| Monetary Policy |    2736 VIEWS  |
| Monetary Policy | |
| 2736 VIEWS | |
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Friday, December 27,
2019 / 06:32 PM / by Central Bank of Nigeria / Header Image Credit: Youtube
The global economy continues to struggle under the
combined weight of factors including trade tensions resulting in significant
tariff increases between the United States and China; subdued investment and
activity prospects in emerging markets and developing economies (EMDES);
increasing policy uncertainty across many countries; unstable commodity prices,
Brexit uncertainties as well as other geo-political setbacks. These conditions
have continued to hurt business sentiment and confidence globally in the second
half of the year. After several downward reviews, the International Monetary
Fund (IMF) currently projects the world economy to grow at 3.0 percent in
2019-the lowest since the most recent global economic and financial crisis.
At the projected level, growth in 2019 would be
significantly lower compared with 2017/2018 for EMDEs and advanced economies.
Clearly, the external environment of economic policy continues to deteriorate,
and the short- to medium-term outlook remains unclear. Against this backdrop,
and given the rather muted inflation path globally, monetary authorities have
generally had no hesitations about sustaining, or even, intensifying monetary
expansion to boost growth and employment.
Although there may not be as much room to expand money
in Nigeria, given the current upward path of inflation, constraining liquidity
any further does not, in my view, represent an optimal orientation of monetary
policy at this time. I therefore voted to retain all policy parameters at their
prior levels at the November 2019 meeting of the Monetary Policy Committee
(MPC), while urging the Bank to sustain its targeted and largely catalytic interventions
in agriculture and SMEs sectors especially. The data available to the Committee
suggested to me that the credit constraint in the economy was alleviating,
owing mainly to the Differentiated Cash Reserve Requirement (DCRR) and the
minimum loan-to-deposit (LDR) ratio specified by the Bank during the year.
Between January and October 2019, gross credit expanded by over one trillion
naira (N1.0 trillion); much of the increase actually occurred between June and
October 2019. The sectors with the largest increases in credit during the
period include agriculture, manufacturing, consumer credit and general
commerce. Importantly, both measures (DCRR and LDR) had not resulted in rapid
monetary expansion as key monetary aggregates continued to be significantly
below their indicative benchmarks. I figured that the immediate risks to price
stability were not necessarily emanating from the growth in credit, but more
crucially from a variety of structural constraints in the economy, preventing
efficient and effective circulation of goods, particularly food. It is expected
that the food supply shock, which led to the mild increase in food inflation in
October would be short-lived as producers of food are incentivized to ramp up
production.
Already from the Q3, 2019 GDP numbers, we could see
agriculture quickening, driven by crop production. In addition, the partial
border closure offers the economy an opportunity to regain control of food
production and prices in the medium-term. It is partly in this connection that
I find merit in sustaining the on-going strategic interventions in the
agricultural sector by the CBN. It is equally important that governments at the
state and local government levels evolve ways to promote agricultural
production including incentives and infrastructure to complement those
initiatives by the CBN and the Federal Government. As I evaluated the economy's
overall performance in the first eleven (11) months of 2019 and the short- to
medium-term outlook, I clearly could see two defining elements - credit to the
real sector and the naira exchange rate.
On credit, the Bank has been able to turn around the
situation through the LDR and the Global Standing Instruction (GSI) which aims
to reduce credit risk. Given that interest rates have started to moderate and
banking industry nonperforming loans (NPLs) trending towards the regulatory 5.0
percent level, money market activities could only be expected to buoy in months
ahead. Regarding the second element, the naira exchange rate, most analysts agree
that its stability has been the central driving force of the current recovery.
I also subscribe to this view. I would argue, therefore, that the most
important medium-term challenge for monetary policy would be how to preserve
the stability of the exchange rate of the naira. I recognize though that some
of the associated mechanics like oil price and capital flows are a bit
exogenous to domestic policy calibrations. As the outlook for the foreign
exchange supply side continues to be uncertain, the Bank must manage the demand
side effectively to keep the exchange rate stable. In this regard, the
restriction on the use of foreign exchange remains relevant and the list of
items-not-valid for funding from the foreign exchange market should, perhaps,
be expanded to ease the pressure building on the current account.
Overall, I have considered that the measures currently
in place have not lived out their full impact and as such should be allowed
some more time to strengthen the recovery process. Meanwhile, the routine
sterilisation actions of the Bank should be enough to prevent system liquidity
from surging rapidly on account of credit expansion. More importantly, however,
the need remains for Government to maintain the focus on diversifying the
economic base and growing revenue. It is especially relieving that the process
of the 2020 budget has very well advanced which means implementation could
begin much earlier than previously experienced. This should accord economic
activity and growth recovery the much-needed push in 2020. Based on the
foregoing, I 10 found no compelling need to tweak any of the headline
instruments of monetary policy at the November 2019 MPC. In effect, I voted to:
Adenikinju, Adeola
Festus
Economic Developments
Developments in the global economy has not changed
radically from the last MPC meeting in September 2019. The global economy
provides mixed opportunities and challenges. Rising yield in the US poses
challenges for portfolio flows to emerging economies. The outlook for the oil
sector is not very bright and remains volatile due to geo-political
developments in the Middle East and around the world. Trade war between the US
and China and the BREXIT issue continues to impact negatively on global output,
global trade, commodity prices, and on the financial markets. Nigeria, like
many other emerging and developing economies have not been able to insulate its
economy sufficiently from these uncertainties and vulnerabilities.
Global inflation rate is somehow tepid. Most advanced
economies continue to implement accommodating monetary policies and allow
corporate debts to soar in order to boost their economies. On the other hand,
several developing countries are faced with rising public debt. The expected
capital flows from advanced economies to emerging economies have also not
happened at the quantum and speed previously anticipated. On the domestic
front, the results are mixed. Output growth retains its fragile, but positive
trajectory in the third quarter of 2019, with a 2.28% growth compared to 1.81%
recorded in comparative period in 2018. This makes it the fourth consecutive
quarter that real GDP has posted a growth above 2.0%. The growth in GDP was
driven mainly by the oil sector. The increase in electricity generation by 4.4%
in the third quarter also contributed to the improved performance recorded in
the GDP. Headline inflation (year-on-year) rose to 11.61% in October 2019, from
11.22% in September 2019. The foreign reserves level stood at US$39.65 billion
by November 21, 2019, compared to US$40.33 billion as at end-September 2019.
Moreover, the current account balance also deteriorated between the second and
third quarters of 2019.
While, the foreign exchange rate markets remain
relatively stable at both the BDC and the I&E windows, the weak performance
of the current account balances, fall in foreign reserves and the small margin
between oil price and the benchmark price for oil, implies that there could be
increasing pressure on the naira in the medium term if the existing conditions
subsists. The fiscal space also deteriorated due to rising fiscal deficit.
Government revenue underperformed relative to budget, while expenditure rose
above the budgeted sum in the first half of the year. The equity market also continues
its downward trajectory in the third quarter of the year. All-Share Index (ASI)
12 declined by 14.12% to 16,991.42 index points on November 22, 2019 from
31,430.5 index points at end December 2018. The financial system indicators
(FSI) trend was generally positive. The NPLs was particularly encouraging.
NPLs ratio declined from 9.4% in August 2019 to 6.6%
in October 2019. It is hoped that the trend will continue. Total operating cost
to operating income of banks also declined from 67.4% in August 2019 to 66.9%
in October 2019, suggesting more efficiency in their operations. Loans and
advances as share of banks' assets rose by 2 percentage points from 33% to 35%
between May and October 2019. Gross credits rose by nearly a trillion naira
between October 2018 and October 2019. More sectors of the economy benefitted
from the increase in lending, with the manufacturing sector, retail and
consumer credits recording the highest increase. Liquidity in the economy
remains high, driving down unsecured interbank and OBB rates below the lower
band of the MPR corridor of 8.5% - 15.5% between September 23 and November 20,
2019. Patronage at the SLF window declined significantly, while those at the
SDF rose appreciably between the period July 22 -September 20, 2019, and the
period September 22 to November 20, 2019. Net liquidity position of the economy
was lower in October 2019 relative to December 2018.
