| Monetary Policy |    2007 VIEWS  |
| Monetary Policy | |
| 2007 VIEWS | |
 |
Monday, July 20, 2020 /
08:o0 PM / By Proshare research / Header Image Credit: CBN
Highlights
Illustration 1: MPC Policy Rate July
2020
Illustration 2: Comparative Analysis
Where Goeth Inflation?
Inflation uncertainty is becoming a growing concern
for investors, savers and consumers alike as the domestic inflation rate in
June 2020 settled at 12.56%. With the savings rate between 2.00 and 3.00%, the
negative return on bank savings products floats between -9.56 and -10. 56%. The meaning of
this is that within 7 years or by 2027 the amount in savers accounts would be
worth exactly half of their values in 2020.
But need to tackle inflation in 2020 appears less of a
priority for the monetary authorities as is the need to grow gross domestic
product (GDP) to counter the rise in the jobless rate (no contemporary figures
are available apart from the 23.1% presented by the National Bureau of
Statistics (NBS) in Q3 2018) and corporate bankruptcies. The domestic Inflation
rate has grown steadily for the last ten months and has more recently settled
at its highest rate in the last twenty-four months.
Despite holding MPC policy rates constant for a term,
the domestic inflation rate may not abate any time soon as supply chain
challenges, rising import costs, falling purchasing managers index (PMI) at
41.1% as of June 2020, suggest cost-push inflationary pressures in Q3 and
perhaps 4 2020 but reduced consumption spending caused by higher jobless rate
and lower consumer disposable incomes may lead to less demand-pull strains. If
the economy expands a bit in Q3 and Q4 2020 (as a result of an easing of lockdowns
and restricted interstate transport movement) the domestic inflation rate may
begin to taper downwards as GDP growth picks up a notch. The projected -4.2% shrink in Nigeria's GDP by the International
Monetary Fund (IMF) may be off the mark by a few basis points as Q1 GDP growth
of +1.87% was ahead of earlier IMF projections
even though it was below the Q1 2019 growth of +2.1%.
Analysts expect inflation to rise at a slower pace
over Q3 and Q4 2020 as long as farmgate produce is allowed to move to urban
centres and transport costs do not escalate. Energy costs are not expected to
rise until Q1 2021 (see Chart 1).
Chart 1: Nigeria's Inflation Rate
Source: NBS, Proshare Research
The Incredibly Shaky GDP; Looking for A Bootstrap
GDP will likely slip
in Q2 2020 as slowly reawakening manufacturing activities; weak recovery of
supply chains and slow consumer spending will combine to drag down GDP growth. To
make matters worse low international oil prices and a cut in oil production as
advised and monitored by the Organization of Petroleum Exporting Countries
(OPEC) in both Q3 and Q4 2020 will hurt Nigeria's oil revenues over the next
few quarters. Although the CBN has noted that NPLs in the banking sector declined
to 6.4% at
the end of June 2020 from 9.4% in the corresponding period of 2019, the narrative may change shortly as
the banking sector becomes hard hit by the fall in international oil prices (The
largest part of tier 1 DMB credits go to the oil sector). In this context,
banks may become more conservative as they de-risk their balance sheets and
gradually unwind their oil & gas exposure.
The rise in domestic
inflation rate has rattled real disposable income and local consumption,
thereby nibbling down on growth in Q2, Q3 and possibly Q4 2020. With the
forecast decline in investment in the real sector, Nigeria's GDP is expected to
contract further in Q2 2020 dropping from N350bn in Q1 (see
Chart 2).
Chart 2: Nigeria Yearly GDP 2010 - Q1 2020 ($'bn)
Source: NBS, Proshare Research
Of Trade Wars and Current Account
Imbalances
A
grey area which the CBN failed to address during the MPC was the outlook for
the exchange rate. The CBN said it would unify its multiple exchange rates has
resulted in the devaluation of the naira in the I & EF window to N381 to a
dollar. The persistent rise in inflation and the devaluation of the naira would
most likely worsen Nigeria's trade balance. This means that companies in
Nigeria that depend on the import of raw materials in their local production value
chain would pay higher costs for inputs (see Chart 3).
Chart 3: Nigeria's Import, Export and Trade Balance
(N'trn)
Source: NBS, Proshare Research
Going Forward
CBN
will face a tough task keeping the economy on an even keel over the next two
quarters as the higher rate of domestic inflation, falling fiscal revenues and
foreign exchange earnings and rising jobless rates would conspire to make
weaken monetary policy as the CBN has little headroom for further policy
adjustments. The fiscal authority also has a slim wiggle room as the country's
high debt service profile and escalating debt size means that the borrowing
window for the fiscal authority is slowly closing shut.
Top
of on the agenda of the CBN's next MPC is likely to be issues around the
exchange rate, the persistent rise in inflation and the likely contraction of
the economy. As noted in its MPC, the CBN decided to retain its MPR at 12.5%
citing the need to allow time for the transmission effect of its policies to
permeate the economy. However, the shape and pace of the economy over the next
few weeks would prove instructive to economic stakeholders as the CBN's still
water approach to key policy metrics would have begun to leave notices of
policy strength or weakness. To be sure, doing nothing at times could prove to
be a brilliant counterpoise to doing the wrong thing.
Related News
1. CBN
Communique No. 131 of the MPC Meeting - July 20, 2020
2. A Pause to
Assess the Cut in May?
3. Fragile
Macro Conditions to Hinder Loan Creation
4. Coronanomics
(26) - CBN's Vexing Trilemma
5. Coronanomics
(25) - A Regulator's Burden - CBN's Tale of Heterodoxy
6. The World
Congress of Central Bankers
7. Personal
Statements By The MPC Members At The 130 MPC Meeting of May 28, 2020
8. Implications
of CBN's Debits on Banks for CRR Compliance
9. Still Very
Weak Lending to the Real Economy
10.Acute
Weakness in Private Credit and GDP Ratio
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