| Monetary Policy |    2036 VIEWS  |
| Monetary Policy | |
| 2036 VIEWS | |
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Tuesday,
March 24, 2020 / 06:29 PM / Central Bank of Nigeria / Header Image Credit: WebTV
The
Monetary Policy Committee (MPC) met on the 23rd and 24th March
2020, amidst heightened uncertainty in the global macroeconomic environment
arising from major disruptions associated with the outbreak of the Coronavirus
Disease (COVID-19) and the oil price war between Saudi Arabia and Russia. The
Committee assessed the developments in the global and domestic environments in
the first quarter of 2020 and the outlook for the rest of the year, including
the threats to capital flows, growing vulnerabilities across global financial
markets, the probability of a global recession, risks to price and financial
stability as well as the quick intervention by central banks to restore
normalcy, with guidance for further action. Ten (10) members of the Committee
were in attendance at this meeting.
Global Economic Developments
The
Committee noted with concern, the combined demand and supply shocks to the
global economy arising from the outbreak of COVID-19 and the oil price war
between Saudi Arabia and Russia. It also noted the weakening performance of
global output growth since January 2020, reflected in losses in global stock
values; declining primary commodity prices, disruptions to the global supply
chain associated with large scale global lockdown of mega metropoles and whole
countries; and social distancing. Also, there has been adverse shocks to global
capital flows; vulnerabilities and uncertainties in major financial markets; as
well as rising corporate debt in the advanced economies and public debt in some
Emerging Market and Developing Economies (EMDEs). Consequently, global output
growth in 2020 is projected to fall significantly below the initially projected
level of 3.3 per cent.
Inflation
in the advanced countries continues to trend below long run targets, except in
the United States, especially in the light of prevailing headwinds and
heightened global uncertainties. Central banks in the Advanced Economies have
thus engaged in a coordinated approach with peers to embrace quantitative
easing across every sector, notably in transportation, travel and tourism, health
and setting up of social safety net funds, to stem the impact of these
headwinds on aggregate demand and supply chains. In the EMDEs, price
developments remained mixed with upward inflationary pressure in some of the
key economies.
Domestic Economic Developments
Data from the National Bureau of Statistics (NBS) showed that growth in
real Gross Domestic Product (GDP) continued to improve in Q4 of 2019.
Consequently, real GDP grew by 2.55 per cent
in the fourth quarter of 2019, compared with 2.28 and 2.38 per cent in the
preceding and corresponding quarters of 2019 and 2018, respectively. Growth in
Q4 2019, was driven largely by the strong performance of the oil sector, which
grew by 6.36 per cent, though lower than 6.49 per cent recorded in the previous
quarter, while the non-oil sector grew by 2.27 per cent. The Manufacturing and
Non-Manufacturing Purchasing Managers’ Indices (PMI) expanded, though at a
lower rate in February 2020, for the 35th and 34th
consecutive months to 58.3 and 58.6 index points, respectively. Staff
projections indicate that real GDP in Q1 and Q2 2020 will slow because of the
tepid global demand, resulting from the recent outbreak of COVID-19, depressed
global aggregate demand and supply, and the oil price war which has resulted in
supply glut and decline in crude oil prices. This muted outlook for the first
half of the year may thus, dampen overall growth prospects for 2020. To
mitigate this trend, the Bank took decisive action to safeguard the Nigerian
financial system and the economy from the emerging headwinds. The key policies
include: provision of extended moratorium on loans by an additional 1 year
beginning from March 2020. This is to ease pressure on loan repayments.
The Bank also reduced interest rates from 9 to 5 per cent on its
existing intervention programmes over the next one year; created a N50 billion
fund to support households and Small and Medium Enterprises (SMEs) affected by
COVID-19; introduced credit support for the healthcare sector; introduced
regulatory forbearance to consider temporary and time-limited restructuring of
loan terms and tenors to households and businesses affected by COVID-19, and
strengthened the loan-to-deposit ratio (LDR) policy. The Bank also announced an
intervention fund of N1.1 trillion to cushion the adverse effects of the
Coronavirus outbreak on the economy. The sum of N1.0 trillion from this amount
will be used to support local manufacturing to boost import substitution, while
the balance of N100 billion will be used to support the health services sector
and products through the provision of loans to the pharmaceutical companies,
hospitals and other health practitioners to build new hospitals and health
facilities or expand existing ones to first class health centres. This is in
addition to the N1.5 trillion private sector driven Infraco Project fund,
designed to target the construction of critical infrastructure across the
country. In addition, pharmaceutical companies would be assisted through loan
interventions to re-establish drug manufacturing firms in Nigeria and curtail
the spread of the corona virus. In summary, it is expected that through these
interventions, about N3.5 trillion would be injected as stimulus to support the
Nigerian economy during this trying time.
