| Monetary Policy |    2121 VIEWS  |
| Monetary Policy | |
| 2121 VIEWS | |
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Tuesday,
April 14, 2020 / 07:30 PM / Central Bank of Nigeria /
Header Image Credit: TVC
Adamu, Edward Lametek
The
Nigerian economy came under severe pressure in the aftermath of the January
2020 meeting of the MPC. Two new sources of vulnerability emerged and grew
rapidly in importance during the first quarter of the year. The first, and
undoubtedly more invasive, is the novel corona virus (COVID-19) pandemic.
Across the globe, COVID-19 is weighing heavily on economic activity and
financial markets, particularly stock markets, despite attempts by monetary
authorities to ease liquidity conditions. Analysts fear that, at the current
rate of disruption of commerce, trade and movement of goods and services, the
COVID-19 pandemic will orchestrate another global economic downturn. COVID-19
has had a direct dampening impact on economic activity in Nigeria through
widespread movement restrictions since the index case was uncovered in February
2020.
It
is also impacting the domestic economy through the disruption of global
supplies of inputs (and intermediates) as well as the demand for oil, Nigeria's
main export commodity. The second source of pressure was the sudden sharp fall
in the prices of oil following the collapse of the OPEC+ production cut
discussions and the consequent price war between Saudi Arabia and Russia.
Whereas the shock to crude oil prices is likely to feed (positively) into
activity recovery process in some countries, it could make recovery even more
difficult in oil producing (developing) countries like Nigeria, by undermining
government revenue/budget, external reserves accretion and exchange rate, in
addition to propagating instability across the financial system.
Meanwhile,
against the backdrop of old pressures, particularly geo-political tensions, Iran
sanctions, Brexit and trade disputes, global economic growth was weak in 2019,
but already stabilising until the new pressure unfolded.
The
global economy continues to be heavily burdened by the fallouts of both
COVID-19 pandemic and oil price war. Factory closures, supply chain
disruptions, cutbacks in services, travel restrictions – all leading to loss of
confidence, have been the primary channels of the impact of the pandemic on
global economic activity. Stock markets are experiencing bearish runs across
the globe, underpinned by rapidly diminishing business confidence and palpable
anxiety about another economic meltdown, barely a decade after the last.
Given
the muted global inflation, central banks are responding to the weakening
prospects of economic activity brought about by COVID-19 in line with the
International Monetary Fund's suggestion that they should aggressively support
demand and confidence by easing financial conditions. Indeed, some of them,
particularly in low inflation countries, have already lowered interest rates
and/or injected more liquidity. However, with Nigeria's current inflation at
12.2 per cent (which is much higher than the policy reference range of 6.0 - 9.0 per cent) and projected to trend upwards, the economic challenge is not
only about supporting demand - liquidity expansion (monetary easing) in the
circumstance becomes a double-edged sword and therefore ought to be carefully
scrutinized. I voted to hold all policy parameters at their levels prior to the
March 2020 meeting based on this and other considerations outlined in the
reminder of this statement.
Data
made available by National Bureau Statistics (NBS) show that in Q4 2019, real
GDP grew by 2.55 per cent, compared with 2.28 and 2.38 per cent in the previous
and corresponding quarters of 2018, respectively. Growth was driven by the
non-oil sector, particularly Services, which contributed the most, 2.60 per
cent in Q4 2019, compared with 1.87 and 2.90 per cent in the previous and
corresponding quarters of 2018, respectively. Overall, non-oil real GDP growth
rate increased to 2.27 per cent in Q4 2019 from 1.85 per cent in the preceding
quarter. Oil real GDP maintained an impressive growth of 6.36 per cent, though
lower than 6.49 per cent recorded in the previous quarter. The Nigerian economy
appeared set for better outcomes going into 2020 until it confronted the latest
headwinds. The outlook for economic growth has since February deteriorated as a
result of the extra challenges. In fact, both manufacturing and
non-manufacturing PMIs dipped in March 2020, just like the overall business
outlook for "Current" and "Next month", based on impressionistic staff survey
of businesses, deteriorated.
In
support of economic activity in view of COVID-19, the CBN recently announced
some measures including direct interventions in the health and SMEs sectors;
one-year moratorium on principal repayments and reduction of the interest rate
on its facilities as well as a regulatory forbearance allowing banks to
restructure existing credit. I believe that these measures would complement the
minimum loan-to-deposit ratio (LDR) introduced in 2019 and the differentiated
cash reserve requirement (DCRR) to ensure adequate flow of credit to sectors
with significant growth and employment prospects. The LDR policy has done
remarkably well – industry credit rose by over two trillion naira between May
2019 and March 2020, against the background of improved banking system
resilience.
It
is quite encouraging that most financial soundness indicators have remained
strong notwithstanding the rapid expansion in credit – strong Tier 1 capital
(88.2 per cent of the total qualifying capital at end-February 2020);
relatively low non-performing loans (NPLs) ratio; rising industry capital
adequacy ratio (15.0 per cent in February 2020 from 14.5 per cent in December
2019); and growing industry size. Sustaining the stability of the banking
system continues to be a key policy priority on its own merit and in view of
its importance in the economic growth process. Since June 2019, inflationary
pressures generally started to build particularly in the food segment, owing to
insecurity in the major food-producing regions (North-east and North-central)
of the country and other supply factors like the partial closure of the
country's land borders. In February 2020, all measures of inflation (headline,
food and core) increased, taking the headline further away from the implicit
policy target.
Food
inflation increased to 14.90 per cent in February 2020 from 14.85 per cent in
January while core inflation inched up from 9.35 per cent in January 2020 to
9.43 per cent in February. However, in terms of short-term outlook, I noted
some important moderating factors which somehow doused my sense of urgency
about the need to further tighten the stance of monetary policy. First, the
reduction in pump price of PMS from N145 to N125 per litre should help to
moderate inflationary pressure on commodity prices, particularly food prices,
as transportation cost is expected to reflect the reduction, albeit with a
little time lag. Second, COVID-19 comes with a drastic reduction in the
velocity of money owing to movement restrictions/lockdowns, implying that
spending-induced pressure on prices could moderate in the shortterm. Third,
slowing economic activity combined with high inflation points fundamentally to
supply disruption/constraint, which best fixed by measures aimed at
ameliorating supply (output). This is essentially what the Bank's interventions
in the agricultural sector seek to achieve. Lastly, the increase in CRR in
January 2020 continues to have the desired effect of reining-in excess
liquidity. As a direct consequence, overnight interbank rates, the open-buyback
(OBB) and interbank call rates trended upwards in February 2020. Meanwhile, the
country's external accounts weakened in 2019 with 3 consecutive quarterly current
account deficits (Q1 - Q3) and a trade deficit in Q4.
Financing
the deficits has meant gradual depletion of the country's external reserves
from about $45 billion in July 2019 to $38 billion in December 2019. As at
mid-March 2020, the external reserves position had declined to about $36
billion. The naira exchange rate, nevertheless, remained stable in January and
February in all the segments of the market, but depreciation pressures crepted
in March following the oil price shock. With receding capital inflows due to
the turbulence in the global economic atmosphere, maintaining stability of the
naira exchange rate, a key priority, can only happen with increased
intervention in the FX market, drawing on already slowing external reserves.
Clearly, the orientation of monetary policy at this point need not aggravate
the pressure on the external accounts by being anymore lax. I therefore did not
deem it immediately necessary to alter any of the policy parameters.
Finally,
in choosing to hold, I am not unmindful of the heavy potential economic costs
of COVID-19; rather, I am persuaded that the various responses by the CBN,
Bankers' Committee, governments at all levels and the organized private sector
would go a long way in ameliorating the impact of COVID-19 on livelihoods and
the economy in general. Nevertheless, a trust fund by the Federal Government in
support of the informal sector as part of the overall response to the fallouts
of the COVID-19 pandemic in Nigeria would not be out of place. I should add that
effective coordination of responses and some understanding of sectoral impact
of the pandemic would be important in ensuring efficient allocation of
resources and attainment of superior outcomes. 16 Classified as Confidential.
Adenikinju, Adeola Festus
Year
2020 is unfolding to be a very difficult year for Nigeria and indeed for the
global economy. The emergence and rapid spread of coronavirus is proving to be
a challenge that few countries were prepared for. COVID-19 is a public health
issue but with significant socio-economic and financial impacts on economies
across the globe. Global growth for the year has already been reviewed
significantly downward. The channels of transmission of COVID-19 on national
economies are through demand, supply and financing impacts. Nigeria is already
experiencing a fallout from the global pandemic through sharp decline in the
price of oil, declining portfolio investment, falling foreign reserves,
adjustments in exchange rates, shut down of global supply networks, gradual
shutdown of the local economy with direct impacts on travel and tourisms,
entertainment, education, manufacturing, and trade sectors; sharp fall in
capital market and threat of corporate debt default.
There
is no doubt that we are still at the early stage of the pandemic. We are yet to
understand the full impacts of the pandemic on our economy as well as the
distribution of the impacts by sectors and economic agents. The primary focus
should be on how to contain the pandemic and address health and safety concerns
of Nigerians. Policy makers have to consider, first, how to respond to these
challenges and mitigate the impacts of the pandemic on the economy, disruptions
on growth, financial stability during and after the crisis and reduce income
uncertainty for economic agents. Second, how to deal with rising inflation
trend from shocks from foreign exchange adjustments, falling oil price and
liquidity surfeit in the banking system. We currently rank 15th among countries
with highest inflation rates.
Bank
Staff Presentations
The
presentations from the Bank Staff shows mixed results. The financial system
Stability (FSS) Report shows that most FSS indicators are trending in the
positive direction, NPLS ratio is at single digit, credit creation by deposit
money banks remain strong, and more sectors record increase in credit access in
Q1 2020. Weighted average lending rates also continue to trend downwards.