Reserve Money in October 2019 was 18.72% lower than
the benchmark value. Broad money aggregates M3 and M2 performed below their
indicative benchmarks in September 2019. Maximum lending rate declined by 0.87
percentage points to 30.56% in October 2019 from 31.43% in September 2019.
Similarly, the prime lending rate fell by 0.08 percentage points to 15.07% in
October 2019 from 15.15% in September 2019. The balance of trade and current
account balances deteriorated in the third quarter of 2019 relative to same
period in 2018.
Considerations
Existing policies put in place by the MPC has been
yielding results. Credit to the economy is expanding, Lending rates are
reducing, albeit marginally and domestic output is growing. Support from the
fiscal side to the efforts of the monetary authorities would further boost
these positive indicators. However, the economy is facing a number of
headwinds, including the new minimum wage, and its effects on Government
finances, especially at the states level, challenges pose by the closure of the
border, including higher costs of imported food, securities challenges, climate
change and poor state of infrastructure.
Bank's staff forecast that inflation may yet tick up
in the last quarter of 2019. The negative output gap and the positive
unemployment gap suggest that the economy has the potential to generate
non-inflationary output growth by 13 utilizing more of the currently unemployed
and underemployed labour force. The absence of any serious fiscal buffer
portends increasing borrowing, and even more debts for the Government.
There is no doubt the economy is in a need of an
urgent and deep boost if it is to grow at a far more descent rate that will
dent the current high unemployment and poverty rates in the country. The
Government needs to take bold steps in the following areas: a) Sale of
government wasteful assets to improve government financing b) Promote domestic
gas utilization and gas-based industries to diversify dependence on oil exports
and boost electricity generation c) Alternative funding of Government capital
projects, using the private sector funding to reduce pressure on government
budget d) Reforming energy subsidies in the oil and electricity subsectors e)
Enactment of oil sector reform law
Decision
On the basis of above considerations, I cast my vote
to hold the existing monetary policy parameters at this meeting at their
existing levels:
Ahmad, Aishah N.
The Monetary Policy Committee held its last meeting in
2019 within a subdued global economic environment amidst some domestic
optimism. The Committee broadly appraised its existing policies vis a vis
global and domestic developments over the year, taking stock of their impact on
the price and monetary stability mandate. Undoubtedly, it had been an eventful
year. Whilst uncertainties continue to persist, some headwinds are now fully
developed and policy makers across many jurisdictions admit to working with
increasingly limited toolkits. Thankfully, domestic policies are yielding some
positive results, evidenced by a relatively resilient domestic economy with a
positive short-to-medium-term outlook, even in the face of rising external
vulnerabilities. Thus, I shared members' broad optimism that the Nigerian
economy had a few bright spots expected to manifest into tailwinds as the
global economy slows into 2020. Global economic sentiment at end 2019 is
decidedly weak. Bank staff reports revealed that 11 out of 14 major central
banks reviewed, cut policy rates, and the IMF cut its global growth forecast
three times within the year. Bleak economic narratives dominated the annual meetings,
all clearly indicating a world bracing itself for a recession. The yet
unresolved US-China trade war was disrupting global trade value chains and
hurting the Chinese economy - the world's second largest - whilst unresolved
Brexit and approaching general elections in the UK are exacerbating the
worrisome situation.
Clearly, global trade uncertainty and geopolitical
tensions appear to be the new normal going forward. Notwithstanding, domestic
output recovery continues to strengthen and remains on a positive trajectory.
Based on Q3 2019 real GDP numbers recently released by the National Bureau of
statistics (NBS), the economy grew by 2.28 percent, compared with 2.12 percent
in Q3 2018. This improved growth numbers which can be partly attributed to rising
domestic credit, exchange rate stability and fiscal stimulus, represents the
10th consecutive positive quarterly growth in GDP since the economy exited a
recession in Q2 2017. The trajectory is expected to continue as reflected in
staff and IMF 2019 GDP forecasts for Nigeria at 2.2 and 2.3 per cent,
respectively and a purchasing managers' index (PMI) at 58.2 points (October
2019), rising for the 31st consecutive month.
While the domestic economic momentum remains broadly
optimistic, global trade headwinds and geopolitical uncertainties mentioned
earlier, may have 15 potential negative effects. Crude oil prices have remained
dampened on the back of deteriorating growth sentiments with limited signs of
any significant price increase in the near term. This has negative implications
for our fiscal revenue, inflation, output performance and external reserves.
However, the current level of external reserves (US$39.65b as at 21st November,
2019) is sufficient to accommodate over 9 months of imports and ward off medium
term threats to price stability as more sustainable economic reforms are being
explored. Limited buffers, lower expected revenue in view of lower oil prices
and a rising debt profile, constrict the fiscal authority's ability to
stimulate growth. However, the Finance Bill - detailing the planned Value Added
Tax increase and other measures - is a positive indication of commitment to
fiscal consolidation. As anticipated, headline inflation increased modestly
from 11.24 percent in September 2019 to 11.61 percent in October 2019 on
account of seasonal endof-year uptick in prices; and partly due to Nigeria's
border closure, which impacted on food supply.
Consequently, food inflation rose from 13.51 percent
to 14.09 percent in September and October 2019, respectively. Core inflation,
the underlying inflation in the economy, however, declined marginally from 8.94
percent to 8.88 per cent in September and October, respectively. The decline
reported in core inflation was attributed to the relative stability in the
foreign exchange market. Whilst data provided at the meeting strongly indicated
that there were net gains to the economy on the partial border closure -
improved local production and access to market, reduced Premium Motor Spirit
(PMS) consumption, - a longer term strategy will be critical to preserve the
net positive effects. These include a comprehensive review of Nigeria's trade
policies and effective monitoring of the borders to consolidate on the gains
recorded so far. Significant investments should also be channeled towards
infrastructure development through public private partnerships in view of the
constricted fiscal space, while sustaining the ongoing tax reforms.
These measures will help strengthen output expansion,
improve job creation, thus making growth more inclusive - an essential
ingredient for securing better economic prospects. Financial stability; buoying
domestic output growth and lower yield curve - The financial system remains one
of the key bright spots of the economy, rising up to its intermediation role
albeit with some policy nudging. A major driver of economic activities, it
continues to be safe and resilient, maintaining progressively strong soundness
indicators across liquidity, capital adequacy and asset quality; a trend which
was sustained through the year. NPLs ratio reduced further to a remarkable 6.6
percent as at end October 2019, the lowest in over four years. Other prudential
ratios remain within desired levels, while positive domestic GDP growth
prospects is expected to further strengthen asset quality, solvency ratios and
sustain financial system stability.
The Loan to Deposit Ratio (LDR) policy has continued
to be very successful adding N1,060.29 billion in loans to the private sector
between end May 2019 and end September 2019 and over N1.6 trillion in new loans
to the economy since it was first pronounced in July 2019. Monetary aggregates
provided by Bank staff validate the impact of increased lending and reduction
in credit to government and clearly show growth in consumer credit. Significant
portions of the new credit went to manufacturing (N459.69 billion), the highest
in two decades, consumer loans (N356.65 billion), General Commerce (N142.98
billion), Information and Communications (N82.07 billion), Construction (N74.52
billion), Agriculture, Forestry and Fishing (N73.20 billion), Mining and
Quarrying (N3.64 billion) and Transportation and Storage (N3.09 billion),
amongst others.