The Committee noted the continued uptick in headline inflation
(year-on-year) for the sixth consecutive month to 12.20 per cent in February
2020 from 12.13 per cent in the previous month. The increase in inflation, was
largely attributed to increases in the food and core components, which rose to
14.90 and 9.43 per cent in February 2020, from 14.85 and 9.35 per cent in
January 2020, respectively. This was driven by shocks to food prices associated
with renewed insurgency in major food producing areas of the Country and
persisting infrastructural deficits.
The MPC observed that broad money supply (M3)
contracted for the second consecutive month by 2.29 per cent (year-to-date) in
February 2020, reflecting the decline in Net Foreign Assets and Net Domestic
Assets. Specifically, the contraction in M3 was driven primarily by a decline
in securities other than shares and currency outside depository corporations in
the review period. Net Aggregate Credit, however, grew by 1.34 per cent in
February 2020.
The Committee noted with satisfaction the growth
in aggregate credit by N2.35 trillion since the inception of the LDR policy,
reflecting the potency of the policy and thus urged the Management of the Bank
to sustain the current momentum of improved flow of credit to the private
sector in Nigeria. It emphasized the need for coordination with the fiscal
authorities, to strengthen access to credit to some critical sectors of the
economy, including the weak and vulnerable population, particularly those in
the informal sector through the setting up of a special fund, as well as
support the enforcement of credit recovery. Accordingly, sectoral distribution
of credit between end-May 2019 and end-February 2020 was as follows:
Manufacturing (N533.06 billion); General Retail and Consumer Loans (N380.71
billion); General Commerce (N229.87 billion); Agriculture, Forestry and Fishing
(N163.04 billion); Information and Communications (N163.69 billion); Finance
and Insurance (N131.20 billion); Construction (N112.25 billion); and Transportation
and Storage (N45.42 billion), amongst others.
The Committee noted the dismal performance in the equities market as the
All-Share Index (ASI) decreased by 17.30 per cent and Market Capitalization
(MC) by 10.73 per cent between end-December 2019 and March 20, 2020. The
decline was largely attributed to profit taking and divestment by foreign
portfolio investors, the delisting of shares of three quoted companies and
capital outflow associated with the COVID-19 and subdued global economic
activity.
The MPC noted the continued resilience of the banking system, evidenced
by the further moderation in the ratio of Non-Performing Loans (NPLs) from 6.59
per cent in January to 6.54 per cent in February 2020. Although the ratio
remained above the prudential benchmark of 5.0 per cent, the Committee
expressed confidence in the Bank's regulatory regime and commitment to
maintaining stability in the banking system.
Outlook
The
overall medium-term outlook for the global economy remains uncertain with
increased deterioration in financial market conditions and weak global output
growth. The major headwinds to the current projection for global growth
includes: disruption to the global supply chain arising from the COVID-19
pandemic; oil price downturn as a result of subdued global demand,
vulnerabilities in major financial markets; rising corporate debt in the
advanced economies and public debt in some Emerging Market and Developing
Economies; as well as broad uncertainties leading to adverse shocks to foreign
investment flows.
On
the domestic front, available data on key macroeconomic variables indicate the
likelihood of subdued output growth for the Nigerian economy in 2020.
Based on the current downturn in oil prices, staff projections indicate that
output in the 2020 would be less than earlier envisaged. The major downside
risks to this outlook, however, include: the continued spread of COVID-19;
further decline in crude oil prices and the reduction in accretion to external
reserves; reduced government revenue leading to weak aggregate demand;
declining non-oil receipts; as well as infrastructural and security challenges.
These headwinds will, however, be partly mitigated by: the timely and effective
response of the monetary and fiscal authorities in containing the spread of the
COVID-19 viral infection, the recalibration and adjustment of the 2020 Federal
Budget to the revised thresholds while pegging expenditure to critical sectors
of the economy, adoption of a new fiscal regime to encourage the build-up of fiscal
buffers; sustained CBN interventions in selected sectors; enhanced flow of
credit to the real sector and deliberate policies to diversify the Nigerian
economy.
The Committee's Considerations
The
Committee reviewed the prevailing adverse conditions in the global economy such
as the COVID-19 pandemic and the oil price shock as well as the likelihood of
continued oil supply glut into the near future, focusing on the impact of these
headwinds on the Nigerian economy.
The
Committee observed that not only will the COVID-19 pandemic result in health
crises, it will also result in massive economic crises that will force many
countries into recession, including the leading industrialised countries. The
MPC took into cognisance the impact of the decline in oil prices on accretion
to external reserves and the emergence of exchange rate pressures. The
Committee thus commended and endorsed the Management of the Bank for its prompt
response with the adjustment of the exchange rate to uniform market rates and
the removal of distortions. It, however, took note of the likely impact of the
exchange rate adjustment on the economy.