However,
staff model simulation shows that the financial system remains vulnerable to
sharp and persistent decline in oil prices and the coronavirus epidemic. The
Economic Report shows that real GDP rose by 2.55% in Q4 2019 according to
National Bureau of Statistics (NBS), bringing average GDP growth for 2019 at
2.27%. Real GDP Growth was driven by oil and non-oil sectors, especially
information and communication, agriculture, manufacturing, finance and
insurance, entertainment and recreation, accommodation and food services. In
the same vein, headline inflation (y-o-y) rose to 12.20% in February 2020 from 12.13%
in January 2020. This is more than 3 percentage points outside the tolerable
band of 6 - 9% for the economy. Growth in headline inflation was driven by food
inflation and core inflation. There is evidence of liquidity surfeit in the
banking system.
Foreign
reserves also declined to US$34.09 billion as at March 19, 2020. Trade and
current accounts balances remain negative. Exports grew less than imports in Q1
2020 Foreign portfolio investment also declined and the exchange rate was
adjusted from N360 to N380/US$ at the I&E window, to stem the pressure in
the foreign exchange market. The capital market also declined sharply and the
uncertainty in the local and global economy is affecting both the equity and
fixed income markets. The absence of fiscal buffers and falling foreign
reserves will not only limit the capacity of the economy to respond to the
unfolding impacts of COVID-2019, but also impairs the future ability of
governments, especially at lower levels, to 18 Classified as Confidential meet
their obligations. The falling oil prices (more than 50% between January and
March 2020) will sharply reduce the quantum of inflow to the federation account
and consequently the shares thereof allocated to all levels of governments.
States will struggle to pay workers, contractors and meet other obligations.
Considerations
and Recommendations
The
CBN has already rolled out package of incentives to mitigate the impact of
supply and financing disruptions and reduce the growth effect of the pandemic.
The intervention cost provided by the CBN is about N3.5 trillion. This more
than compensates the expected reduction of N1.5trillion in 2020 FG budgetary
expenditure. However, I am worried that the current interventions may not cover
individuals and families and those largely in the informal sector. The CBN is
already in a tightening mode. Given the 500 basis point increase in the CRR at
the January meeting of the MPC. The CBN also has arrays of tools at its
disposal, including the OMO to address inflation as it arises. My survey of all
central banks that had responded to the ongoing pandemic did not show any that
has raised policy rates or tighten monetary policies at this time. Monetary
policy rates have either been reduced or left unchanged. There are good reasons
to advocate for loosening (encourage growth) or tightening (fight inflation and
attract portfolio investment). However, given the unfolding situation, and the
state of our economy, the cost of both actions will be detrimental, hasty and
not appropriate and definitely worsening than just staying the course.
1.
I endorse current measures put in place by CBN to mitigate the impact of the
pandemic.
2.
The Bank should continue to review the situation as it unfolds and take
appropriate measures to stabilize the economy.
3.
The fiscal side should consider complementary trade and income policies to
support the measures put in place by the CBN including the reduction in tariff
rates on imported raw materials, intermediate and capital goods.
4.
Deferment of implementation of the 50% increase in VAT,
5.
Put a hold on increase in utility prices for this year
6.
Compensation package for vulnerable households and individuals
My
Vote
Based
on the unfolding developments in the economy, uncertainties around the full
impacts of COVID-19, and preliminary measures by the CBN, I cast my vote at
this meeting to retain all policy parameters at extant levels. Hence, I vote as
follow:
1.
Retain MPR at 13.5%
2.
Retain the CRR at 27.5%
3.
Retain LR at 30%
4.
Maintain Asymmetric corridor around the MPR at -500/+200 basis points.
Ahmad, Aishah N.
The
Monetary Policy Committee held its March 2020 meeting under the dark cloud of
an unprecedented global health and emerging economic crisis caused by the COVID
-19 pandemic. Naturally, discussions at the meetings focused on the impact of
the outbreak on the global economy, with emphasis on domestic policy implications
for the Nigerian economy.
Coronavirus
Pandemic: The most pervasive global economic shock in modern history
Over
150 countries have been affected as infections and deaths continue to rise
exponentially - over 300,000 and about 14,500, respectively as at 24th March
2020. While the economic impact is yet to fully manifest, massive lock-downs
and travel restrictions are in place across multiple countries, leading to
disruptions in global supply chains, particularly in manufacturing, travels,
tourism and trade. Global financial and commodity markets are also in deep
turmoil. The Dow Jones lost 25.6 per cent between 10th March and 23rd March
2020, whilst Bonny light crude oil price dropped 56 percent from an average of
US$65.10pb in January 2020 to US$28.60pb as at 20th March 2020 primarily due to
the Saudi - Russia oil price war, but exacerbated by slowing global demand due
to the Pandemic. As a consequence, global growth in 2020 is expected to
significantly underperform the 3.3 per cent earlier projected by the IMF,
increasing the likelihood that the world economy will slip into a recession.
In
response, governments and central banks worldwide have implemented various
measures ranging from social distancing, partial or complete lockdowns,
monetary easing, unemployment benefits and other fiscal stimulus and relief
packages. The US Fed made a full percentage point cut to the federal funds rate
to range from 0.00 per cent to 0.25 per cent, coupled with a fiscal stimulus of
US$1trillion among other initiatives. China, UK, Australia, Italy, South Africa
and many other countries announced various forms of stimuli to mitigate the
economic impact of the coronavirus outbreak.
COVID
- 19 in Nigeria: Health and Economic Implications
In
Nigeria, COVID-19 cases are low, but are expected to rise as testing capacity
improves (over 40 infections and 1 death as at 24th March, 2020). Should
positive cases grow significantly, there would be tremendous strain on an
already weak healthcare system, causing a severe health crisis. Whilst
infection prevention strategies – travel history monitoring, contact tracing,
self-isolation - have been put in place by the Nigeria Center for Disease
Control (NCDC), Federal and state governments have begun to institute
containment measures via lockdown/stay-at-home pronouncements, shutting down
schools, religious, business and social activities. These actions, designed to
‘flatten the curve’ and slow spread of the coronavirus will have negative
consequences for output growth, price and monetary stability, and key
macro-economic variables such as inflation, exchange rate, and the financial
system; these are briefly explored below.
Domestic
Output growth
Contraction
in oil and gas sector caused by softening demand, glut in the oil market and a
collapse in crude oil prices; disruption in global trade and domestic business
activity due to the lock-downs are all negative for domestic output growth,
which is currently fragile. Under/unemployment levels are also predicted to
rise even as businesses make significant cut backs to cushion losses. This
implies that the rising trend in domestic output (averaging 2.27 per cent)
through 2019, may likely reverse in 2020 as spillover effects from the pandemic
build up.
Naira
Exchange rates
The
sudden deep crash in oil prices is a seismic shock for a country like Nigeria
which relies on oil exports for over 60 percent of its government revenues and
over 80 per cent of foreign exchange earnings. Furthermore, the exit of foreign
portfolio investors from emerging markets, due to rising global investor risk
aversion, is a double whammy for foreign reserve levels and exchange rate
stability. Whilst reduced forex demand due to restrictions in travel and global
trade are somewhat compensating, it is reasonable to expect some exchange rate
pressures which may also worsen inflation expectations in view of the high pass
through to domestic prices.
Inflation
The
pandemic may temporarily exacerbate an existing trend of rising domestic prices
in the short term. Headline inflation (year-on-year) rose for six consecutive
months to 12.20 per cent in February 2020 from 11.02 per cent as at August 2019
largely driven by the food index, which increased to 14.90 per cent from 13.17
per cent, over the same period. Stock piling of food by households and
artificial supply shortages during the lock-downs may drive food prices higher
in the short term. However, this is expected to be tempered by increasing
domestic food production which has been aggressively pursued since the partial
border closure in August 2019. Increased coordination between states is also
expected to smoothen domestic food supply chains to meet demand. Monetary
induced inflation is also being actively curtailed by the CBN via an increase
in the minimum Cash Reserve Ratio (CRR) from 22.5 per cent to 27.5per cent in
January and dynamic implementation of CRR.
Financial
System: Preserving resilience to support macroeconomic stability
The
financial system remains vital to support the domestic economy through this
crisis, hence the need for continued vigilance by the Bank to forestall any
reversal of gains recorded so far. The Loan to Deposit Ratio (LDR) policy
together with other complementary measures has been effective (net growth in
aggregate credit of N2.35 trillion between May 2019 and March 2020) in driving
credit to growth enhancing sectors of the economy such as manufacturing,
retail, commerce and agriculture. Furthermore, financial soundness indicators
such as return on equity, asset quality, capital adequacy and other prudential
ratios remained strong; for instance, capital adequacy ratio strengthened by 50
basis points to 15 per cent as at end February 2020 as a result of
capitalization of strong 2019 earnings. Notwithstanding, there are imminent
risks to the banking sector arising from the spillover effects of the COVID-19
pandemic.
There
is potential default risk by obligors with oil-related repayment sources, or
others unable to meet obligations due to the economic downturn, increased
concentration of oil and gas exposures, deterioration in the foreign currency
asset book, pressure on capital adequacy from currency depreciation, pressure
on liquidity from reduced trading lines and heightened exposure to cyber
threats. Stress tests conducted by Bank staff under low to moderate scenarios
revealed that the financial system remained resilient in the face of tightened
financial conditions. However, under severe stress scenarios certain
vulnerabilities in the system are evident – reduction in earnings,
deterioration in asset quality and decline in capital adequacy. This requires
heightened vigilance by the Bank to mitigate emerging risks and other
complementary measures such as restructuring of credit lines for existing
obligors and provision of liquidity backstops as and when required to safeguard
the financial system.