In addition to credit to the private sector, which has
helped spur growth in Q3 2019, the LDR policy created a number of other
positive effects. Renewed focus on lending by banks has created competitive
pressure, which is driving a reduction in market lending rates, enhancing
affordability and creating demand for loans. The new credit has been primarily
in manufacturing, agriculture and consumer lending which is helping to
diversify bank credit portfolios which have hitherto been heavily concentrated
in Oil and Gas. Contribution of Oil and Gas reduced to 27.4 per cent of total loans
and manufacturing grew to 16.0 percent (end October 2019) from 30.41 and 14.68
per cent respectively (end December 2018). The reduction in credit to Oil and
Gas and FGN Payments of outstanding obligations in this sector is also helping
to reduce risk, as the sector NPLs reduced from 20.76 to 5.39 per cent of
industry NPLs from end October 2018 to end October 2019. Other complementary
policy measures such as the Global Standing Instruction (GSI) to address
willful default by serial borrowers in the banking system, Differentiated Cash
Reserve Ratio (DCRR), Development Finance Initiatives in agriculture, micro,
small and medium enterprises (MSMEs) are expected to further strengthen the
credit drive. The recent policy measure limiting participation in the OMO bill
market to banks and foreign portfolio investors is expected to have a positive
impact on both the fixed income and equities markets, creating supply of long
term equity capital from domestic and foreign investors seeking improved
yields, given the reduction in yield and supply of treasury products.
Summary and Policy Decision
2019 ends with the Nigerian economy having "held its
own" in the face of growing headwinds and uncertainties in the international
monetary and financial system. Oil prices have been choppy through the year,
averaging around US$60 per barrel and external reserves have seen some net
reduction on the back of uncertainty in the global economy. However, on
balance, the economy has weathered the storm.
Growth has continued to be positive and rising fueled
by increased lending to the manufacturing, agriculture, and consumer goods
sectors, and progressively lower interest rates. Inflation has risen slightly
and remains critical to watch but, continues to be driven primarily by temporary
supply-side factors to be resolved by an expected bumper harvest,
counterbalanced with positive impact on domestic production in some sectors due
to the temporary border closure.
Positive impact from the monetary policy measures is
expected to be sustained as credit growth, domestic production and aggregate
demand continues to rise. This must be complemented by fiscal initiatives aimed
at improving the investment climate to attract foreign direct investment to
keep Nigeria globally competitive.
Price and monetary stability continue to be maintained
at the current policy rate, and thus there appears to be no immediate reason to
change course. Therefore, I vote to retain the current monetary policy stance,
by keeping MPR at 13.5%; Cash Reserve Ratio at 22.5%; Liquidity Ratio at 30%
and Asymmetric corridor at +200 and -500 basis points around the MPR.
Asogwa, Robert Chikwendu
Background
The period preceding the November 2019 Monetary Policy
Committee meeting was characterised by a mix of macroeconomic events driven by
multiple, but interrelated factors at both the domestic and global levels.
These events have particularly shaped the configuration of thoughts on expected
monetary policy choices at this meeting. On the domestic side, there are
concerns with the re-emergence of marginal upticks in monthly inflation rates
at a time when the GDP growth is picking up and a gradual output recovery is
projected to continue in the 2020-2021 period. On the global level, the
persistence of economic uncertainty that has kept growth subdued for a long
period amidst muted inflation in many countries is taking an increasing toll on
investment confidence. The possibility of further escalation of trade tension
or a disorderly Brexit now casts an obstructed 2020 outlook for monetary policy
for all developing and emerging economies, and the policy responses in many
countries have been similar, focused more on scaling back in monetary easing.
The policy options at this MPC meeting should therefore seek to balance the
weights of risks between the global economic uncertainties and the changing
domestic economic conditions. While monitoring closely the responses of global
policy makers to Brexit developments and the prospects for faster recovery in
global growth, it is also important to invest in measures that enhance the
prospects of sustainable medium term growth for the domestic economy.
The Global Economic Outlook
Over the past two months, the global growth outlook
has again been revised slightly lower and the risks remain titled to the
downside. The key source of uncertainty for the external environment remains
the same as in the last MPC meeting. The signs of economic slowdown intensified
even with weakening inflation. The US-China trade disputes continue to affect
international trade flows and investment as many firms step up the scaling back
of spending. The projected global growth of 3.0 percent in 2019 appears to be
the weakest in the past decade and except for countries in sub-Sahara Africa,
per capita growth for 2019 is expected to be the lowest in over two decades.
For the US, output growth looks strong, but shows a slower pace of expansion in
the first three quarters of 2019. The growth slowdown has been pronounced in
other major economies including the UK, the Euro Area as well as in such
emerging economies as China, Hong Kong, Mexico and Russia. CBN staff report
suggests that UK's 2019 third quarter growth is perhaps its weakest growth
figure in a long time.
GDP growth in the Euro Area has also remained subdued
in the third 19 quarter of 2019 especially as Germany and Italy record poor
growth despite the marginal growth upticks in France and Spain. GDP growth in
China is expected to moderate further in 2019 and 2020 as escalating trade
tension weigh in on investment and fuels even more uncertainty. Output trend in
Brazil and India in contrast to other emerging markets appears to be improving
and largely underpinned by some modest acceleration in private consumption
expenditures. While global output expansion weakened, core inflation remained
muted and below target ranges in many advanced economies, often as an aftermath
of the weakening aggregate demand and subdued wage growth. In many emerging and
developing economies, inflation rates also moderated, sometimes below
historical levels except in few cases like Argentina where the large currency
depreciations found its way to higher prices or in Venezuela where there were
acute shortages of food and other essential items which has generated increases
in prices.
The risks of economic slowdown and the prevailing low
inflation rates prompted may central banks in the advanced economies to either
ease monetary policy or communicate their readiness to act in such a direction.
The US Federal Reserve lowered policy rates cumulatively by 75 basis points and
in three successive sessions in 2019. More recently, the Federal Reserve also
resumed purchases of treasury bills, which it plans to continue into the second
quarter of 2020. The European Central Bank also in November 2019 introduced a
new and indefinite monthly asset purchase programme despite maintaining policy
rates at same levels, while the Bank of England in early November 2019, agreed
to maintain policy rates as before, whilst strengthening the level of bond
purchases from central bank reserves. With this drop in global borrowing costs,
some emerging markets and developing economies benefited from the global
liquidity flows, while some others suffered from flight to safety issues. These
outflows from emerging markets came largely from the weakening equity markets
and in Sub-Sahara Africa particularly, sovereign bond issuance activity has
been relatively subdued compared to the levels in 2018 and 2017.
The Domestic Economic Outlook
The outlook for the Nigerian economy is a little
changed from the position from two months ago which was the last MPC meeting
for 2019. After a soft patch in Q2 GDP growth, which declined to 1.94 percent
in Q2 2019 from the Q1 2019 GDP growth of 2.10 % (revised from 2.01% due to oil
output revisions), a subtle turning point appears to have started in Q3 2019 as
the GDP growth moved 20 upwards to 2.3 percent. The central scenario remains
that the Nigerian economy will on average grow by 2.3 percent in 2019, but then
the growth rate will pick up to about 2.9 percent in 2020, and further to 3.3
percent in 2021. Generally, the oil sector performance was again impressive,
growing from 5.15 percent in Q2 2019 to 6.49 percent in Q3 2019, while the
non-oil sector which grew by 1.64 percent in Q2 2019 also improved to 1.85
percent in Q3 2019. The expansion in both the manufacturing and
non-manufacturing PMI from 57.7 and 58.0 index points, respectively in
September 2019 to 58.2 and 58.2 index points in October 2019 also show a
brighter outlook for investment and consumption expenditure expected to support
future growth. The recent inflation data for October 2019 just released before
this MPC meeting were generally as expected with headline inflation increasing
to 11.61 percent from 11.24 percent in September 2019. The expectation of a
marginal uptick is in response to the temporary effects of the border closure
on such commodities as rice and poultry products. CBN staff projection is that
inflation may increase further in the remaining months of 2019 (expected at
11.87 percent at end December 2019) and probably commence a modest decline in
early 2020. The outlook for oil prices continues to be an important source of
uncertainty from the external environment as negative developments could
further harm exchange rate stability and hence pass through to inflation. Gross
external reserves as at October 31, 2019 declined by 2.69 percent compared to the
levels at the end of September 2019 and there are projections of further
declines by end of December 2019. The banking stability indicators have shown
some further signs of a turnaround after the last MPC meeting. The
non-performing loans ratio dropped dramatically from 9.4 percent in August 2019
to 6.6 percent in October 2019 which is now very close to the regulatory
benchmark of a 5 percent maximum. This has somewhat increased the confidence in
the banking system despite the October 2019 marginal drop in the capital
adequacy ratio to 15.3 percent from the August 2019 level of 15.8 percent. The
growth in total assets by October 2019 when compared to earlier months and
largely driven by growth in credit is quite remarkable as it also suggests that
credit conditions especially for small and medium enterprises have responded to
new Central Bank regulatory policies especially the loan to deposit ratio and
the sector targeted quantitative easing measures. The wide expectations on the
part of the fiscal authorities in Nigeria to minimize distortions created by
the current fiscal stance through revised policy options remain unfulfilled. In
previous MPC meetings, the concerns over increasing public indebtedness have
been extensively expressed. Even though Nigeria 21 remains characterised at the "moderate risk level" in terms of the debt distress situation, the increased
reliance on external debt remains a potential source of vulnerability and pose
severe risks to future growth. A coherent fiscal consolidation strategy that
complements and enhances the effectiveness of monetary policy remains a strong
option.
