019 was
as follows: manufacturing (N446.44 billion); General Retail and Consumer Loans
(N419.02 billion); General Commerce (N248.48 billion); Agriculture, Forestry
and Fishing (N160.94 billion); Information and Communications (N156.47
billion); Finance and Insurance (N129.87 billion); Construction (N86.54
billion); and Transportation and Storage (N68.61 billion), amongst others.
The
Committee observed with delight that, over the last six months, aggregate
credit grew by N2.0 trillion and urged the Management of the Bank to sustain
the current momentum of improved flow of credit to the Private Sector, while
exploring other options with the fiscal authorities to strengthen the legal
framework for the enforcement of credit recovery. Lower money market interest
rates, in the review period, reflected the liquidity overhang in the banking
system, resulting from the restriction of individuals and non-bank corporates
in the domestic economy from participating in OMO bill auctions.
Consequently,
the monthly weighted average Inter-bank call and Open Buy Back (OBB) rates fell
sharply to 3.82 and 3.24 per cent, in December 2019, from 11.42 and 10.73 per
cent, respectively, in the previous month. The Committee noted the improved
performance in the equities market, as the All-Share Index (ASI) and Market Capitalization
grew by 11.61 and 18.27 per cent, respectively, between end-October 2019 and
10th January, 2020. This was indicative of the shift by domestic investors from
the money market to the equities market in response to the Bank's policy to
restrict their investments in the OMO bills auction.
The
MPC also noted the improved performance and sustained resilience of the banking
system, evidenced by the continued moderation of the Non-Performing Loans
(NPLs) ratio from 6.6 per cent in October to 6.1 per cent in December 2019. The
Committee noted that the improvement reflected the Bank's continued deployment
of heterodox policies to ensure that NPLs fell below the prudential benchmark
of 5.0 per cent.
Outlook
Although
global output is projected to expand moderately in 2020, compared with the
previous year, the overall medium-term outlook for the global economy remains
uncertain, due to the persistence of several headwinds. These include: the
lingering trade tensions between the US and its major trading partners; rising
levels of both corporate and public debts; continued geopolitical tensions in
the Middle-East; fragile recovery of manufacturing activities; and the 6
narrowing policy space by which central banks in the advanced economies can
respond to future macroeconomic shocks.
In
addition, predicted weather-related disasters could pose further threats to
global output recovery. On the domestic side, available data on key
macroeconomic indicators show prospects of improved output growth for the
economy in 2020. Revised projections for 2020, show that the economy is
expected to grow by 2.50 per cent (IMF), 2.10 per cent (World Bank) and 2.35
per cent (CBN). The underlying projection is anchored on the following
conditions: enhanced flow of credit to the real sector of the economy; sustained
stability in the exchange rate; continued CBN interventions in agriculture and
non-agricultural Small and Medium Enterprises (SMEs); and the effective
implementation of the Economic Recovery and Growth Plan (ERGP). The downside
risks to this projection are primarily the rising stock of public debt and lack
of fiscal buffers. Others include the persistent security threat in major
food-producing areas, poor and inadequate infrastructure and weak public and
private sector investment.
The Committee's Considerations
The
Committee noted the persistent increase in the inflation rate, which stood at
11.98 per cent in December 2019. It also noted that the inflation was driven by
both monetary and structural factors. Having addressed the monetary factors,
the headroom for further monetary policy measures has become constrained, being
7 supported by empirical evidence which suggests that inflation above 12.00 per
cent is inimical to output growth in the Nigerian economy.
The
MPC thus called on the fiscal authorities to speedily address legacy structural
impediments giving rise to upward-trending price developments. Amongst these,
the Committee identified infrastructure deficit and the long-standing clashes
between herdsmen and farmers, which are constraining domestic production and
contributing substantially to the rise in food inflation.
The
MPC, therefore, urged the Federal Government to relentlessly seek innovative
ways of addressing security challenges across the country in order to boost
aggregate food supply. The Committee further noted the contribution of imported
food and other tradeables to the rise in price levels but emphasized the
opportunity to ramp up production of domestic substitutes supported by the
Bank’s development finance initiatives, particularly in agriculture and
manufacturing sectors. The Committee noted the improvement in the financial
soundness indicators, growth in assets of the banking system and the gradual
switch in the composition of DMB assets from investments in government securities
to growth in credit portfolio. It, however, noted that lending rates at the
retail segment of the market had remained fairly sticky downwards as deposit
rates had declined substantially.
It
also noted that in some cases, DMBs were not encouraging term deposits in their
portfolios and therefore, emphasized the Bank's 8 commitment towards the
implementation of the Loan-to-Deposit ratio (LDR) policy. On fiscal operations,
the Committee applauded the Government for the recent signing of the 2020 Finance
Bill which opens a new vista of opportunities in public financial management.
The MPC, however, cautioned that public debt was rising faster than both
domestic and external revenue, noting the need to tread cautiously in
interpreting the debt to GDP ratio. The Committee also noted the rising burden
of debt services and urged the Fiscal Authorities to strongly consider building
buffers by not sharing all the proceeds from the Federation Account at the
monthly FAAC meetings to avert a macroeconomic downturn, in the event of an oil
price shock. It urged Government to gradually reduce reliance on oil receipts
and focus on revenue diversification through reforms of the tax system.