The
Committee noted the weakened revenue position of the Federal Government,
arising from the sharp drop in oil prices. It reiterated the need for
government to urgently reduce reliance on oil revenue by gradually diversifying
the economy and improving tax collection. To this end, the MPC noted the speedy
response of the Federal Government to the oil price shock by the revision of
the 2020 budget downwards by N1.5 trillion and the oil price benchmark to US$30
per barrel. The MPC urged the NASS to fully cooperate with the Federal
Government in coming up with a budget that reflects our new realities. In
addition, the Committee noted the introduction of price modulation measures,
resulting in reduction in the pump price of PMS from N145 to N125 per litre and
its contributory effect in boosting aggregate demand, lowering inflation and
improving the welfare of the ordinary Nigerians.
The
MPC further noted the persistence of inflationary pressures attributed to a
combination of monetary and structural factors, and thus urged the Federal
Government to leverage on Public Private Partnership (PPP) to intensify
investment in infrastructure to increase output and employment. The Committee
cited the potentials for Foreign Direct Investment (FDI) flows to the Nigerian
auto manufacturing, aviation and rail industries, which could take advantage of
these viable and untapped domestic and regional markets.
The
Committee noted the sustained improvement in the financial soundness
indicators, applauding the continued decline in the ratio of non-performing
loans, growth in assets of the banking system and profitability of the industry
in the light of increasing global uncertainties. It also recognised the success
of the Bank’s loan-to-deposit ratio policy and its potential to alleviate
production shortfalls, reduce unemployment and boost aggregate demand, urging
the Bank to pursue this and other related policies to a conclusive end.
The
MPC underscored the COVID-19 pandemic as a public health crisis which will
continue to undermine any monetary or fiscal stimulus unless appropriate
measures are taken to trace, test, isolate and treat infected persons in order
to curtail the spread, while ensuring the that migration across the country is
significantly reduced. The MPC, therefore, called on the
Federal Government to take the necessary steps to safeguard the population
through close monitoring and emergency readiness measures to identify and care
for infected persons in the country, including compulsory restriction of
movement to curtail spread of the pandemic.
On the choices before the Committee, the MPC noted the recent actions of
the Bank, targeted at strengthening the resilience of the financial system and
alleviating the initial impact of the crisis. In its wisdom, the Committee felt
that tightening would result in reining in the rising trend in inflation, and
that it would support reserve accretion. However, it would reduce money supply
and limit DMBs credit creation capacity, thus resulting in increasing the cost
of credit, with adverse impact on output growth. Tightening would also result
in a reduction in aggregate demand as a fall in disposable income results
in output compression; whereas at this time, policy emphasis should be on
stimulating aggregate supply and demand, both already weakened by COVID-19.
With respect to loosening, whereas the Committee felt it would stimulate
the economy in the short term, and boost aggregate supply and demand, the
Committee nevertheless, was of the view that there was a need to be cautious in
loosening given the fact that it would exacerbate an already worsening
inflationary condition, resulting in massive pressure on reserves and the
exchange rate.
Based on the balance of these arguments, the MPC, in taking note of the
recent actions already taken by the Management of the Bank in response to the
COVID-19, resolved to allow time for the measures to permeate the economy while
allowing the pandemic to wear out its plateau before deciding on further
supporting policy measures to boost and strengthen aggregate demand and supply
in the recovery phase of the economy. The choice to hold also considered the
subsisting LDR and the DCRR policies, which sterilize excess liquidity in the
banking system, hence an increase in the MPR would be counter-productive.
The monetary policy stance arrived at this meeting took cognisance of
the need to address the unfolding unfavourable macroeconomic developments, rein
in inflation, support growth and employment through the extant interventions
and recent initiatives, check capital outflows and support external reserves
accretion, and dampen pressure and ensure foreign exchange market stability.
A review of the policy options indicate relative tightness of the
current monetary policy stance. The CRR was increased at the last MPC meeting.
Time is required for its full effects to manifest. Increasing the MPR will be
contradictory to the recent reduction of interest rate in the CBN intervention
windows from 9 to 5 per cent. Besides, an increase in MPR will be taken by the
Deposit Money Banks (DMBs) as in invitation to increase lending rates and this
will be most undesirable at this point in time when efforts are being made to
avert a recession. Besides, a reduction in the MPR, will not encourage the DMBs
to reduce lending rates. But other strategies of the CBN are making the DMBs to
reduce lending rates in furtherance of the growth objective.
The
Committee's Decision
The Committee noted the
continued rise in domestic prices; the glut in oil supplies and low oil prices
in the wake of the current global shocks; exchange rate pressure and other
domestic monetary and fiscal responses to the evolving crises. In view of the
foregoing, the Committee decided by a unanimous vote to retain the Monetary
Policy Rate (MPR) at 13.5 per cent and to hold all other policy parameters
constant.
In
summary, the MPC voted to:
I.
Retain the MPR at 13.5 per cent;
II.
Retain the asymmetric corridor of +200/-500 basis points around the MPR;
III.
Retain the CRR at 27.5 per cent; and
IV.
Retain the Liquidity Ratio at 30 per cent.
Thank
you.
Godwin
I. Emefiele
Governor,
Central Bank of Nigeria
24th
March 2020
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