COVID-19
in Nigeria: Policy responses
The
fiscal and monetary authorities, working collaboratively have announced various
initiatives to cushion the impact of the pandemic on households, businesses,
fiscal revenues and the economy. The CBN plans to inject about N3.5 trillion
into the economy through various policy measures ranging from reduction in
interest rates and increased moratoriums on existing intervention programs, a
N50 billion fund to support households and Small and Medium Enterprises (SMEs)
most affected by COVID-19, and over N1.1 trillion in credit support facilities
for hospitals, advanced diagnostic centers and pharmaceutical companies to
improve healthcare and boost local manufacturing across critical sectors, in
line with Government's import substitution strategy. The Bank has also granted
regulatory forbearance to deposit money banks to consider temporary
restructuring of loan terms to individual, SME and Corporate obligors in the
financial system whose repayments may be affected due to the disruptions caused
by the pandemic. Complementary fiscal measures include a new price modulation
framework for petroleum products, reduction of petroleum pump price from N145
to N125 per litre, cut in public expenditure targets and downward revision of
the oil price benchmark from US$57pb to US$30pb in the 2020 Federal budget.
Policy
Decision
The
Nigerian economy is facing a significant and unprecedented shock from the
Covid-19 pandemic, accentuated by idiosyncratic structural deficiencies. It
must forestall an imminent severe health crisis, weather a global economic
crisis and maintain financial and macroeconomic stability in the light of
exchange rate pressures, low foreign exchange flows from crude oil receipts
amidst a severely constrained fiscal space and low reserve buffers. Like other
central banks, the Bank has limited policy options in this circumstance.
As
it works in collaboration with the fiscal authorities to limit the humanitarian
and economic costs of the pandemic, it will be prudent to focus on structural
reform and the long term objective of diversifying the economy to enhance its
global competitiveness. Initiatives designed to boost local food and
manufacturing production, improve import substitution and support local
businesses to meet domestic demand, whilst positioning for export and
participation in the global supply chain must be sustained.
As
earlier stated, a number of policy responses have been embarked on, which
introduce significant stimulus into the economy to buffer it from the shock of
the pandemic. It is advisable to monitor the effects of these measures in the
short term before further policy actions are contemplated. I therefore vote to
maintain the current stance of monetary policy by retaining the MPR at 13.5%;
Cash Reserve Ratio at 27.5%; Liquidity Ratio at 30% and Asymmetric corridor at
+200 and -500 basis points around the MPR. 26 Classified as Confidential.
Asogwa, Robert Chikwendu
Background:
Developments
related to the COVID-19 pandemic which recently sparked a combined health and
economic crisis has radically altered both the global economic outlook for 2020
and the current thinking about monetary policy priorities. The fears that the
economic crisis could possibly lead to liquidity problems that may threaten
financial stability spurred quick monetary policy actions in many economies
across the globe with aggressive cutting of interest rates and liquidity
injections. On the domestic level, the persistent marginal upticks in monthly
inflation rates up to February 2020 at a time of gradual output growth remain a
significant concern.
Besides,
early threats of currency depreciation were beginning to emerge as external
reserves maintain a sharp fall in the midst of declining oil prices and
investors negative sentiments on portfolios. These unfolding events shaped the
thoughts on expected monetary policy choices at this March 2020 MPC meeting and
the options were to ensure a balance of weights in the risks between the rising
domestic headline inflation (especially in the absence of other fiscal and
structural policy support) and the potential consequences of a prolonged COVID-19
outbreak. While monetary policy actions need to remain supportive of growth, it
may be necessary in the current situation to monitor the many uncertainties
involved so as to be able to provide coordinated policy actions in the short to
medium term.
The
Global Economic Outlook and the Threat of COVID-19
Prior
to the COVID-19 outbreak, the estimation was that the global GDP growth will
improve to 3.3 per cent in 2020 compared to 2.9 per cent in 2019, especially
with the US-China 'phase one' trade agreement in January 2020 and the
conclusion of BREXIT on 31st January, 2020. In the fourth quarter of 2019, GDP
growth slowed in a number of developed and emerging market economies. For 27
Classified as Confidential instance, Eurozone real GDP increased just 0.1 per
cent in the fourth quarter of 2019 with Germany's output remaining flat, while
Italy and France suffered contractions. The UK fourth quarter 2019 output also
slumped to 0.0 per cent from 0.5 per cent in the third quarter.
Similarly,
there was output contraction in the fourth quarter of 2019 in Japan as a result
of sharp declines in household consumption, while marginal increases in quarter
four output growth were recorded in few emerging markets such as China and
India, but output growth in the US remained the same in Q4 2019 as in Q3 2019.
At the start of 2020, available data was suggestive of a path to solid growth
as several indicators had begun to stabilize and modest improvements observed
in the manufacturing sector in many countries. In addition, financial market
conditions in Europe and America started off on a strong note following
monetary policy accommodation measures in the Eurozone and other advanced
economies as well as the reduced global trade tensions. Unfortunately, the
stress arising from the spread of COVID-19 virus appears to have eroded the
2020 early year gains. There are new predictions that the global economy will
be heading for a recession as a downturn is imminent possibly as from the
second quarter of 2020.
In
China, where the corona virus first appeared, industrial production, sales and
investment all fell in January and February 2020 and this has largely disrupted
the global supply chains. The effects of the disruptions on the commodity and
travel markets across the world have also been substantial. Subsequent
outbreaks in other economies have led to unprecedented restrictions in economic
activities and declaration of national emergencies especially in North America
and Europe. On the basis of the pandemic, global growth prospects have now been
revised downwards from 2.9 per cent in 2019 to 2.4 per cent in 2020 with growth
possibly hitting the negative territory in the first quarter of 2020. Growth is
however expected to pick up in 2021 as the effect of corona virus pandemic
reduces leading to recovery of global production and trade.
These
expectations have generated significant across–the-board cuts in the forecasts
for GDP growth in major economies such as China, the Eurozone, UK, USA and
Japan. Even developing markets with highly concentrated trade exposures are
particularly vulnerable to the expected growth slowdown in these major
economies and their growth prospects also remain highly uncertain. Many
commodity exporting economies are hard hit as world demand depresses amid
increasing travel and business restrictions. The early year production
disagreements between Russia and Saudi Arabia led to the high uncertainty in
the global oil market and a consequent slump in prices, while the effect of the
pandemic has driven prices further down. The financial market has since February
2020 been affected by the COVID-19 pandemic thus adding to the persisting
financial vulnerabilities.
The
stock market particularly experienced sudden bouts of volatility in several
countries fuelled by uncertainty related to both the oil market and the COVID-
19 pandemic. The currencies of many emerging markets have also come under
severe pressure as investors are reducing risk in their portfolios due to the
increasing negative sentiments worldwide. In response to the deteriorating
economic outlook arising from COVID-19, Central Banks across developed and
developing countries have initiated several monetary policy measures which are
expected to complement some discretionary fiscal easing by the national
authorities.
The
US Federal Reserve Bank lowered its target rate by 50 basis points to 0.0-0.25
per cent, while the Bank of England cut its rate by 50 basis points to 0.25 per
cent. The European Central Bank has also rolled out strategies including the
expansion of their asset purchase programmes so as to deliver cheap liquidity
for banks to prevent credit market crunches. Other Central Banks in Asia, Latin
America and Africa have also implemented rate cuts recently. It is however not
clear if the interest rate cuts and asset purchases will stimulate economic
activity at this immediate period as the pandemic keeps spreading, but they at
least represent important market signals which will help to restore market
confidence and support economic recovery.
The
Domestic Economic Outlook:
There
were signs of stabilisation of the domestic economy in the early parts of 2020
despite the mild inflationary upticks. The quarter four real GDP grew by 2.55
per cent, compared with 2.28 per cent in the previous quarter with an
impressive performance of the non-oil sector, especially services. There was
also a relative expansion in the Purchasing Managers Index for both
manufacturing and non-manufacturing sectors in January 2020 as compared to the
levels in December 2019. Signs of economic pressure started to manifest in early
March with a downward spiral in oil prices arising from the impact of the
raging COVID19 pandemic and the dispute between OPEC and non-OPEC oil producers
relating to output stabilization. The possible impact of the plunging oil
prices on government revenues and the external reserves unleashed fears on the
domestic economy and this has subsequently triggered some policy response by
Federal government and the Central Bank of Nigeria. The outlook for domestic
output growth in 2020 now looks uncertain and a short but sharp dip is highly
anticipated especially in the first half of the year. Should oil prices remain
at the current low levels for a sustained period, then the near term economic
outlook for Nigeria will be extremely challenging.
However,
based on historical experience, a bounce back in global demand for commodities
may be very likely once there is gradual recovery from the pandemic. There are
still downside risks which may weaken growth further and slowdown an early
recovery from the effects of COVID-19.
First,
Inflationary developments remain a huge concern with a seventh consecutive
increase from 12.13 per cent in January 2020 to 12.20 percent in February 2020
which is the highest rise since April 2018. CBN Staff estimates suggest a
further increase in the March 2020 inflation rates, with a slowdown expected as
from May 2020, but the impact of an extended COVID-19 pandemic may further
worsen the current inflationary situation.
Second,
the domestic currency is under pressure now as oil prices wobble and foreign
investors are drastically reducing their portfolio risk due to a global
negative sentiment. A serious currency depreciation will affect the country's
ability to service the foreign currency debt and with the current huge exposure
to foreign-currency denominated debt, a contraction in governments capital and
social infrastructure spending becomes highly inevitable.
In
addition, the domestic equity market has also taken a big hit as the All Share
Index (ASI) and the Market Capitalization, both of which had increased between
October and December 2019 fell by 17.30 and 10.73 per cent, respectively, in
February 2020. These declines have been attributed to the building financial
market volatility across the globe and investors fear that the spread of
COVID-19 will hamper future domestic economic growth.
Interestingly,
threats to bank stability remain minimal. Although CBN staff report show a
minimal negative trend in the non- performing loans ratio and the banks' profitability indicators (ROE and ROA) in February 2020 as compared to December
2019, the banking system remains somewhat robust. The consistent increase in
both the banking industry total assets since November 2019 and total deposits
since August 2019 apparently demonstrates some internal resilience within the
industry. If the COVID-19 crisis becomes prolonged and the banks experience any
further increases in the non-performing loans ratio, then the Central Bank and
the Government may need to introduce some policy measures to forestall any
possible short-term banking distress.
