Post MPC Analysis: A Second Look At CBN’s July 2019 Monetary Policy – Intent and Impact


Thursday, July 25, 2019 /  12.00PM / Teslim Shitta-Bey, Managing Editor  / Header Image Credit: Channels TV

Central Bank of Nigeria, CBN, on 23 July, 2019 announced that its monetary policy rates would remain unchanged from those set earlier in May 2019. The implications will be that the following policy rates will prevail over the next three months:


  • Monetary Policy Rate will stay at 13.5%
  • Cash Reserve Ratio (CRR) will remain at 22.5%
  • Liquidity Ratio will rest at 30%


The decision to keep rates constant, according to the CBN governor was to observe the effects of policies such as the reduction of MPR from 14% to 13.5% in May 2019 on domestic credit supply and reviewing the impact of the Bank’s decision to compel deposit money institutions (DMBs) to retain a minimum lending-to-deposit ratio (LDR) of 60%. The CBN was of the opinion that these policies will aid the acceleration of economic growth.


Paradise Lost

CBN’s optimism that its policy rate cut and its LDR instruction will stimulate credit and hence economic growth is misplaced. The 50 basis points cut in the Bank’s policy rate will not lead to a reduction in local lending rates because underlying economic and business risks that have prompted high lending rates still prevail. The slow 2.01% growth in gross domestic product, GDP, and falling consumer spending will combine to keep manufacturers’ inventories of finished goods high and put upward pressure on holding costs. A loss of liquidity will translate into higher finance costs as manufacturers ratio of operating cash flow to interest expense continue to fall. Manufacturers will find themselves unable to generate adequate operating cash flow to cover short term debt obligations.  


The risk of repayment default in a slow moving economy will require banks to charge higher rates for borrowing to cover perceived default risk. The higher default risk premium charged on bank lending would be impervious to policy rate declines. The additional fact of high lending concentration with 100 persons or institutions responsible for over 65% of total domestic bank borrowings from DMBs reduces the impact of policy across the economy as lending to smaller businesses with higher credit risk will be unlikely. However, increased lending to large institutions or high net worth individuals is not likely to jump start growth as the businesses of these entities will not likely grow beyond present levels in the immediate future. The growth paradise desired by the Bank will not occur because weak correlation between interest rates and production output is unlikely to change, despite increased banking sector liquidity.  




The recent CBN policies will potentially result in the following course of commercial actions:

  • Banks will extend further credit to large customers with relatively lower default risk assessment. Credit risk concentration will likely rise.
  • Non-performing Loans (NPLs) will rise above the recent N1.7trn aggregate for the banking sector.
  • Borrowing cost will fall marginally as liquidity will increase on the back of more money moving from T-bills to commercial bank lending. The size of the shift would not be enough to make a dent in economic growth as domestic consumption continues to stay repressed while investment spending also remains muted.
  • Borrowers will be reluctant to take on more borrowings in the face of slow demand growth. The lack of growth in demand for goods and services would, consequently, lead to low demand for additional bank borrowing regardless of how low marginal loan rates are or how abundant the increase in loanable funds (this is the ‘kinked equilibrium’ in the diagram below).

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A Case of Sour Milk

In answer to a question asked by a journalist at the end of the Bank’s Monetary Policy Committee (MPC) press briefing penultimate Tuesday, the CBN Governor, Mr. Godwin Emefiele, hinted at the possibility of the regulator limiting access of milk importers to foreign exchange from the official market. The governor said the policy move would be designed to encourage local production and processing of cow milk in the country. The CBN’s Governors heart is in the right place but the logic of the policy may require further consideration.


At a period when unemployment in Q3 2018 was 23.01% and underemployment was hinged at 20.01% resulting in a combined unemployment and underemployment rate of 43.02% in the third quarter of 2018, the decision to adversely curtail production activity of Nigeria’s largest milk companies needs further attention.

Chart 1  Quarterly Unemployment Rate 2017-2018

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Source: National Bureau of Statistics


The immediate consequences of the Bank’s intended policy include the following:

