Five Takeaways from CBN‘s 122nd Monetary Policy Committee Meeting, January 2019

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. 

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