My Decision
The fragile global outlook has pushed a number of
central banks around the world to ease monetary policy in response to declining
inflation rates and the growth downside risks, which appears to have persisted
for a long period. The expectations of further monetary easing in these key
advanced economies is now low, but still uncertain. While Nigeria's Q3 output
show some modest improvements in the economy, but in the face of such new
challenges as the latest marginal inflation upticks and a slowdown in the
overall level of the country's external reserves, a balance of future
expectations is key for the choice of monetary policy stance. Taking together,
it is reasonable to maintain status quo, while the committee continues to
monitor developments and also remain prepared to adjust monetary policy in
future if required so as to support overall growth in economy, whilst keeping
on track the targeted inflation band.
My opinion therefore, is that policy parameters should
remain largely unchanged at this November 2019 MPC meeting. I will thus vote
to:
Balami, Dahiru Hassan
Global Economic And Financial
Environment
Output Growth
The year 2019 can be described as a year of weak
global growth which was downgraded from 3.6 percent to 3 percent. Factors that
shaped the 2019 global economy largely included: the trade war between the US
and its major trading partners such as China; the inconclusive Britain exit
from the European Union (EU); continued weak response to monetary stimulus;
slowdown in car market in China and Germany, in the latter where the
manufacturing sector has been in recession; the threat to central banks
independence mirrored by development in the US Fed, sacking of Turkish Central
Bank Governor, and resignation of the Reserve Bank of India Governor. Other
factors affecting global economy were: uprising in Hong Kong; trade dispute
between South Korea and Japan, tension in the Persian Gulf, and weakening
aggregate demand and output in many advanced economies namely; Germany, France,
Italy, Spain as well as United Kingdom and Japan.
Output growth in emerging markets
Output in China declined to 1.5 percent in October
2019 from 1.6 percent in September 2019. The Chinese economy, which is the
major economy in the block of emerging market economies, contributed sizably to
the slowdown of the global economy. Also, contraction of the Chinese and German
automobile markets, which is partly due to increase in pressure to innovate
coupled with great emphasis on the environmental protection. The Indian
economic growth also moderated to 1.0 per cent in the second quarter of 2019 from
1.3 per cent in Q1 2019, due to low growth in construction and manufacturing
which was expected to grow at 6.6 percent instead of 6.15 percent in 2019.
Output growth in other developing economies also moderated. For instance,
growth in the Ghanaian economy decreased to 1.3 percent in the second quarter
of 2019 from 1.6 percent in the first quarter of 2019.
Output in the Middle-East and North African countries
in 2019 similarly dropped to 1.0 percent due to weakening oil prices. In Kenya,
output growth declined to 1.25 percent from 1.57 percent into first quarter
2019. The totality of this is that global growth was marked down as earlier
highlighted. The uncertainties reviewed above have implications for the
Nigerian economy such as the possible threat of further appreciation of the US
dollar. Remedial actions could include the necessity to create a foreign
reserves buffer and reducing fiscal deficit; building buffers to support
foreign exchange; 23 improvement of investment climate and restoring investor
confidence. Nigeria could also proactively re-align its trade strategies to win
new trade partners.
The Domestic Economic and Financial
Environment
Output Growth
The growth rate of the Gross Domestic Product (GDP)
shows that the economy recorded a positive growth from 2.10 percent in the Q1
2019 to 2.28 percent in Q3 of 2019. This level of growth is weak when compared
with the estimated population growth rate of 2.82 percent, indicating that the
economy has a lot of excess capacity in terms of harnessing huge natural
resources to push the economy to the next level. The growth drivers for the
third quarter 2019 growth of the economy were crude oil price; increased credit
to the real sector of the economy; non-oil sector; the level and quality of
infrastructural development; and level of security and peace in the economy.
The volatility in the price of oil is a big determining factor in the growth of
the economy. The current situation in the global oil market does not guarantee
further higher price due to development in the Shale oil, and the US preference
for lower price of crude oil during periods of elections. In terms of the
position of external reserves, the situation showed improved performance
compared with 2015 and 2016. Although there had been appreciable level of
outflow compared with the inflows. This development therefore requires
additional demand and supply management polices to reverse the trend. It should
be noted that in Nigeria, the conventional monetary policy seems to have become
less effective, which prompted and promoted the leaning towards the deployment
of unconventional monetary policies. This trend in policy had been very
effective and has positively impacted the economy.
The goal of policy therefore should be to reduce the
level of import-dependence and, in the long term diversify the economy by
getting more aggressive to encourage exports other than crude oil. Massive
investment is required in the gas subsector to expand output. As part of supply
management strategies, import can be reduced by boosting domestic production,
and further provide the enabling environment for domestic industries.
Additionally, Nigeria should also put in place polices to fight corruption,
tackle the problem of institutional failure, and reducing smuggling activities
across the Nigerian borders. To promote an all-inclusive growth, the Government
needs to create more jobs through public works by deliberately embarking on
labour intensive rehabilitation of public buildings, road repairs,
construction, and cleaning of the environment. There is also the need for
increasing support to the agricultural sector through anchor borrowers
programme, establishment of more rice mills, construction of rural roads and
credit expansion to the agricultural sector.
As a short to medium term strategy, temporary border
closure. It will lead to the following: reduction in smuggling of goods through
neighbouring countries; imported goods that were repackaged by neighbouring
countries and brought into Nigeria; and the reduction in the level of import of
petroleum products, for example, available statistics show that fuel
consumption dropped by 30 percent due to reduction in smuggling of the
petroleum products following the border closure which in turn will enhance more
production and milling of Nigerian rice. The temporary border closure will
reduce the smuggling of illicit drugs, and weapons, thereby reducing terrorism,
robbery and kidnapping. Currently, there are a lot of sectoral linkages in the
economy hence the need to link agricultural output with the manufacturing
sector, so that agricultural output can be fed into industry, for example, skin
and hides into production of leather.
Financial Sector
The trend of financial soundness indicators shows
improved performance for Capital Adequacy Ratio (CAR), the Non-Performing Loans
(NPL), Liquidity Ratio (LR), Return on Equity (ROE), Return on Asset (ROA),
Interest margin to total operating ratio (TOC), and as well as the total
operating cost when compared to figures of October 2018. It should be noted
that the total asset of the banking sector recorded an increase in October
2019. The Deposit Money Banks (DMBs) performance in terms of credit to the
private sector of the economy was remarkable. The declining level of credit to the
real sector was reversed in Q3 October 2019, thus aiding the level of growth in
the economy to 2.28 percent in the Q3 2019. This is reflective of the impact of
the CBN's directive on Loan to Deposit Ratio (LDR) of the initial 60% in July
2019, and further increase to 65% by the end year 2019.