Decision:
Given
the severity of the COVID-19 pandemic globally and its rising trend in Nigeria
at the time of this meeting, monetary policy changes at this early containment
phase will have limited effectiveness. While moves to enhance monetary policy
accommodation at this time may be good to send future market signals, its
ability to stimulate domestic output in this immediate period when there are
both supply and demand sides disruptions is highly doubtful.
What
may be needed now, are short term measures to ensure enough liquidity in the
financial system while the pandemic containment phase lasts. These measures
should support any existing fiscal measures to cushion the adverse effects on
vulnerable groups. Once the pandemic outbreak ceases, policy adjustments will
have more meaningful impact of accelerating demand recovery and boosting
investment confidence. It is necessary that the monetary policy decisions now
should align with the current inflationary realities and the need to mitigate
future risks to financial stability.
My
opinion therefore, is that policy parameters should remain largely unchanged at
this March 2020 MPC meeting. I will thus vote to:
•
Retain the MPR at 13.5 %
•
Retain the CRR at 27.5%
•
Retain the Asymmetric Corridor at +200/-500 basis points around the MPR
•
Retain the Liquidity Ratio at 30.0% 32 Classified as Confidential
Balami, Dahiru Hassan
Global
Economic And Financial Environment
Global
Growth
In
year 2020, the global economy started with a hint of recovery, owing to
positive outlook such as the US-China trade negotiations, successful resolution
of the BREXIT crisis and growth in the manufacturing sector. However, shocks
shattered hopes of higher level of growth emerged in the Q1 2020.
These
include the Corona Virus pandemic which started in China; oil price war between
Saudi Arabia and Russia on crude oil production cut as Russia and its allies
stand firm against production cut; US/China trade dispute remains largely unresolved;
negotiations with the European Union (EU) and the United Kingdom (UK) have
still not been fully resolved, with the UK threatening to pull out and pursue a
no deal BREXIT, if the EU remains rigid.
These
developments will affect the global growth. The International Monetary Fund
(IMF) had earlier estimated global output growth at 3.3 percent in 2020, from
2.9 percent in 2019 due largely to the Corona Virus pandemic, shocks to travel
and tourism, along with the fall in Chinese exports in the first two months of
2020. These would lead to lower demand for our crude oil, increase the level of
unemployment, business failures, reduce economic activities, as well as weaken
demand for non-essential items globally and domestically.
Growth
in Advanced Economies has been marked down to 1.6 percent in 2020, from 1.7
percent in 2019. In the Emerging Market Economies, output growth is expected to
slow down, while in Europe growth is expected to fall to 1.4 percent in 2020
from 1.5 percent in 2019. In Africa, output growth is expected to rise to 3.9
percent in 2020 from 3.4 in 2019, due to moderate expansion in the continent's "big Five" (Algeria, Egypt, Morocco, Nigeria, South Africa).
The
evolving global trend has implications for the Nigerian Economy. It is
estimated that the Nigeria's major trading partners like China and Russia, have
also been hit by the nibbling effects of the virus resulting in broken supply
chains. These would also result in large decline in both Foreign Direct
Investments (FDIs) and Foreign Portfolio Investments (FPIs) to Nigeria. This
has Implications for the external reserves and the foreign exchange market. The
return to monetary accommodation led by the US federal reserves, implies a huge
capital outflow from the Nigerian economy to safer assets such as gold. This
may require Nigeria's government to refocus its attention on gold reserves in
the country, diversify its external reserves from oil, the primary foreign
exchange earner due to the crash in price and demand. As a consequence, the
Nigeria economy will be hit with significant revenue shock in the absences of
buffers. The shock to the economy of major oil exporters like Nigeria could
lead to depletion of their foreign reserves. This may weaken the naira, if the
situation persists, heightened the downturn in the Nigerian Stock Exchange,
weakened domestic aggregate demand, increase unemployment, and overall presents
challenging business environment that would dampen growth in Nigeria.
Global
Exchange Rates
The
effect on global currencies showed that the British pound, euro, and Russian
rubble depreciated against the US dollar by 3.98, 0.91 and 6.45 percent,
respectively. In Asia, the Japanese yen and the Chinese yuan appreciated
marginally by 1.2 and 0.5 percent, respectively, against the US dollar, while
the Indian rupee depreciated against the US dollar by 2.56 percent.
In
North America, the Canadian dollar and Mexican Peso depreciated by 3.02 and
2.94 percent respectively. In South America, the Brazilian Real, Argentine Peso
and Columbian Peso depreciated by 11.61, 3.99 and 2.16 percent, respectively.
However, in Africa, the Ghanaian cedi and Egyptian pound appreciated by 34
Classified as Confidential 5.77 and 2.56 percent respectively, while the South
African and Kenyan shillings depreciated by 8.77 and 1.27, percent
respectively.
Policy
Rates
In
the developed economies, the US Federal Reserve Bank and Bank of England cut
their policy rates by 50 basis points, while in Emerging Markets and Developing
economies (EMDEs), Russia cut its policy rate by 25 basis points, and Reserve
Bank of South Africa by 100 basis points. Kenya, Brazil, Russia, China and
Indonesia had also lowered their rates in response to broad weakening of the
global economy, while the Reserve Bank of India maintained their policy rate in
response to the need for economic stabilization.
Domestic
Economic And Financial Environment
Output
Growth
National
Bureau of Statistics (NBS) 4th Quarter 2019 data showed that GDP grew by 2.55
percent compared to 2.28 percent in 2020. Growth was driven by the non-oil
sector mainly finance, insurance and information and communication technology,
entertainment and recreation, food, services, agriculture, and industry
sub-sector. Oil gdp grow by 6.36 percent lower than 6.49 recorded in the last
quarter of 2019. This was due to the decline in crude oil output from
1.91million bpd in 3Q 2019 to 1.8 million bpd in 4Q 2019.
The
expansion in non-oil Gross Domestic Product (gdp) was driven by finance,
insurance, information and communication technology. Growth in the economy is
depicted by expansion of purchasers' managers index, relative stable exchange
rates, rising consumer loan, and credit to the manufacturing sector. The
headwinds to growth which include oil price volatility, lack of fiscal buffers,
security challenges, infrastructure shortage, and novel corona virus pandemic,
have crushed the hopes for stronger growth in 2020. Overall the macro economy
remains relatively weak.
Domestic
Inflation
Inflation
in the domestic economy inched up from 12.13 percent in January 2020 to 12.20
percent in February 2020, due to monetary and structural factors. It should be
noted that an inflation rate of more than 12 percent is inimical to growth in
the Nigerian economy. Some of the structural factors include decaying
infrastructure, shortage of food due to insecurity in major food producing
areas of the North-East and North-West, border closure, and the emergence of
the novel coronavirus and its impact, due to social and economic shutdown. It
should be noted that the adjustment of the exchange rate at the I&E to
N380/US$ from N360/US$ is inflationary, along with increase in food inflation
could be major contributors to inflation in Nigeria.
Financial
Soundness Indicators
Stress
tests for Deposit Money Banks (DMBs) show that Capital Adequacy Ratio (CAR) has
improved from the level in December 2019. The Non-Performing Loans (NPLs) ratio
performance at 6.1 percent as at December 2019 is also commendable because it
is close to the prudential requirement maximum of 5 percent. Furthermore, the
Liquidity Ratio (LR) of the industry was above the prudential requirement of 30
percent and comparable to that of Turkey, South Africa and Malaysia. Likewise,
the Return on Assets (ROA) of 1.9 percent was also laudable. Lastly, the Return
on Equity (ROE) at 20.5 percent is above most of similar countries such as
Turkey at 13.3 percent; South Africa, 18.7 percent; and Malaysia, 13.3 percent.
This clearly shows that the banking industry system is stable. However, it
should be noted that the headwind affecting the banking system include the
following: credit fault, credit concentration, liquidity, solvency, increasing
cybercrime, and the side effect of corona virus pandemic. The CBN should
therefore continue to monitor the performance of the DMBS and intervene
appropriately. 36 Classified as Confidential
Policy
Choice
On
the basis of the above analysis, the three policy options are to tighten,
loosen or to hold. The monetary stance is already tight, therefore there is no
need to adjust or tinker the Monetary Policy Rate and the Cash Reserve Ratio
(CRR), because raising these tools will negatively affect growth. On the other
hand, loosening will be inflationary, and contradict the Bank's earlier
policies, hence the Bank should hold all parameters to allow the earlier
polices and the current interventions taken by the Central Bank to work its way
through. The Central Bank's interventions should be encouraged and maintained.
Given the weak public revenue profile, exchange rate stability is essential to
support the current outlook, besides, there is need to give assurance to the
market. The monetary policy decision should be made to attract both foreign
direct investment and foreign portfolio investment.
Therefore,
the need for cooperation between monetary and fiscal authorities is indispensable,
as it relates to developing strategic policies to manage the impact of the
corona virus pandemic. As highlighted earlier, economic growth should be the
responsibility of fiscal authorities, while monetary policy should play a
complimentary role. Notably, government finance would be negatively impacted by
low crude export receipts. The budget which is riddled with high recurrent
expenditure needs to be drastically reduced. In addition to the above, the CBN
should continue to monitor developments in the financial sector, recommend,
implement and monitor the appropriate management tools.
Based
on the above analysis, I vote to hold, therefore, to retain:
i.
The Monetary Policy Rate
(MPR) at 13.50%,
ii.
The Cash Reserve Ratio
(CRR) at 27.50%,
iii.
The Liquidity Ratio (LR)
at 30.00%
iv.
