Wednesday, January 23,
2019 6:30 AM /By Teslim Shitta-Bey
Highlights
·
Monetary Policy rate remains
14%
·
Liquidity ratio stays at 30%
·
Cash Reserve Ratio (CRR) still anchored
at 22.5%
·
Asymmetric spread between +200 and
-500 basis points
Highlights
- The central bank (CBN) is
worried about inflation pressures and is not prepared to loosen its leash on
money supply. With inflation rising to 11.44% in December 2018 up from 11.28%
in November of the same year, the regulator is determined to restrict growth of
narrow and broad money supply, M1 and M2 at least throughout Q1. The Bank can
be expected to be involved in regular mop up exercises through its Open Market
Operations (OMO) and the sale of Treasury Bills (T-bills) and Bonds. Treasury
yields for 5 and 7 year instruments are 15.25% and 15.50% respectively or
roughly 4% above annual inflation rate for December 2018.
Chart 1 Nigeria Inflation rate 2018-2019

Source: National Bureau of Statistics (NBS), Proshare
- Interest rates in Q1 2018 will
remain high as private sector borrowers will have to cope with the higher
finance charges as best they can as the CBN will be unwilling to bring rates
down by increasing money supply in the quarter. High interest rates will naturally
lead to lower GDP growth and a lower capacity of the economy to create new jobs.
Obviously the jobless rate will go up but this is not a top priority of the CBN
at the moment. Unemployment rate has been rising steadily over the past four
years from 9% in Q3 2015 to 23.1% in Q3 2018 or what amounts to a compound
average annual growth rate of +37%. Surprisingly, none of the political aspirants
contesting for the presidency in February appear to have articulated a credible
plan to bring the jobless rate down.
Chart 2 Nigeria Unemployment rate 2014-2018

Source: National Bureau of Statistics (NBS)
- Government’s fiscal deficit still
appears to be a major threat to economic stability in 2019. The CBN governor tactically
smoothed over the issue of Nigeria’s burgeoning budget deficit, but it was
clear from his body language and mildly placed advice of broadening the value
added tax base (VAT) that the CBN was growing increasingly worried by the size
of the nation’s spiraling debt service burden. The debt service to revenue
ratio (DSRR) in the 2019 budget was estimated at 67% on the shaky assumption
that total national debt would be in the region of N24trn and that debt service
obligations in the course of the year would be around N2.4trn. These assumptions would hold
only if international oil prices remain stable at an average of $60 per barrel
for the year. A lower oil price would mean a larger fiscal deficit and a more
perilous public debt situation.
Chart 3 Nigeria fiscal deficits as a % of GDP

Source: National Bureau of Statistics (NBS)
- Importers of goods for which
there are local substitutes may be in for a harsh quarter as MPC’s monetarist
hawks insist that the CBN would not permit such importers to have access to the
official foreign exchange window of the Bank. The monetary policy makers contend
that importers of goods that can be produced locally would be advised to seek alternative
businesses. Godwin Emefiele, CBN
governor, said that the Bank would actively cooperate with agencies such as the
Economic and Financial Crimes Commission (EFCC) to put the squeeze on such
importers. To be certain, reducing access of importers of substitutable goods to
FX could ease pressure on the naira and slow the rate of depletion of the
country’s foreign reserves.
Chart 4 Nigeria External Reserves January-December 2018

Source: National Bureau of Statistics (NBS)
- Non-performing loans (NPLs) of
banks have steadily declined in the last few months, especially in Q2 and Q3 of
2018. The CBN believes that with the Federal government set to pay contractors in
Q1 of 2019 deposit money banks (DMBs) look ready to show healthier profit and
loss accounts and hopefully more stable balance sheets.
Chart 5 Nigerian Banks by Loan Market Share

Source: Central Bank of Nigeria (CBN)
The CBN still considers the economy as undergoing fragile growth and a lot of uncertainty will dominate economic decisions over the next eight weeks as pre and post-election issues dominate the public space and prompt investors and other economic actors to sit on the sidelines until the atmosphere becomes less tense and much more clearer.

Related News
1.
CBN Communiqué
No. 122 of the MPC Meeting – Jan 21-22, 2019
2.
Implications of
The MPC Decision of January 2019 MPC Meeting
3.
CBN Monetary
Policy Committee Leaves All Key Variables Unchanged
4.
January 2019
MPC: 5 Key Things To Watch
5.
MPC:
Considerations and Policy Options: Keeping Policy Rates at Current Levels is
Still Prudent
6.
Monetary Policy
Outlook For 2019 - Federal Reserve
7.
Personal
Statements By MPC Members At The 121 MPC Meeting of Nov 21-22, 2018
8.
Has Monetary
Policy Reached Its Tether’s End In Nigeria?
9.
CBN Communiqué
No. 121 of the MPC Meeting – Nov 21-22, 2018
10. Nigeria’s MPC
Maintains Status Quo At The End of November 2018 Meeting
11.
To Hold or
Increase Policy Rates – FSDH Research Leans Towards a Hold Decision
12. Refocusing The
Single Digit Pricing For DFI Debate