Policy Choice
From the foregoing analysis, it is evident that the
current polices put in place by the CBN were effective as shown by the
improvements in financial soundness indicators, particularly the capital adequacy
ratio, the nonperforming loans ratio, and the liquidity ratio. In fact, the
improvement in the non-performing loans ratio from 9.6 per cent in August 2019
to 6.65 per cent October 2019 is highly commendable. Introduction of credit
polices by the CBN has led to the growth of credit in the economy, particularly
to the private sector. The Loan-to-Deposit Ratio has been moved from 60 to 65
per cent leading to increased advancement of credit in the economy. Monetary
policy has contributed immensely to the economy, the fiscal side is encouraged
to 25 create conditions for growth, fix the land borders, review the tariff on
trade, and support the growth of value chain in agriculture. Government should
be consistent in any policy decision it takes to facilitate more growth and
employment generation in the economy. Such policy should also include
infrastructural developments.
With regards to policy options, the possible three options are to tighten, loosen or hold, given the above scenario, I vote to hold so as to allow the policies on ground to work itself through, given the positive outcomes thus far. I therefore vote to:
Isa-Dutse, Mahmoud A.
Introduction
The global economic downturn which started in the
second half of 2018 worsened in 2019 with the world economy now expected to
grow at its slowest pace since the global financial crisis of 2008/2009. On the
domestic front, the Nigerian economy has shown some degree of resilience
despite the numerous headwinds. Economic growth continued on its recovery trend
in Q3 2019, with significant upturn in the volume of new credits channeled to
the real sector. The foreign exchange market remained stable and the financial
soundness indicators portray an increasingly robust banking system.
External Economic Conditions
The broad slowdown in global economic activities is
evident as output growth in the advanced economies is expected to decelerate to
1.7% in 2019 from 2.3% in 2018, while growth in the Emerging Market and
Developing Economies (EMDEs), is projected to decline to 3.9% in 2019 from 4.5%
in the preceding year. On the whole, global growth is forecast to drop to 3.0%
in 2019 from 3.6% in 2018. The negative trend in global production is traceable
to the seemingly intractable trade war between the United States (US) and its
key trading partners and rising geopolitical tensions. The impact of these
shocks has resulted in falling manufacturing performance, disruptions in global
input supply chains, subdued investment, and reduced trade flows. Global trade
growth is forecast at 2.6% in 2019 as against the 3.6% recorded in the previous
year. The on-going monetary accommodation in key advanced economies implies
that further appreciation of the US dollar may have subsided. However, this
development may not translate into more capital flows for Nigeria because of
the uptrend in the US yield curve, which signifies a return of attractiveness
in dollar-denominated assets. Thus, Nigeria might experience more portfolio
outflows in the foreseeable future, which may impact negatively on external
reserves and the stability of the naira. The twin factors of a weak global
crude oil demand and increase in supply from non-OPEC sources has served to
dampen the outlook of oil prices in the medium term. It is projected that
prices may hover around the mid-US$50.0 per barrel in 2020. This may constitute
a serious downside risk to the implementation of the 2020 budget in Nigeria
where the stated benchmark oil price per barrel is US$57.0. Furthermore, the
anticipated accretions to external reserves may 27 not materialize, and in
turn, foreign capital flows and exchange rate stability may be constrained.
Domestic Economic Conditions
The growth momentum in Nigeria is still tepid as real
GDP maintained a gentle rise of 2.10%, 2.12% and 2.28% in Q1 2019, Q2 2019 and
Q3 2019, respectively. The most recent output data for the third quarter of the
year indicates a sustained rebound in oil sector output, which grew by 6.49%,
while the non-oil sector recorded a growth of 1.85%. The three main drivers of
growth were services, agriculture and industry. The significant recovery of the
oil sector and its contribution to real GDP underscores the fragility of the
growth process because the performance of the sector is primarily determined by
exogenous forces. The current drive of the Federal Government to achieve a
higher growth trajectory by focusing more on the agricultural and industrial
sectors with high potentials for value-addition and job creation is very
important and should be sustained.
Headline inflation (year-on-year) inched up to 11.61%
in October 2019, compared to 11.24% in September 2019. Food inflation also rose
(year-on-year) to 14.09% in October 2019 from 13.52% in the preceding month,
while core inflation declined to 8.88% in October 2019 from 8.95% in the
previous month. Furthermore, headline and food inflation increased (month-on
month) in October 2019 to 1.07% and 1.33% from 1.04% and 1.30% in the previous
month, respectively, but core inflation declined to 0.74% in October 2019 from
0.94% in the preceding period. As inflationary pressures mount, there is need
for appropriate measures to tackle the problem. The identified upside risk to inflation
include insecurity in key food producing areas in the country, the supply-side
shock arising from the border closure between Nigeria and neighbouring
countries as well as quasi-fiscal and other liquidity injections into the
economy.
Monetary conditions in the review period remained
tight to curtail upward price movements. In October 2019, broad money
aggregates, M3 and M2, fell below their benchmarks for 2019 by 10.36 and 11.02
percentage points, respectively, while reserve money dipped by 18.74% below the
Q4 2019 benchmark. Nevertheless, the combined effects of various policy
measures, such as the increase in loan-to-deposit ratio (LDR) of deposit money
banks and the global standing instruction (GSI) of set-off have pushed the
volume of new credits to record heights. The main sectoral beneficiaries were
manufacturing, general commerce and agriculture. The remarkable upsurge and
broad sectoral spread in new credits is indicative of a more efficient
intermediation process in the banking system. The capitaland asset-based
financial soundness indicators provide a picture of a liquid 28 and stronger
banking system that is poised to meet the growth challenges of the economy with
non-performing loans down to 6.6% - a little above the prudential maximum of 5%.
Voting Decision
A policy rate cut is inadvisable at this time given
the uptick in inflation. Further Monetary tightening is also inadmissible given
that growth is still sluggish and fragile and there is the yawning need to
accommodate growth concerns, create jobs and reduce widespread unemployment. To
balance the competing objectives of monetary policy, I voted to retain all
existing policy parameters as follows:
Nnanna, Okwu Joseph
Output and Prices
Recent data from the National Bureau of Statistics
(NBS) reveal symptoms of an economy on the mend with real GDP rising and
non-oil sector making modest contribution. Real GDP grew by 2.28 per cent in Q3
2019 compared with 2.12 and 2.10 per cent in Q2 2019 and Q1 2019, respectively.
Comparatively, the oil sector grew by 6.49 per cent, while the non-oil sector
growth stood at 1.85 per cent. Growth was driven largely by services,
agriculture, industry and construction which grew by 3.24, 2.28, 3.74 and 2.37
per cent, respectively. Non-oil growth epitomizes the recent surge in credit
growth to the private sector attributed to the de-risking of banking industry
and the innovative loanto-deposit ratio of 60 per cent, which was prescribed
for Deposit Money Banks. Domestic output has responded positively to the
favourable credit and weather conditions across the country. The push towards
import substitution and food self-sufficiency appears on track.
The uptick in inflation in October arising from supply
side shocks was largely envisaged, but certainly the supply shortages were
lower than expected. Structural factors have continued to weigh negatively on
inflation over the short term. Food and headline inflation rose from 13.51 and
11.24 per cent in September 2019, to 14.09 and 11.61 per cent in October 2019,
respectively, while core inflation declined from 8.95 per cent to 8.88 per cent
in the same period. The need for scaling-up investment to address the
investment gap and narrow the infrastructure deficit, cannot be overemphasized.
Financial System
The financial system remain resilient with stable and
positive outlook. Liquidity transformation into risk assets is progressing
albeit slowly. The introduction of the Global Standing Instruction (GSI), in
the banking industry by the Regulator is indeed a welcome development. The GSI
empowers the Central Bank to prevent predatory serial borrowers from reneging
on loan repayments. The policy would contribute immensely in de-risking lending
and reducing NonPerforming Loans (NPLs). The exclusion of non-deposit bank
corporates from participation in the open market fixed income instrument (OMO),
has forced a reduction in the money market yield curve and mild resurgence of
the equity market. Overall, interest rates are trending low, despite the fact
that the Monetary Policy rate remained unchanged since it was reduced from 14.0
per cent to 13.5 per cent in March 2019. 30 Net claims on the Federal
Government grew by 85.99 per cent in October 2019, compared with the growth of
114.79 per cent in September 2019. Credit to the core private sector increased
to 13.08 per cent in October 2019 from 12.49 per cent in September 2019.