To retain the asymmetric
corridor at +200 / -500 basis points
Obadan, Mike Idiah
The
272nd meeting of the Monetary Policy Committee was held against the backdrop of
the coronavirus (also called COVID-19) pandemic which has spread like wild fire
to about 148 countries with devastating effects on the global economy and
individual economies. In some severely-hit countries, the spread of the disease
has taken a geometric dimension with the death rate also assuming the same
character. The micro and macro-economic impact of the disease is such that
recession is feared in the global economy and many individual economies,
prompting governments to roll out stimulus packages.
The
Coronavirus Pandemic And The Global Economy
In
an effort to contain the coronavirus disease, the Chinese economy, where the
outbreak first occured, has been locked down and many businesses and firms shut
down, setting the stage for contraction of economic activities. Indeed, the
Chinese economy is expected to slow considerably in 2020 from the 6.1 percent
growth in 2019. Many other countries where the virus has berthed, have taken
similar containment measures with significant threat to global growth, trade
and financial flows. In other words, considering the containment measures taken
by countries so far, coronavirus has resulted in a retrenchment of
globalisation with negative implications for growth, trade, financial flows,
inflation and welfare.
China is the world's second largest economy and the largest importer of crude oil. Its impact on global trade and growth is significant. With the corona virus, the initial expectations of improved global growth in 2020 have subdued and agencies like the IMF and OECD have cut their growth projections. For Nigeria, China is the largest source of imports. It also buys some of Nigeria's oil and gas and other exports. With the developments in China and other countries where the coronavirus has taken firm root, global macroeconomic stability is under serious threat as portrayed by the following:
Coronavirus
And The Nigerian Economy
Certain
features of the Nigerian economy make the country to be very vulnerable to the
impact of the coronavirus. The economy is highly open and strongly connected to
the rest of the global economy through trade and financial flows. The economy
is not diversified in any meaningful sense. It relies rather precariously on
crude oil production and export for the bulk of its domestic revenue and
foreign exchange earnings. Oil revenue propels over 50 percent of the Nigerian
economy.
The
country has no fiscal buffers to fall back on when there are unfavourable
disturbances in the world oil market as is currently the case as a fall-out of
the corona virus pandemic. The Excess Crude Account is less than US$ 80.0
million while the Sovereign Wealth Fund has about US$ 2.0 billion compared to
Saudi Arabia's over US$ 500.00 billion. Nigeria thus has very limited financial
capacity to deal with the social and economic impact of the coronavirus. In
other countries experiencing lockdowns and shutdowns, the corona virus has had
both macro and microeconomic impact. So far, in Nigeria, the very visible
impact has been macro in nature, especially in relation to government finances
and macroeconomic performance.
Now
that the virus has begun to spread with 46 confirmed cases, necessitating
restrictions in movements and gradual lockdowns affecting the production and
distribution enterprises, the likelihood is that the impact will become visible
on individuals (whose means of livelihood depends on their daily efforts),
households and firms, thus eliciting the kind of fiscal responses in the USA
and Europe where the virus has intensified.
Meanwhile,
the following current features of the Nigerian economy should guide the
monetary policy response.
The
above features are most likely to be exacerbated by the coronavirus pandemic.
At a time when Nigeria's economic growth, which had been weak and fragile since
2016, was beginning to show signs of improvement, the coronavirus is posing a
notable threat to the growth prospects with fears of a likely return to the
stag-flationary era.
Therefore,
the key issues to consider in the monetary policy decision relate to the need
to: • Support growth and employment and prevent recession 42 Classified as Confidential
•
Rein in inflation which has trended up uncomfortably for sometime and which
will worsen if unaddressed in the corona virus era
•
Check capital outflows and support external reserves accretion
• Reduce
pressure and ensure stability in the foreign exchange market
Generally,
price and monetary stability remains the primary responsibility of the Bank.
Consequently, it will only complement the efforts of the fiscal authority in
addressing the growth objective. This, the Bank can continue to do through its
unconventional monetary policy measures while the fiscal authority takes the
lead in promoting growth.
Other
Points of Note
For
some time, various indicators have pointed to a misalignment of the exchange
rate in an environment of dwindling external reserves and intensified market
pressure and so the recent exchange rate adjustment is in order. But there is
need to dampen uncertainties and speculation in the foreign exchange market.
This means that assurance needs to be given to the market to the effect that
the Bank will continue to do the needful to maintain a stable exchange rate in
the context of a managed float exchange rate system. Finally, the monetary
policy decision should support the need for external reserves accretion through
capital inflows. The current monetary accommodation stances of the advanced and
EMDEs provide an opportunity to attract capital inflows given the right
policies and environment. Nigeria has the balance of advantage in relative
returns to investment.
The
government needs to be reminded that the current situation is grave; the
dreaded disease is being battled at a time the country is facing a serious
revenue challenge unlike the advanced countries where the virus is also being
battled. It is a situation whereby the country is consuming more than its
income. In a period when the rest of the world is struggling for survival, the
prospects of getting foreign assistance including loans are dim for now. The
government would therefore need to look inwards, undertake adjustment by
cutting luxurious and inefficient expenditures and explore imaginative options
for revenue generation. Inefficient expenditures include the huge petrol
subsidy payments with high opportunity cost. The government should use the
opportunity of the low crude oil prices which has robbed off positively on pump
prices in the country to deregulate the petroleum downstream sub-sector and
free the economy of burdensome subsidy payments.
As
the economy gradually locks down, it is not clear as to the feasibility of
gathering information in support of evidence-based public policy responses,
especially with respect to the microeconomic impact. Nevertheless, there is a
group of individuals who are going to be adversely impacted by the lockdowns.
These are the individuals who may lose their jobs and/or lose their means of
livelihood because of the nature of their occupations as daily-paid workers,
artisans, traders and others. For this group to have succour, the government
may need to consider setting up a fund (COVID-19 Relief Fund) with the support
of stakeholders. With assistance they should be able to maintain a certain
amount of consumption and boost aggregate demand. It is a socio-economic
initiative that the government should consider seriously.
Finally,
two crucial lessons need to be learnt from the economic impact of the
coronavirus pandemic: First, is the need to build fiscal buffers to eliminate
panic and anxiety on the part of the government in difficult times like we are
in. Second, is the need to take the diversification of the economy very
seriously. A country whose economy is diversified has a much greater capacity
to respond to the present type of socio-economic crisis than a country like
Nigeria that is commodity dependent and lacks meaningful diversification.
Monetary
Policy Opinion
It
is important to stress that monetary policy decisions need to be taken with a
view to achieving a clear objective(s); they should not be taken because other
countries have taken similar decisions as circumstances tend to differ. For
example, in the present situation that is conditioned by the coronavirus
pandemic, the infected advanced countries are battling to redress the
unemployment, loss of revenue and loss of demand arising from the shutdowns of
their economies; consequently, monetary easing and fiscal stimulus packages are
being implemented to stimulate aggregate demand and avert recession. This
contrasts with the Nigerian situation where the micro impact is limited as at
now, but could be high in the event of serious lockdowns aimed at combatting
the virus.
The
current monetary policy stance in Nigeria is already tight with MPR at 13.5
percent and CRR at 27.5 percent. It will not be desirable under the present
circumstance to raise them. Raising the MPR will be interpreted by the deposit
money banks (DMBs) as a signal to raise their lending rates which will
neutralise the gains under the Loans-to-Deposit Ratio policy. Reducing the MPR
to entice DMBs to reduce lending rates will be an academic exercise as they
relate to the MPR in an asymmetrical way. In light of the foregoing, I vote to
retain the policy decision parameters at their current levels, while the Bank
will vigorously implement the extant intervention measures and those recently
rolled out, specifically, in response to the impact of the corona virus
pandemic. 45 Classified as Confidential
Obiora, Kingsley Isitua
In
light of the unprecedented, yet unfolding, impact of the COVID-19 pandemic, and
in support of the measures already announced by the Management of the CBN to
mitigate these effects, I voted to retain the MPR at 13.5 percent, the CRR at
27.5 percent, the LR at 30 percent, and the asymmetric corridor of +200/-500
basis points around the MPR. This stance allows for better dimensioning of the
effects and preserves the flexibility for further actions once they are fully
calibrated.
The
December 2019 outbreak of the Novel Coronavirus Disease (COVID-19) in China has
fundamentally altered the global economy. Although this is first and foremost a
public health crisis, the spillover economic damages are already unparalleled
in many ways: stock valuations for the Nikkei, Dow Jones and FTSE 100 have
declined by 22.2, 24.1, and 28.8 per cent, respectively; global airlines have
lost about US$252 billion in revenues, due to sharp decline in average global
flights from 188,901 daily to 69,508 as of 28 March 2020; year-on-year car
sales in China sank a record 80 percent in February 2020, while exports fell by
17.2 percent for January and February combined; cancelled and/or postponed
events have cost the sports and entertainment industry more than US$10 billion;
close to 10 million Americans filed for unemployment benefits in the first two
weeks of March, and many analysts expect U.S. unemployment rate would spike to
about 15 percent in the coming months, which would be the highest such number
in over 70 years.
This
impact has also been drastic on the domestic front, with the most immediate
spillover reflecting in the price of crude oil. Global crude oil prices fell
from about US$63 per barrel in January to as low as US$17 per barrel by the end
of March. Given that oil contributes a large share of both revenues for the
government and reserves for the Central Bank, I cannot exaggerate the effect 46
Classified as Confidential of this slump, especially as the 2020 Budget was
planned with a US$57 per barrel oil price benchmark. Furthermore, many foreign
investors have, as usual, settled their fears on the side of caution, and
withdrawn investments from the Nigerian Stock Exchange, with about N2.3
trillion wiped off in losses in the three weeks following the first confirmed
case of the virus in the country. In addition, widespread local and
international travel restrictions and supply disruptions have dramatically
changed the way we live at the moment. Regrettably, these outcomes are a
setback for the promising signs of progress in the economy, particularly in the
fourth quarter of 2019. Growth was gradually picking up from 1.6 percent
contraction in 2016 to 2.1 percent expansion over the next three years.