The
Committee also called on Government to rationalize fiscal expenditure towards
reducing the current excessively high cost of governance. The MPC expressed
concern about the rising inflation, which increased consecutively in the last 4
months as at December 2019 to 11.98 per cent and higher than its target range
of 6-9%. This rising price level is attributable to a combination of structural
and supply side factors, expansionary fiscal policy; and growth in money supply
arising from rising liquidity surfeit in the industry due to changes in the
Bank's OMO policy.
In
furtherance of its primary mandate to maintain price 9 and monetary stability
and in view of the anticipated medium-term liquidity surfeit from maturing OMO
bills held by local private and institutional investors, which would not be
rolled over, the Committee considered it prudent to raise the CRR to curtail
liquidity surfeit in the banking system. The Committee is confident that
increasing the CRR at this time is fortuitous as it will help address
monetary-induced inflation whilst retaining the benefits from the Bank's LDR
policy, which has been successful in significantly increasing credit to the
private sector as well as pushing market interest rates downwards. The
Committee further encouraged the Management of the Bank to be more vigorous in
its drive to improve access to credit through its pursuit of the Loan-to-deposit ratio policy as doing this would help, not
only in creating job opportunities but also help in boosting output growth and
in moderating prices.
It
is noteworthy that Gross credit in the industry grew by N2 Trillion between May
2019 and December 2019; channeled primarily to the employment-stimulating
sectors such as agriculture and manufacturing, in addition to increased lending
to the retail and SME segments, which is expected to help boost domestic output
growth in the short to medium term. To retain the gains from credit expansion
and current industry focus on lending, the Committee advised the Bank to
sustain its LDR Policy and in addition continue to deploy its DCRR policy which
directs new funding for greenfield projects and expansion to critical sectors
of the economy.
The Committee's Decision
On
the arguments to tighten, the Committee noted that given that inflation rate
inched up in December 2019 and that the rate is still above the upper band of
the 6-9 per cent threshold, tightening may be necessary to tame the rising
trend in inflation. In addition, the relatively bearish outlook of the equities
market indices points to waning investor confidence in equity in preference for
coupon rate on bonds. Raising the policy rate, could be a policy choice to
reverse the tendency and attract more foreign portfolio investments.
Also,
the risks to the level of reserves persist as prices of oil futures remain
uncertain. Policy tightening would enhance the accretion to foreign reserves
and attain relative stability in the foreign exchange market. Moreover, raising
rates would reinforce the stability of the foreign exchange market as an
upswing in the rate will inhibit demand pressures in the market through a
decline in money supply. Although tightening would limit the ability of DMBs to
create money, ultimately leading to a reduction in money supply and curtail
their credit creation capabilities, which would eventually lead to rising cost
of credit and credit risk as DMBs re-price their risk assets, the MPC believes
that the aggressive pursuit of the current loan-to-deposit ratio policy thrust
would continue to help to catalyze credit growth and positively impact growth
and prices. On the decision to loosen, members noted that the relative
stability in the foreign exchange market provides confidence to foreign
investors.
There
is, therefore, no immediate concern that loosening would exert pressures on the
foreign exchange market in the near term. In addition, an accommodative
monetary policy stance would motivate banks to lend to maintain their profit
performance and would result in decline of the overall cost of production. This
would further affirm the Bank's support for stimulating output growth. The Committee
also feels that the downside to loosening is that it could amplify inflationary
pressures as the economy experiences increased liquidity surfeit, particularly
if loosening drives growth in consumer credit, without corresponding adjustment
in output, thus escalating inflationary pressures. An interest rate reduction
would increase money supply and exert pressure on the exchange rate.
Moreover,
an accommodating monetary policy stance may not necessarily lower the retail
lending rate, as interest rates are generally sticky downwards. On the argument
for a Hold, the MPC acknowledged that a mix of heterodox monetary and financial
policy measures have recently been deployed by the Bank. Noting the existence
of a lag between the policy pronouncement and its impact on the economy, a hold
in the rate would ensure its efficient impact on the economy.
The
Committee noted the slow pace and low rate of economic growth as real GDP
growth of 2.10, 2.12 and 2.38 per cent in Q1, Q2 and Q3 2019, respectively,
being below the population growth rate, still needs 12 sustained policy
support. Maintaining monetary policy rate at its present level is essential for
sustainable support to growth before any possible adjustments. This will enable
policy to react suitably to developments as they occur in the near term. In
addition, retaining the current policy position provides avenues to evaluating
the impact of the heterodox monetary and financial policies to support lending
by the banking industry without altering the policy rate.
On
the downsides to holding, the Committee noted that it would reduce the speed of
economic recovery relative to loosening, exert a drag on output growth, as DMBs
continue to utilize bonds sales instead of engaging in financial intermediation
to the private sector. In view of the foregoing, the Committee by a decision of
9 members, voted to alter the Cash Reserve Requirement (CRR) by 500 basis
points from 22.5 to 27.5 per cent, while leaving all other policy parameters
constant. Two members voted to leave all parameters constant.
In
summary, the MPC voted to:
1.
Change the CRR from 22.5 to 27.5 per cent;
2.
Retain the MPR at 13.5 per cent;
3.
Retain the asymmetric corridor of +200/-500 basis points around the MPR;
4.
Retain the Liquidity Ratio at 30 per cent.
Thank
you.
Godwin
I. Emefiele
Governor,
Central Bank of Nigeria
24th
January, 2020
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