The Balance of Payments position remained resilient,
while exchange rate in all the windows remained relatively stable. The external
reserves is sufficient to finance 12 months of imports, surpassing the 6 months
of import cover provided under the ECOWAS convergence criteria. This, I
believe, should allay the concerns of foreign investors. The overall balance of
payments outlook in the short-to-medium term remains positive and stable,
especially with crude oil price hovering around US$60 per barrel and daily
production level of approximately 2.0 million barrels per day.
The major threat to macroeconomic stability is the
lack of fiscal buffer and the creeping rise on the level of unemployment.
However, the recent increase in Value Added Tax (VAT) and Sundry Stamp Duty
represent a step in the right direction. We continue to reiterate our call for
massive public works programs to be executed in conjunction with the private
sector particularly as Nigeria is in dire need for the rehabilitation of
hundreds of its public buildings such as schools and hospitals, housing for the
Armed Forces, as well as several kilometers of urban/rural and farm-to-market
roads dotted all over the country. Government should appropriately incentivize
the private sector to execute these projects. The "big-bang" strategy should be
adopted as public works program represents the low hanging fruit and the
antidote for the unemployment scourge. Incrementalism on the other hand will be
tantamount to, "too little too late" cure for the unemployment plague.
In view of these developments, I vote to hold all the
policy metrics constant.
Obadan, Mike Idiah
The monetary policy opinion expressed in this
Statement, as in previous Statements, takes cognisance of both global
developments and domestic developments in the spheres of growth, prices,
external sector, and monetary and financial conditions, among others. They have
significant implications for monetary policy stance.
Implications Of Global Developments
For The Nigerian Economy
The challenges facing the global economy have not
abated. For example, global output growth in 2019, which was earlier projected
to moderate to 3.2 percent from 3.6 percent in 2018 has been further downgraded
to 3.0 percent. Even then, the growth rate could weaken below this level as
uncertainties in the global economy remain high and unrelenting. There are the
issues of continuing trade tensions across the global economy, in particular
the continuation of US-China trade conflict, the likelihood of the dollar
weakening further, moderating price of gold, subsisting uncertainties around
BREXIT and the likelihood of lower oil prices. Global trade is projected to
weaken further from 3.2 percent in 2018 to 1.1 percent in 2019 - the weakest
since the global financial crisis of 2008/2009, largely because of weakening
growth and USChina trade war.
Volatility in the oil market is sustained. And the
futures prices of oil in 2020 do not signal any notable improvement. Rather,
the price of oil is expected to hover around the mid-fifties due to
uncertainties surrounding both the demand and supply sides of the market. On
the supply side, rising nonOPEC supply, especially projected sharp increases in
US shale oil supply from 12.3 million barrels per day (mbpd) in 2019 to 13.2
mbpd in 2020, is a significant threat to increase in oil prices. On the demand
side, in light of the subdued global growth, the demand for oil may remain weak
for some time, thus dampening crude oil prices. Against the backdrop of the
subsisting global uncertainties and a slowing global economy coupled with
signals of possible recession in some countries, there is a growing trend
towards monetary accommodation in both the advanced economies and some Emerging
Market Economies. The United States Fed, European Central Bank and some other
central banks have cut their policy rates and/or adopted other measures aimed
at averting recession, stimulating recovery and growth and boosting employment.
Many others have maintained their policy rates in response to the prevailing
uncertainties in the global economy.
Some of the implications of the global developments
for Nigeria are as follows. First, in light of the monetary accommodation
stance in the advanced economies, Nigeria could attract more capital inflows to
boost its reserves and maintain exchange rate stability. For this to happen,
however, the right 32 investment environment is required along with an
appropriate monetary policy stance. The Government would need to continue the
reforms that resulted in the country's significant improvement in the World Bank's
latest ranking on the Ease of Doing Business Index. Secondly, the oil market
outlook does not provide good news for the country.
Therefore, the Government must seize any opportunities
of high oil prices to build fiscal buffers to smoothen public expenditure and
avoid painful adjustments when oil prices decline significantly. Thirdly, with
global growth momentum subdued to the lowest level in recent years due to the
already identified factors coupled with unencouraging oil prices forecast,
Nigeria's growth outcomes in 2019 and 2020 may be far below those in the
Economic Recovery and Growth Plan. Thus, the need to diversify the economy away
from oil cannot be overemphasised.
Domestic Macroeconomic Developments
There is some good news on the economic growth front.
The revised growth figures for Q2 2019 at 2.12 percent is a marginal increase
over the Q1 figure of 2.10 percent. The previous estimate for Q2 at 1.94
percent was lower than the Q1 figure. Then, in Q3, the aggregate growth rate
increased to 2.28 percent. Thus, growth has showed a steady increase in the
three quarters of 2019 but the highest is lower than the rate achieved in Q4
2018 of 2.38 percent. However, there is the prospect that the growth rate could
be between 2.5 and 3.0 percent in Q4, 2019. Nevertheless, the growth rate is
still relatively low and fragile. Importantly, there is a negative output gap,
reflected by real output being lower than the potential output since Q2 2016.
This suggests the existence of underutilised capacity in the economy, reflected
in high rate of unemployment and subsequent pressure on the real wage rate.
Although the oil sector grew by 6.49 percent in Q3
2019 and contributed less than 10.0 percent to total domestic production, the
sector still accounts for the bulk of government revenue and foreign exchange
earnings. But then, instability is a major feature of the oil sector. No doubt,
the non-oil sector has, for some time now, being a major driver of growth of
the economy contributing over 90.0 percent of total output. But the sector is
not diversified and dynamic enough to generate non-oil tax revenue to finance
development. Hence the serious revenue challenge that the country is currently
facing with attendant high fiscal deficits which stood at over N3.0 trillion
naira in the first three quarters of 2019. Thus, the economy needs greater
diversification and interventions to stimulate growth that can reduce the very
high rate of unemployment and make a dent on the high incidence of poverty. But
the news is not that good on the inflation front as the latest inflation
figures indicate a further movement away from the CBN's implicit inflation
target of 6- 33 9 percent.
Headline inflation (year-on-year) further increased to
11.61 percent in October 2019 compared to 11.02 and 11.24 percent in August and
September, respectively. The uptick in inflation in Q3 was mainly due to
increased food inflation. Food inflation increased to 14.09 percent in October
from 13.51 percent in September. The rise in food inflation may not be
unconnected with structural factors such as poor transport infrastructure,
insecurity arising from insurgency activities, impact of the farmers-herders
clashes and the border closure since August. The insurgency and farmers-herders conflict-induced food shortages has subsisted causing increases in food prices.
The partial closure of the nation's land borders has had short-term shock
effects on domestic prices, especially food prices, arising from limited
imports through the land borders. However, the effect on prices is likely to
taper-off as local supply response increases. The medium-long-term benefits of
the measure outweigh the short-term costs: reduced subsidization of smuggled
petroleum products, increased production and enhanced growth of the economy,
reduction in unemployment and poverty, among others. Thus, there is the strong
need for local producers of importables shut out by the border closure to
realise that the policy is aimed at helping them to expand their production
capacities, be assured of a market and hence earn more income.