During
the fourth quarter of 2019, the country recorded a 2.55 percent growth rate,
its highest quarterly growth since the 2016 recession. This fourth quarter performance
culminated in a 2.3 percent year-on-year GDP growth for 2019, largely driven by
the non-oil sector, which increased to 2.26 percent in the fourth quarter of
2019 from 1.85 percent in the third quarter of 2019. Similarly, the agriculture
sector grew marginally by 2.31 percent in the fourth quarter of 2019 from 2.28
percent in the third quarter of 2019.
Although
headline inflation rose to 12.2 percent in February 2020, it did so at a
decreasing rate when compared with the 12.13 percent rate in January 2020.
While food inflation increased by 14.9 percent in February 2020, the rate of
increase was 0.12 percentage point lower than it was in January 2020. To my
mind, these were preliminary signs that inflation may have plateaued and ready
to turn the corner towards a deceleration. There were also significant
improvements in the financial system, reflecting proactive policies by the
Central Bank. The policy on Loan-to-Deposit Ratio (LDR) appears to have boosted
lending to key sectors of the economy, as credit increased by N2.35 trillion
between end-May 2019 to mid-March 2020.
This
credit expansion was largely recorded in manufacturing, consumer credit,
general commerce, ICT, and agriculture. Reflecting recoveries, write-offs and
disposals, 47 Classified as Confidential non-performing loans (NPLs) decreased
to 6.54 percent at the end of February 2020, compared to 11.28 percent in the
corresponding period of 2019. Shortterm interest rates continue to suggest some
surfeit in the system with average Open Buy Back (OBB) and inter-bank call
rates opening at 9.40 and 10.50 percent on January 27, 2020, and closing at
15.50 and 16.42 percent on February 28, 2020, respectively. As of end-February
2020, gross external reserves stood at US$36.5 billion, representing a decrease
of 0.54 percent or US$199.52 million when compared with US$36.730 billion at
the end of January 2020. This outcome largely reflects lower-than-anticipated
receipts from oil revenues and the outflow of funds by portfolio investors in
the wake of the COVID-19 outbreak. In light of a somewhat hazy economic
outlook, I believe that the Central Bank must remain vigilant and retain the
flexibility to act at short notice.
No
one knows for sure the length and depth of potential effects of this pandemic
on key macroeconomic variables. But it does appear that the net effect of the
associated temporary supply shocks and the reductions in the price of PMS would
be a slight moderation in both inflationary and related fiscal pressures in the
coming months. At the moment, many financial sector indicators suggest that the
industry remains safe and sound, but several downside risks may materialize in
the short term, particularly those related to loan exposures. This implies that
both the Central Bank and Deposit Money Banks (DMBs) must be ready with nimble
and effective strategies to contain and/or mitigate these risks. That is why I
support the recent policies by the Central Bank that grants regulatory
forbearance allowing DMBs to restructure existing loans, while also providing
immediate reprieve to households and businesses through interest rate reduction
and moratorium on both new and existing loans. These policies also provide
direct credit facility to the healthcare industry, and strengthens the LDR
policy to ensure greater flow of credit to other key sectors at this critical
time. I believe that these measures are already helping to cushion the worst
effects of the crisis on the economy. 48 Classified as Confidential I also
think that coordinated and targeted policies are needed to ensure we do not
waste the latent opportunities presented by this pandemic. As aforementioned,
this is first and foremost a public health problem, and as such, the most
immediate priority is clearly to keep people as healthy and safe as possible.
Precautionary
and temporary measures would be needed to limit the reproductive rate of the
disease using travel/movement restrictions, closures of all forms of public
gathering, and voluntary/involuntary quarantines. All of these require policy
coordination at the highest levels of the government. More also, considering
that the economic fallout would not be even or symmetric and may be more acute
in specific sectors, coordination is required to objectively dimension these
effects, design appropriate policies and implement targeted fiscal, monetary,
and financial market measures to help affected households, corporates and
aspects of government operations. This could entail using new realities to
re-prioritize both revenues and expenditures in the entire budget, undertake
more aggressive health awareness campaigns, and provide temporary and targeted
stimulus to help households and businesses stay afloat. Alongside these
measures, however, we must also harness the opportunities being presented by
this pandemic. For example, the ongoing supply shocks in processed food, ICT,
personal healthcare and medical services clearly offer opportunities for
investments, job creation and local sourcing of production inputs that could
all boost economic growth in the near-term.
While
awaiting the unfolding magnitude of effects and the incipient adjustments from
the policy actions of the Central Bank, I believe the best course of action at
this meeting is to leave our policy parameters unchanged. In light of the
uncertainty of the outlook for economy in the short- to -near-term, and in
support for the immediate policy actions already taken by the Bank's
Management, I voted to:
1.
Retain the Monetary Policy Rate (MPR) at 13.5 percent;
2.
Retain the Cash Reserve Requirement (CRR) at 27.5 percent;
3.
Retain the Liquidity Ratio (LR) at 30.0 percent; and
4.
Retain the asymmetric corridor at +200/-500 basis points around the MPR.
Sanusi, Aliyu Rafindadi
Decision:
My
perception of the multi-dimensional effect of the COVID-19 global pandemic on
the domestic output and inflation informed my decision to hold all the
parameters unchanged. In my opinion, the appropriate public health policy
measures required to curb the spread of the virus (local and international
travel restrictions, border closure, social distancing or complete lockdown),
would necessarily reduce output at best, or lead to a recession. This recession
would result from the effect of the containment measures on both Demand-side
and Supply-side of the economy. During this period, therefore, monetary policy
response must strike a delicate balance in addressing the demand-side and
supply-side effects of the shock so that in doing so, the policy does not
exacerbate the inflationary pressure already observed before the shock. In my
opinion, therefore, monetary policy should not boost the Aggregate Demand when
the lockdown measures limit the scope of Aggregate Supply to adequately
increase. The already announced targeted interventions are appropriately
directed at supporting production and distribution in the health sector so as
to shorten the duration of the pandemic as well as support the few businesses
that remain operational during the pandemic. In the post-containment period,
these interventions would facilitate fast-recovery. Easing the monetary policy
stance, at the moment, is therefore inconsistent with the appropriate public
health containment policy. As the probability of global economic recession
rises, with attendant implications on the domestic output, a policy-induced
stagflation environment must be avoided
Background
and Justification
Global
Economic Developments
The
necessary epidemiological solution to the outbreak of the COVID-19 that is fast
spreading across the world has induced a global economic recession. Economic
response to this shock must, therefore, focus on ensuring that the recession is
both short-lived and the recovery is V-shaped. The global economic environment
was hit by a debilitating global response to an unprecedented global health
pandemic. The highly infectious coronavirus disease (COVID-19), which started
in China, has been ravaging the world with unprecedented speed. In addition to
the international travel restrictions since January 23, 2020, the global public
health policy response to reduce the peak critical care demand in the affected
countries was a combination of caseisolation, home quarantine and
population-wide social distancing. Workers were, therefore, asked to work from
home; schools, sports & entertainment events, bars, restaurants and markets
were shut down. As the number of COVID19 cases outside China continues to
accelerate rapidly, the chances of economic shutdown increases as more of the
heavily affected countries impose these public health containment measures.
These measures will continue to cause significant disruptions in the global
supply chain, increase uncertainty and threaten global investments, trade,
capital flows and increase the vulnerability of the global financial markets.
At
the global level, therefore, the public health response to containing the
spread of COVID-19 is an intentionally-induced unavoidable economic recession.
Before the global outbreak, the global macroeconomic environment had already
started showing clear signs of weakness due to weak growth and risk of
recession in the advanced economies and Emerging Market and Developing
Economies (EMDEs) as well as the lingering trade war. This weakness was
reflected in slower output growth, losses in major financial markets, rising
corporate debt in advanced economies and public debt in EMDEs. Several global output
growth projections were, therefore, already revised downwards. For instance,
OECD cut its forecasts for global output growth in 2020 from the earlier 2.5%
announced to 2.4%. On account of the COVID-19 outbreak, Fitch has reduced its
projection for global growth in 2020 from 2.6% to 1.3%. Inflation in the
Advanced Economies is projected to rise by 1.7% in 2020 from 1.5% in 2019.
Except in the US, inflation in the Advanced Economies continued to trend below
their long-run target in February 2020. In the Euro area, inflation decreased
to 1.2% in February 2020 compared to 1.4% in January 2020, mainly due to
declining energy prices. In the US, inflation fell from 2.5% in January 2020 to
2.3% in February 2020 due to the declining energy costs. In Japan, inflation
also decreased from 0.8% in January 2020 to 0.7% in February 2020 due to a
decrease in fuel prices and utilities.
The
combination of weak output and declining inflation that is below its long-term
target, monetary policy easing could be an appropriate response to the COVID-19
pandemic in these economies. Apart from the effect of COVID-19 on global demand
for crude oil, the declining demand from China, as well as the
warmer-than-expected winter in the Northern Hemisphere, had already caused
over-supply in the international oil market. The failure of the OPEC+ to reach
agreement on production cut (December 2019 and March 2020) ignited an oil price
war between Saudi Arabia and Russia that has led to the oil price crash. As at
March 11 2020, the price of Bonny Light stood at US$36 per barrel compared with
US$67 per barrel on January 8, 2020, and by March 20, 2020, Bonny light has
declined to US$26.07 per barrel. Given the effect of the COVID-19 on global
demand, failure of production cut agreement by the OPEC+, the global oil market
will continue to be volatile with price remaining low. This volatility has
serious implication on Nigeria's international reserves accretion as well as
the Government's' fiscal revenue.