  • The cost of milk and milk-dependent products will rise significantly.
  • Local production of the product at the scale required to meet domestic needs would take between 3 and 4 years during which the dominant milk products in the country would be smuggled in, thereby distorting the demand and supply equilibrium in local markets with major revenue loss to government.
  • Job losses in the domestic milk value chain will worsen an already dire unemployment situation
  • Contrary to the Central Bank Governor’s notion that milk production in Nigeria is easy based on domestic cow production, the deeper reality is that the cows husbanded in Nigeria are not ideal for milk production and are principally used for their meat. Dairy cows would have to be massively imported from countries like Argentina and Brazil and they would need to be pre-inseminated and supported by appropriate fodder before being introduced to local cow ranches. As things stand today, the required ranches and ranch facilities are thin on ground.  This means heavy investment in ranch infrastructure would be required, which translates to high initial breakeven margins for cattle dairy farmers.
  • The high cost or clear shortage of milk in Nigeria will have perverse effects on child mental health development and lead to an unintended ‘Cobra Effect. The absence of adequate supply of milk will cause increased child health challenges which will require the importation of drugs not manufactured in the country to counter the medical challenges caused by the relative absence or high cost of milk products. This will bring the CBN to a point where it would have to fund medical supplies that would have been avoided if milk was approved for official foreign exchange transactions.
  • The CBN has said that Nigeria spends between US$1.2bln and US$1.5bln annually on the importation of milk. The fiscal (rather than monetary) imperatives are clear. The fiscal authorities need to provide incentives and policy frameworks that encourage the local production of the product as quickly as possible. New enterprises coming into the business should be given tax incentives to produce milk locally while existing manufacturers should be given tax rebates based on the gradual reduction in the importation of finished products. The bigger the import reduction the larger the marginal tax rebate allowed.


Staying Catholic

The CBN’s developmental interventions in the past four years have increasingly blurred the lines between monetary and fiscal policy.  The blurring of the lines between macroeconomic policy authorities will foreseeably lead to a conflict between the Ministry of Finance (MoF) and the Bank. The conflict is avoidable and unnecessary but the CBN must allow the fiscal authorities drive real sector growth while the Bank itself manages the nation’s nominal financial flows while providing oversight for intermediaries; this is best global macroeconomic practice.


The problem of the CBN taking on fiscal roles began in 2015 with the delay in the appointment of a Minister of Finance; the CBN Governor became the de facto coordinating minister for the economy for six months. This appears to have festered after the appointment of the former finance minister, Kemi Adeosun, who appeared to have ceded part of her macroeconomic responsibilities to the Bank. 


The anomalous situation under Adeosun tainted CBN policy clarity and left the bank deprived of Catholic discipline. A growing consensus amongst local economists is that the Bank needs to retrace it steps and keep within the technical confines of monetary policy rather than dabble in the murky business of so called ‘development’ functions. 




The Productivity Gap

Nigeria’s major economic challenge is productivity. The low productivity of the industrial and agricultural sectors has impaired the country’s international competitiveness in the non-oil sector and posed a challenge for economic management, growth and employment.  To reverse the poor production trend the government will need to take a number of bold policy steps which will include the following:


  • Remove petroleum subsidy on PMS
  • Use petroleum subsidy savings for power sector investment and transport infrastructure development
  • Reduce fiscal debt service-to-revenue ratio
  • Reduce ratio of recurrent spending to total spending
  • Reduce Public Sector Borrowing Requirement (PSBR)
  • Reduce number of government agencies and departments
  • Reduce overall size of government
  • Reduce waste and improve service delivery quality
  • Digitalize government operations


These fiscal measures will support growth and create an environment that is driven by efficiency and public sector effectiveness. Removal of petroleum subsidy, for example, will begin to plug the fiscal deficit and reduce pressure on the domestic money market, hence reducing interest rates. The CBN will have to keep broad money supply in check (see chart 2 below) to hold down inflation but the more efficient allocation of public sector resources will make up for the temporary price pains. What appears to be happening is that the fiscal authorities are waiting for the commencement of the Dangote Petroleum Refinery before allowing the pump price of PMS to become market determined.


Chart 2 Broad Money Supply January -May 2019

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Source: National Bureau of Statistics



Private sector:

  • Marginal tax rate cuts and tax rebates should be introduced as incentives to encourage green and brown field investments
  • Multiple tax rates by different levels of government should be harmonized to reduce corporate tax burdens
  • Regimes of consumption subsidies should be dismantled in all industries
  • Regimes of subsidized lending are unsustainable, market rates should be allowed to prevail with windows created for tax credits on mutually agreed production milestone levels or production anniversaries



The CBN monetary policy stance is unlikely to spur growth as credit expansion will be difficult to achieve in a fragile economy with weak effective consumer spending capacity and major supply-side challenges (weak local currency putting upward pressure on input costs). A vertical domestic investment/savings curve (IS curve) makes monetary policy somewhat ineffective over a certain policy range. The CBN may need to either allow interest rates stay high and allow credit find its natural level or set a loan-to-deposit ratio (LDR) of 60% and let interest rates respond to relative demand: the Bank cannot control lending levels and lending rates at the same time.   


As far as the issue of restricting the access of local milk producers to the official foreign exchange market is concerned, the consequence could produce a classic situation of the cure being worse than the disease, as Yogi Berra would have described it, this is “déjà vu all over again!’.

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