They should therefore reciprocate the government's
good gesture by stepping up production significantly to boost supply and, hence
bring down prices and the inflation rate. They should also avoid hoarding
goods. In other words, as they are the primary beneficiaries of the land border
closure policy, they must ensure adequate supply from the medium-term, moderate
prices and vindicate the good intentions of the policy. Therefore, the
Government should sustain the border closure until the neighbouring countries
respect the ECOWAS rules of origin on intra-ECOWAS trade, and reach a firm and
enforceable agreement as to how they will discourage smuggled re-exports to
Nigeria and smuggled petroleum products from Nigeria into their countries. At
the same time, the Federal Government needs to intensify efforts to ameliorate
the short-term effects with appropriate measures. What becomes clear from the
latest inflation figures and, indeed, for some time now, is the largely
non-monetary nature of inflation. While the Central Bank's conventional
monetary policy instruments may appear not to be directly helpful in fighting
food inflation, the heterodox policy measures expressed through the various
development interventions aimed at making credit available at affordable
interest rates to priority real sectors of the economy - agriculture,
manufacturing, MSMEs, etc. - will boost production/supply and hence push down
prices and the rate of inflation.
Under the present circumstances of un-abating fiscal
challenges of the government, the Central Bank will have to continue with the
policies to complement the efforts of the fiscal authority, especially the
following special interventions that have 34 impacted positively on output,
employment and poverty reduction: Anchor Borrowers' programme, Agricultural
Credit Guarantee Scheme, AGSMEIS, MSMEs Fund, Differentiated Cash Reserve
Requirement, etc. But then, the Government will need to come up with
imaginative solutions to the structural factors driving non-monetary inflation
in the country. Monetary developments. The growth of the monetary aggregates
has not warranted any fears about inflationary expectations. Broad money supply
M2 and the broader money supply M3 increased in October but stayed below the
provisional growth benchmarks. The annualised M2 growth of 2.51 percent was below
the provisional benchmark of 13.11 percent for 2019 while M3's annualised
growth rate of 6.87 percent was below the benchmark of 16.08 percent for 2019.
In addition, Net Foreign Assets decreased by -19.92
percent in October 2019 due to a fall in the foreign assets holding of the
banking system. Thus, the performance of the monetary aggregates imply that
money supply remains weak to drive the growth momentum of the economy. However,
the annualised net aggregate domestic credit to the economy, credit to Government,
and credit to the private sector were all above their respective provisional
benchmarks. But the annualised rate of credit to the government at 103.19
percent was much higher than the provisional benchmark of 58.78 percent for
2019, suggesting that the government was borrowing too much from the banking
system. This has implications for the cost of borrowing and crowding out of the
private sector. Relative effectiveness of the Bank's monetary policy measures,
especially the Loans to Deposit Ratio (LDR), financial inclusion, and measures
targeted at reducing Non-Performing Loans (NPL) and helping the deposit money
banks to de-risk. The financial soundness indicators as at October 2019 are
encouraging: Capital Adequacy Ratio that is above the Prudential requirement,
highly improved NPL ratio of 6.6 percent although still above the Prudential
Limit of 5.0 percent, good Liquidity Ratio Position, increasing total banking
assets, changing structure of assets in favour of loans and advances and less
of government securities. Importantly, is the observed steady increase in
aggregate credit, manufacturing sector credit and consumer credit. The LDR has
compelled the commercial banks to move in the direction of advancing more loans
and advances which is their primary function and a vital ingredient for growth
and development.
Competition among the banks for loans recipients has
resulted in the observed downward movement of lending rates. They are now
emboldened to advance more loans because of the Central Bank's new policy
measure - the Global Standing Instructions (GSI). GSI allows a clause to be
inserted in a loan agreement to recover, in case of default, a loan facility to
a customer from any other bank where he/she has 35 accounts with funds. These
are new measures whose impact needs to be allowed to work out. The deficit
incurred in Government's fiscal operations is rising and highly worrisome
because of its implications for debt accumulation and inflation. For example,
From January to September, 2019 the cumulative fiscal deficit stood at
N3,466.83 billion. To finance the deficit, the Government issued FGN bonds
amounting to N670.0 billion, thus leaving a net overall deficit of N2,796.83
billion which may have been financed through inflationary sources. Therefore,
while the current efforts of the Government to step up domestic revenue
mobilisation through, for example, increasing the Value Added Tax from 5.0 to
7.5 percent, are in the right direction, it is crucial at this point in time to
take a hard look at the structure of recurrent expenditure with a view to
rationalising it and achieving some cost savings. Growing fiscal deficits not
only lead to debt accumulation and crowding out of the private sector in the
financial markets it also undermine monetary policy effectiveness.
Opinion
This takes cognisance of the fact that monetary policy
making has continued to be a delicate balancing act as to the need for: robust
and inclusive economic growth which, reduces unemployment and poverty; single
digit inflation; robust external reserves and stable exchange rate, among
others. In light of these, cognisance was taken of developments relating to the
following: economic growth situation, price developments, monetary developments
external sector developments and reserves position, oil prices and market
outlook, financial sector developments in terms of soundness of the indicators,
the recent monetary policy measures aimed at ensuring financial sector
soundness, and role of heterodox policy measures, among others. A review of the
above suggests the need to allow time for the recent monetary policy measures
to demonstrate their full effects which have been positive, especially in
ensuring financial sector soundness and increasing credit to the real sectors
of the economy. This means holding the monetary policy parameters - Monetary
Policy Rate, Cash Reserve Requirements and Liquidity Ratio - at their extant
levels while the Central Bank also continues with the heterodox policy measures
that have proved so successful in achieving the objectives of the various
development interventions.
Sanusi, Aliyu Rafindadi
Decision
At today's meeting, the last for the year 2019, I
voted for a hold on all the policy parameters in consideration of the key
global and domestic economic developments. The global macroeconomic
uncertainties that characterized the year 2019 continued to weigh on global
output, commodity price developments as well as monetary policy responses that
have potential consequences on the evolution of domestic prices and output in
the medium term. On the domestic side, the positive developments, including the
significant increase in the flow of credit to the private sector, implying that
the Bank's heterogeneous monetary policies may have, finally, succeeded in encouraging
banks to lend to the real sector. While domestic price developments are driven
by the recent closure of land borders, the observed surge in the flow of credit
to the private sector needs to be sustained as a means of raising the domestic
production and, therefore, reducing the inflationary pressure in the medium
term. My vote today was, therefore, for a hold on all parameters to enable the
positive effects of the heterogeneous policy on output manifest, as a mean of
curbing the inflationary pressure occasioned by the fiscal authorities' policy
on the land border.
Background and Justification
Global Economic Developments
The vulnerabilities and uncertainties in the global
economy associated with BREXIT, the lingering trade tension between US and China
as well as between US and key trading partners have slowed down global output
growth, global trade and subdued investments in the Emerging Markets and
Developing Economies (EMDEs). These have important implications for exports
earnings, capital flow into EMDEs, exchange rate stability and fiscal buffers.
Available data from IMF shows that global output growth is projected to slow to
3.0% in 2019 from the 3.6% achieved in 2018. This forecast, which is the lowest
since the 2008 financial crises, was based on the US-China trade war that has
weighed down the global economy for the last 15 months. Consequently, global
manufacturing activities also fell as a result of the contraction in Chinese
and German car market as well as for the Japanese manufacturing sectors. Output
in the EMDEs was also projected to slow down to 3.9% in 2019 compared with 4.5%
in 2018. The JP Morgan's Global Composite Output Index showed that the rate of
expansion of the Global economy declined in October 2019 (stood at 50.8) relative
to September 2019 (which stood at 51.1). Global output growth remained at 1.8%
in Q3 2019, attributable to weak global trade flows and deteriorating business
condition. Forecast for the growth of the 37 Global Potential Output, estimated
by the Bank of Canada, was also revised downwards from 3.3% to 3.0% in 2019 as
the escalating uncertainties adversely affected capital growth and total factor
productivity. In advanced economies, inflation continued to trend below their
long-term target.
Inflation in advanced economies is expected to
continue to moderate to 1.5% in 2019 from 2% in 2018. In the US, inflation
increased to 1.8% in October 2019 from 1.7% in September 2018. In the Euro
area, inflation declined to 0.7% in October 2019 compared with 0.8% in September
2019 due to the fall in the cost of energy. In the UK, inflation declined from
1.7% in September 2019 to 1.5% in October 2019. As a result of this, the recent
monetary accommodation observed in key central banks is expected to continue
into the foreseeable future. The volatilities in the international crude oil
markets also continue, owing to excess supply driven by the increase in crude
oil inventory in the US, increase in non-OPEC supply, fading concerns about oil
supply disruptions as well as market's reaction to the weak global demand. The
price of OPEC basket and Bonny light stood at US$63.68/barrel and
US$63.64/barrel, respectively, as of November 24, 2019.