Domestic
Economic Developments and their Implications
Data
from the NBS shows that output recovery continued in the fourth quarter of
2019, with the quarterly real output growth of 2.55% in Q4 2019. The annual
growth of real output for the year 2019 was 2.27%, which is 0.38 percentage
points above the 1.9% achieved in 2018. In Q4 2020, the output growth was
driven by both oil and non-oil sectors. The non-oil sector, which contributed
92.68% of the real GDP, grew by 2.27% in Q4 2019 compared with 1.85% in the
preceding quarter. Industry (2.75%) Services (2.60%) and Agriculture (2.31%)
were the key drivers of the non-oil GDP growth in Q4 2019. Oil GDP, which contributed
7.32% of the real GDP, grew by 6.36% in Q4 2020, which is lower than achieved
in Q3 2019. The decline in the growth of oil GDP during the quarter was
attributable to the fall in oil output from 1.91mb/d in Q3 2019 to 1.84mb/d in
Q4 2019. Although lower than desired, the output growth in Q4 2019 is the
highest rate recorded since the 2016 recession and reflects the effects of the
massive increase in credit flows to the economy induced by the Bank's LDR
policy during the period. As noted earlier, however, the outlook for the rest
of the year remains poor as Nigeria joins the rest of the world in enforcing
the public health containment measures against the spread of the COVID-19. As
major cities and urban centres lockdown, real output would necessarily decline
in what can be seen as an intentional and unavoidable recession.
The
depth and length of this inevitable recession will depend on how successful
these public health measures (domestic and global) are in containing the spread
of the virus as well as the appropriateness of the fiscal and monetary policy
responses to the economic consequences of this public health crisis. Staff
forecasts suggest that, in Q4 2020, 54 Classified as Confidential real output
growth decline on account of weak global demand due to the COVID-19 and
developments in the crude oil market. Available data from NBS shows that, in
February 2020, inflation has continued on the upward trajectory, which started
since September 2019 following the closure of all land borders on August 20,
2019. Headline inflation (year-on-year) has increased to 12.20% in February
2020, compared with 12.13% in January 2020. The increase was mainly due to
increases in food & non-alcoholic beverages and core inflation. Food
inflation (year-on-year) increased from 14.85% in January 2020 to 14.90% in
February 2020. The key components that drive food price developments include
processed foods, garri and vegetables. Imported food prices increased by 2.51
percentage points in February 2020. Core inflation increased (year-on-year) to
9.45 % in February 2020 from 9.35% in January 2020.
The
increase in core inflation was driven by processed foods; clothing and
footwear; housing; water; gas & other fuel; furnishing; household equipment
& household maintenance. On the month-on-month basis, however, headline
inflation declined from 0.87% in January 2020 to 0.79% in February 2020. Both
the food and core components have also declined (monthon-month) in February
2020. According to staff forecasts, inflation would continue an upward
trajectory. The upside risks to inflation include increased shortages induced
by the containment measures against the COVID-19 pandemic; increased foreign
exchange market pressure; and high cost of imported food arising from the
border closure. Review of the Banking System Stability Report shows that the
banking system continues to be stable and resilient. The Non-performing loan
(NPLs) ratio decreased from 6.59% in January 2020 to 6.54% in February 2020.
Total assets of the industry have grown from N38.57 trillion in November 2019
to N42.89 trillion in February 2020. Total credit to the economy has also
continued to increase from about N15.69 trillion in February 2019 to N17.62
trillion in February 2020.
Since
the 55 Classified as Confidential introduction of the LDR policy, total credit
has increased by N2.35 trillion between end-May 2019 and March 17, 2020.
Manufacturing, consumer credit, general commerce, ICT and agriculture continue
to receive the highest share of this new credit. Owing to the outbreak of
COVID-19, the CBN has announced several policy measures and interventions to
mitigate the adverse effect of the pandemic on the economy. These measures
include an extended moratorium on loans by one year to ease repayments given
the cashflow disruptions; reduction of interest rate on all interventions from
9% to 5% over the next one year; introduction of time-limited regulatory
forbearance for DMBs to temporarily restructure terms of loans and tenors to
businesses and households affected by the COVID-19 containment measures; and a
total of N3.5 trillion in various targeted interventions to support the economy
during the difficult times, including support for local pharmaceutical firms to
manufacture the drugs and medical supplies needed in the fight against the
pandemic.
The
Basis for My Policy Choice
The
appropriate scientific measure of combating the COVID-19 health pandemic across
the world necessitates slowing down of production, as all economic activities
that involve physical interaction would drastically reduce. These measures, as
I noted earlier, imply that economic recession is unavoidable, and output will
contract as firms either require workers to work from home or completely shut
down in major cities. Because the supply chain is also disrupted, unaffected
businesses would suffer rising costs and slower production activities. The
stay-at-home measure also implies that household consumption would
significantly fall not only because of the implied income losses,A but also as
many bases for expenditure are unfeasible. This suggests that the COVID-19
measures would reduce both Aggregate Supply, as firms produce less, and depress
the Aggregate Demand as consumption declines. The effect 56 Classified as
Confidential of this measure on output and inflation, therefore, depends on its
relative impact on the Aggregate Demand and Aggregate Supply. Given that, even
before the emergence of COVID-19, inflation was trending on upward trajectory
owing to the scarcity that followed the land border closure, I am convinced
that the effect would be disproportionally more significant on the Aggregate
Supply.
This
would further raise the inflationary pressure amidst contracting output
(leading to stagflation). Given that production must fall, an appropriate
monetary policy response should therefore not seek to boost AD when the scope
for increasing AS is limited. On the one hand, the effect of a conventional
monetary policy easing will be to raise the Aggregate Demand at a time when
Aggregate Supply may not sufficiently increase; this exacerbates the already
existing inflationary pressure. On the other hand, conventional tightening to
rein in inflation would be inconsistent with the state of the economy when the
few businesses that remain operational may suffer from cashflow disruptions and
may need low-cost credit. Indeed, the N3.5 trillion intervention funds already
introduced by the CBN seek to make funding available to such businesses at a
reduced cost. In considering my options, therefore, I am convinced that the
best option is to hold all policy parameters, for now.
Consequently, I voted to:
Shonubi, Folashodun A.
Coronavirus
pandemic (Covid-19) and a troubled global oil market are the challenges to
global and domestic economic growth prospects in 2020. The public health shock
from rapid outbreak of Covid-19 is fast causing widespread economic paralysis
that is set to lead to severe contraction of the global economy. The resulting
demand shock in the oil market, along with the collapse of the OPEC+ agreement,
has created a heavily oversupplied market, with implications for
near-historically low prices. These developments have aggravated the precarious
domestic economic conditions, characterised by fragile output growth, rising
inflation, tighter fiscal space and pressured external sector. To address the
challenges, the Bank must continue to pay attention to the fundamentals and
peculiarities of the domestic macroeconomic environment, while implementing
policies that are focused on maintaining the delicate balance of achieving
price and monetary stability that is conducive for economic growth.
Global
and Domestic Economic Developments
Prospects
of global growth in 2020 is significantly dampened, initially because of the
collapse of global oil market and further aggravated by the outbreak of
Covid-19. The rapid spread of Covid-19 has created global demand shock via loss
of consumer and investment spending, as well as, supply disruption, in terms of
widespread forced shut-downs. This has liquidity and solvency implications for
operators in the real economy, investors and producers. Overall, global growth
is generally subdued, with a high probability for global recession, especially
as Covid-19 shock persists, creating human and economic challenges.
The
uptick in domestic inflation continued, as headline inflation rose to 12.20 per
cent in February 2020, from 12.13 per cent in January 2020, on account of rise
in both food and core inflation. Food inflation reached 14.90 per cent at end-
February 2020, from 14.85 per cent in the previous month. Core inflation also
rose to 9.43 per cent, just as imported food inflation increased for the 6th
consecutive month to 16.14 per cent in February 2020. It is worth noting that
headline, food and core inflation moderated, on month-on-month basis. Output
growth, according to National Bureau of Statistics (NBS) improved to 2.55 per
cent in the fourth quarter of 2019, driven by improvement in both oil and
non-oil sector, resulting in overall growth of 2.27 per cent for fiscal 2019.
Though growth continued on a positive trajectory, the expansion rate remained
weak and fragile, underscoring the need for a strengthening of measures
designed to facilitate continuous expansion. Declining manufacturing and
nonmanufacturing purchasing manager's Indices further highlighted slowing
growth. Sustained resilience of the banking system continued to provide some
respite and hope for promoting expansion of the domestic economy.
Though
recent lull in the international oil market and uncertainties in the global
economy has led to some stress, industry financial soundness indicators
remained generally within regulatory thresholds. Aggregate industry credit
continued to grow, as a result of the LDR policy, even as industry capital
adequacy ratio improved to 15.0 per cent at end-February 2020. Slight increase
in non-performing loan ratio to 6.5 per cent, from 6.1 per cent in December
2020, reflected regulatory induced provisioning, an outcome of targeted risk
weighted assets examination for final account approval. Industry liquidity
ratio declined to 44.2 per cent, but remained well above the regulatory threshold.
Return on asset and equity, at 1.9 and 20.5 per cent, respectively, fell
slightly, to reflect current lull in the business environment. Though liquidity
conditions underscore the presence of monetary influence on inflation,
performance of monetary aggregates showed that broad money supply (M3)
contracted by 2.29 per cent at end-February 2020, against the 10.26 per cent
provisional growth benchmark. Low yields on government fixed income securities
continued to impact patronage, while slightly higher money market rates
reflected the effect of net liquidity withdrawals from the banking system.
Developments in the capital market were generally bearish, reflecting the
investors' concerns about uncertainties in the market.
The
fiscal space is characterised by persistent revenue shortfall, on account of
declining proceeds from crude oil sales, due to low global oil demand and
price, thereby causing near-zero capital release, rising deficit and increasing
debt. The squeezed fiscal space has made it more difficult for the Government
to effectively carry out its fiscal operations. The external sector faces
severe difficulties as external reserves continue to decline on account of low
foreign exchange earnings and net capital outflow, which exerts significant pressure
on the exchange rate.
