March 25, 2019 08:50 AM / FBNQuest Research
The monetary policy committee (MPC) holds its latest meeting today and tomorrow in Abuja. In January it voted unanimously for an unchanged stance, which has been its decision since July 2016. This was expected, not least in light of the then imminent elections. We see it repeated this week because we are in a domestic political transition, because the global landscape has improved from a Nigerian view and because inflationary pressures have calmed. The normalization of US monetary policy has slowed and oil prices have moved up comfortably above US$60/b.
Domestic demand remains weak, and Nigerian still has double-digit inflation due to structural factors which are the responsibility of the FGN rather than the CBN. These include the poor infrastructure and insecurity in core food growing areas. The headline rate has settled within a range of 11.0% to 11.5% y/y since June 2018: stable fx rates have helped to contain inflation but the CBN does not have the weapons in its armoury to drive the rate downwards.
Growth is picking up slowly but is well below the rates posted in the first part of the decade. The governor told a conference in Lagos last week that the CBN saw growth of 3.0% this year, with a decent (unspecified) rate in Q1 on the back of spending related to the elections and the FGN’s fiscal stimulus. This expectation has been challenged as too high in several quarters but, if attained, would still be very modest in per head terms (depending on whose population growth projections are selected). We have an ambitious forecast of 2.9% for the year.
A common theme of MPC communiques is the importance of encouraging foreign portfolio investors (FPIs). We have seen very sizeable inflows into the fixed-income market over the past four weeks without any signals from the committee. Official reserves have increased by US$1.2bn since the start of March, which suggests that the CBN has become a steady buyer at NAFEX (I & E window).
Another theme in the communiques is regret at the very low level of credit growth to the private sector, which amounted to 1.8% in 2018 vs the benchmark of 12.4%. The official response is to advocate new or expanded CBN vehicles to boost lending, particularly in areas such as agriculture where the deposit money banks are reluctant to tread without support.
In the communique in January the committee identified grounds to “await clarity on the macroeconomic performance after the general elections”. The polls have been concluded but it still too early to judge the macro impact, which again points to an unchanged stance this week.
In addition to the several reasons already identified, we see that the MPC/CBN are looking for fiscal and structural reform from the FGN to deliver growth, inflation and employment objectives. They are looking for the government to do a far greater share of the “heavy lifting”.