Overall Considerations and Decision
The
public health shock of Covid-19 is causing extensive human and economic
challenges, with far-reaching implications for the global economy. Actions by
various government has likened the outbreak to a war-like situation that
requires prompt and aggressive responses. A weakened global economy portends
danger for the Nigerian economy, the effects of which can be further worsened
by escalating outbreak on Covid-19 in the domestic environment.
As
a first step, Nigeria must rise to the occasion both as a sovereign nation and
in collaboration with international community, by acting appropriately and
promptly to stop the pandemic, to at least reduce the painful economic
consequence that may follow. In taking proactive actions to ameliorate the pain
of the public health shock on the domestic economy, we must continue to take
actions to rein in inflation, especially as it becomes inimical to growth,
while addressing other impediments 60 Classified as Confidential to growth.
Today,
the monetary policy rate (MPR) serves more as a reference rate and a tool for
signaling, while the cash reserve ratio has proven to be a more effective tool
for liquidity management. The loan-to-deposit ratio policy is achieving the
credit growth and interest rate reduction targets. Clearly, our current actions
to support growth is working in the right directions and only requires us to be
steadfast, for the full benefit to materialize. At this juncture, the fiscal
authority is advised to be more pragmatic in its engagement of the issues.
As
I mentioned in my earlier statements, Government is encouraged to explore
aggressive expenditure rationalisation, including significant reduction of
recurrent expenditure, in the face of persistent revenue shortfall and consider
opportunities to use excess liquidity in the banking sector for deficit
financing.
Though
this crisis time provides opportunity for us to reset, our actions must take
cognizance of our economic fundamentals. The speed by which confidence is
restored will depend on the effectiveness of policy implementation. Even as we
identify the drivers of inflation, to further intensify and target our efforts,
I believe that the current tight policy stance will eventually serve to
moderate inflationary pressure. Adjusting the MPR either way or increasing
liquidity will be contradictory and not align with our current stance and
recent actions.
I
therefore vote to retain:
Emefiele, Godwin I.
Governor
of The Central Bank of Nigeria And Chairman, Monetary Policy Committee
Since
the last MPC, an already fragile global macroeconomy was further weakened by a
fast spreading pandemic, the COVID-19. The various containment measures being
put in place to prevent or slow down the spread of the pandemic is taking
massive tolls on global economic activity. The hitherto expected stabilisation
of global output and increased growth momentum in 2020 now appears fragile. An
unusual shock, the impulse of the COVID-19 pandemic is shifting both demand and
supply functions of contemporary market system; and affecting every facet of
economic, social, and political order globally. We have seen significant
weakening in every genre of markets (including financial, primary commodities,
and even tertiary products) following the outbreak at the beginning of the
year. Global economic outlook for 2020 is realistically downgraded, following
general lockdowns, disrupted production schedules, widespread layoffs, travel
restrictions, border closures, portfolio capital flights, and heightened debt
vulnerability. This reflects the expected adverse effects of the outbreak on
both advanced economies and EMDEs. Accordingly, the 3.3 percent global growth
projected by the IMF for 2020 is expected to be significantly downgraded. As a
matter of fact, the IMF warned that coronavirus pandemic will cause a global
recession in 2020 that could be worse than the one triggered by the global
financial crisis of 2007-2008.
Developments
in the Domestic Economy
For
the domestic economy, short-term outlook has tapered considerably as the impact
of the pandemic is exacerbated by the huge plunge in crude oil prices, with
significant knock-on ramifications for fiscal operations and FX receipts. Previously
envisaged consolidation of domestic economic recovery is now enfeebled, as
eventual growth outcome for 2020 may fall significantly below the initial
projection of about 2.4 percent. This is also reflected in the moderation of
the Manufacturing and Non-Manufacturing Purchasing Managers' Indices (PMI) that
expanded at lower 58.3 and 58.6 index points in February 2020 respectively,
than in January.
These
are irrespective of the steadily rising momentum recorded throughout 2019, with
annual growth rate of 2.3 percent from 1.9 percent recorded in 2018. The oil
sector grew by 4.6 percent in 2019, contributing 0.4 percentage point to total
growth, while non-oil sector, with a growth of 2.1 percent, accounted for 1.9
percentage points. This underscores the importance of the non-oil sector for
the economy.
Recent
realities indicate that the economy could slowdown in the short-term as
businesses come to standstill following lockdowns and other containment
measures to stem coronavirus. The diminished prospect, due to global headwinds
and local imbalances, provides the opportunity to reposition the economy, prop
domestic productivity, and strengthen domestic demand. I note the proactive and
recent efforts of the CBN to stimulate the Nigerian economy and defuse the
prevailing shock, with an expected injection of about N3.5 trillion. Domestic
price levels maintained an upward trend, for the sixth consecutive month, due
essentially to structural and supply factors. Year-on-year headline inflation
rose to 12.2 percent in February 2020 from 12.1 percent in January, reflecting
rises in both food and core components. This is attributable, in part, to
border protection policy, disruptions and challenges around food production
belts, and pass-through from the recent VAT increase. Short-term outlook
suggests a gradual but continuously rising inflationary pressure. This may be
aggravated by the inherent infrastructural deficits and emergent FX market
pressures, especially as oil receipts dwindle and capital outflows persist.
Given
the trade-off between output stabilisation and price stability, I want to
emphasize the importance of a cautiously balanced and coordinated policies by
fiscal and monetary authorities. Aggregate liquidity in the economy decreased
in February 2020 as the broad money supply (M3) contracted by 2.29 percent,
driven by decline in net foreign assets (given the observed depletion in FX
reserves). Aggregate Credit to the domestic economy grew by 1.34 percent in
February 2020.
The
All-Share Index (ASI) and Market Capitalization of the Nigerian Stock Market
declined by 17.30 and 10.73 percentage points, respectively, driven by concerns
over the coronavirus pandemic and sharp decline in crude oil prices. External
reserves position stood at US$34.9 billion as at March 20, 2020 as against
US$38.07 billion in December 2019. The depletion in external reserves was
driven by FX sales to BDCs and I&E Window as well as dwindling oil receipt.
The current level of reserves is estimated to finance about 6.30 months of imports.
Consequently
the value of the naira at the I&E window was readjusted by 4.53 per cent to
N380.00/US$1 on March 20, 2020 from N363.53/US$1 as at end-December 2019, and
at the BDC window by 5.48 per cent to N380.00/US$1 from N360.25/US$1 at
end-December 2019. Overall, the BOP recorded a further deficit of US$4.018
billion in Q3 2019 as against a deficit of US$48.76 million in Q2 2019. The
overall balance as a percentage of GDP in Q3 stood at -3.22 per cent. The
Banking System Stability Review indicate robust financial soundness indicators.
The banking industry Capital Adequacy Ratio (CAR), for example, strengthened to
15.0 per cent at end-February 2020 as against 14.5 per cent at end-December
2019 and prudential limit of 15.00 per cent for banks with international
authorization. Tier 1 capital accounted for 88.2 per cent of the total
Qualifying Capital at end-February 2020. Similarly, the non-performing loan
(NPL) ratio stood at 6.5 per cent in February 2020 compared with 6.1 per cent
in December 2019 and our prudential limit of 5.0 per cent.
Although
the industry NPL ration is still above the prudential limit of 5.00 per cent,
it however, represents a substantial improvement when compared with 11.3 per
cent in February 2019. Similarly, the industry average liquidity ratio of 44.2
per cent at end-February 2020 is well above the prudential minimum of 30.00 per
cent. I note with satisfaction, the positive impacts of the new LDR policy
introduced in July 2019 to improve lending to the real sector. Total gross
credit of the banking system increased by N1,997.72 billion from N15,567.66
billion at end-May 2019 to N17,565.37 billion at end-December 2019 and recorded
an additional growth of N353.85 billion between end-December 2019 and March 17,
2020. The credit growth were mainly recorded in manufacturing, consumer credit,
general commerce, information and communication as well as in the agricultural
sectors. I continue to emphasize the importance of enhanced credit flows to
strategic and high impact private sector ventures through an effective
collaboration of all stakeholders. I reiterate that CBN will continue to propel
credits to the private sector, even as I remain mindful of the risk aversion of
banks to supposedly high risk real sector ventures.
Key
Considerations
In
my consideration, I affirm that the objective of price and exchange rate
stability remain sacrosanct. I note the emergent pressure in the FX market due
to oil price softening and the need to unify the exchange rate across all
segments. On the weakened short-term growth outlook following the recent
pandemic and allied global shocks, I also note the need to adequately support
domestic productivity and buoy aggregate demand. In this respect, the CBN has
taken recent measures to support critical private sector businesses and
earmarked stimulus packages to assist households and Micro, Small and 65
Classified as Confidential Medium Enterprises (MSMEs).
The
recent LDR policy to enhance credit flows to the private sector is, again,
hereby acknowledged. In order not to undermine price stability, I want to
emphasize the importance of cautiously aggressive and coordinated responses
that are adequate. Inflation outlook suggests a rise in the short-term. The
continued fall in oil prices which could heighten FX market pressures and
undermine price stability needs to be sufficiently mitigated. Money market
conditions including the real interest rates should be appropriate to retain
investors' confidence and boost sentiments.
Policy
Preference
I
believe that the recent economic stimulus pronouncements by the CBN are
adequate to spur domestic conditions. The adjustment and unification of
exchange rates is also a step in the right direction. I am equally of the view
that the effects of the changes to CRR is still permeating the system. It is
important, thus, to allow the effect of these actions to touch-down so as to
avert indeterminate equilibrium, which could accompany too many sudden policy
impulses. Overall, I am of the view that the current levels of key policy
parameters are sufficient to balance the objectives of exchange rate stability,
price stability and output stabilization without introducing disruptive policy
shocks. Therefore, I vote to:
Godwin
I. Emefiele, CON
Governor
March
2020
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