Developments in the global economic environment such
as the weakness in global demand, accommodative monetary policy stance in
advanced economies, and excess supply of crude oil in the international market
may be expected to affect Nigeria's foreign exchange earnings and fiscal
balance adversely. 2.2 Domestic Economic Developments and their Implications
The observed recent increase in credit flows to the private sector, especially
manufacturing, occasioned by the Bank's Loan-to-Deposit Ratio (LDR) policy,
could help raise domestic output and, therefore, reduce the observed
inflationary pressure. Indeed, the fiscal authority's policy on the land border
could complement the Bank's LDR policy by raising the demand and quality of
loans, thereby further consolidate the observed improvements in credit flows
and reduction in NPLs as well as improve banking sector stability. In my
personal statement for the 267th Meeting of May 2019, I attempted to
characterize and document my belief about the nature of Nigeria's inflationary
process based on my interpretation of the medium-term data on the evolution of
prices, output and employment since 2018. I depicted the domestic inflationary
process as predominantly driven by the supply-side factors, and therefore
governed by movements in short-run Aggregate Demand with output below the
NAIRU.
I argued that, while tightening could help in the
disinflationary process, there would be associated costs in terms of output and
38 employment. I argued for intensifying the Bank's "development finance
interventions and other heterodox policies that support the supply side so that
both lower inflation and faster output growth can be achieved simultaneously".
This view on the nature of the inflationary process has influenced my policy
choices during the 268th MPC meeting of July and the 269th Meeting of September
2019. In my personal statement for the 268th meeting, for instance, I noted
that the low positive growth of output was too weak to "make a dent" on the
unemployment rate and that supply-side pressures made inflation "sticky
around the low double digits" above its target band. I, therefore, noted that "significant output growth, especially in employment elastic sectors" was
required to reduce unemployment and inflation. I also argued that achieving
this required bank "to play their traditional role of extending credit to
support production as well as boost aggregate demand". In my personal statement
for the 269th meeting, I also reiterated my conviction that supply-side
improvements, supported by the heterodox monetary policy interventions could be
the sustainable means reducing inflation and unemployment. The available data
shows that these policies, especially the policies on LDR and the Global
Standing Instruction (GSI), have begun to improve the muchneeded credit flows
to the private sector.
The resumption of banks' willingness to lend, in
compliance with the policy guidelines, is an especially welcome development in
the context of the fiscal authority's policy on the land border. This is
because, although the border closure has, by reducing the supply of (foreign) goods
in the domestic market, raised the domestic inflationary pressure in the
short-term, it also expands the potential demand for goodquality lending as
domestic firms respond to the price signals to raise domestic supply capacity.
This would further consolidate the observed improvements in the stability of
the financial system, as evidenced by the significant reduction in the NPLs
over the last few months. The rate of real domestic output growth, which has
remained positive throughout 2019, increased from 2.12% in Q2 2019 to 2.28% in
Q3 2019. This rate is also significantly higher than the 1.81% achieved in the
corresponding quarter of 2018. This performance was largely driven by the oil
sector (9.77% of the total real GDP), which grew by 6.49 % in the Q3 of 2019.
The non-oil sector, which contributed 90.23% of the real GDP, grew by 1.85% in
Q3 2019 compared with the 1.64% achieved in Q2 2019. The growth in the real GDP
was driven by services (1.09%), industries (0.69%), agriculture (0.67%) and
construction (0.07%).
Trade output, however, declined by 0.23% during the
quarter. Manufacturing output, which contributed 8.74% of the total real GDP,
grew by 1.1% in Q3 2019 compared with a decline of 0.13% in the previous
quarter. Data on the Industrial Production Index (IPI) indicates an increase of
0.6% in Q3 2019 39 over the preceding quarter. This increase was driven by
growth in manufacturing, mining, and electricity generation and consumption.
Index of manufacturing production increased by 2.3% due to increased consumer
demand and moderation in input prices. The Purchasing Manager's Index (PMI)
also showed a faster rate of expansion in October 2019 compared September 2019
due to higher production level, new orders, suppliers' delivery time and raw
materials inventory. This is an indication of greater manufacturing activities
during the 4th quarter and, therefore, higher quarterly output than achieved in
Q3 2019. This also implies that the higher lending activities by banks, which
is expected to continue, would further support output expansion as it
strengthens consumer demand to sustain the increase in new orders and support
production activities. The staff projected that output growth in the fourth
quarter of 2019 would grow by 2.38%, driven mainly by the stable exchange rate,
enhanced credit to the real sector, sustained peace in the Niger Delta and
CBN's special intervention in Agriculture and SMEs. In October 2019, the
headline inflation (year-on-year) increased to 11.61% from 11.24% in September
2019. This increase was driven by the increase in food price inflation from
13.52% in September 2019 to 14.09% in October 2019.
This increase, caused by the increased supply
constraints due to the closure of the land border, is the highest recorded
since May 2018. The closure of the land border significantly reduced the supply
of food, especially rice, oils, grains, poultry products and other processed
foods, hence their prices. For instance, the price of imported rice rose by
15.51% (y-o-y). Core inflation has, however, declined to 8.8% in October 2019
from 8.95% in September 2019. Staff forecasts showed that inflation would
continue to rise, in the medium term, mainly due to shortages and higher costs
of imported food caused by insecurity in the food-producing areas and land border
closure as well as the festivities of the season. A review of the banking
system stability report showed some encouraging signs that the various policy
actions during the course of the year were yielding the desired results. For
instance, the combined effect of the GSI, which reduced the default risk and
improved chances of debt recoveries, and the LDR guidelines, incentivized banks
to resume lending to the real sector.
Data revealed that the growth in credit to the private
sector increased from 12.49% in September 2019 to 13.08% in October 2019. The
total credit as increased by about N1.17 trillion in five months between the
end of May 2019 and end of October 2019. The manufacturing sector received the
highest share (of N459.69Billion), followed by Retail & Consumer
(N355.11billion), General Commerce (N142.98billion), ICT (N82.07billion),
Construction (N74.52billion) and Agriculture & Forestry (N73.2billion). An
additional credit flows of N2.17 trillion is expected between November 2019 and
end of December 2019 to 40 meet the 65% target for LDR. In addition, data
showed that the decline in NonPerforming Loan (NPL) continued from the 9.4%
achieved in July and August 2019 to 6.56% in October 2019 compared with 14.05%
in October 2018. The significant decline is largely attributed to recoveries,
write-offs and disposals. This welcome development would further encourage bank
lending. In my opinion, therefore, the rise in inflation, which is clearly as a
result of supply constraints arising from the border closure, could be reversed
by the increased output growth supported by credit flows to the real sector.
The border closure provides an opportunity for increased demand for
good-quality lending from firms as they attempt to raise output in response to
price signals. The data on PMI appears to support this.
The Basis for My Policy Choice
My interpretation of the available data reinforces my
conviction that a policy stance that help raises output is the preferred means
of sustainably reducing inflation beyond the lower-double digits towards its
long-run target of 6 - 9 per cent. It is also a means of reducing the
unemployment that has been above the NAIRU since Q2 2017. I am also convinced
that the heterodox monetary policies have started to direct credit to the real
sector, which would raise production, especially in the context of the recent
border closure. In considering my options, therefore, I am convinced that the
best course of action is to hold all policy parameters in order to sustain the
observed improvements.
Consequently, I voted to:
Shonubi, Folashodun A.
As we approach the end of 2019, the policy spectrum
becomes increasingly challenging, on account of a volatile global economy, and,
frail, but slowly recovering domestic macroeconomic environment. I am, however,
optimistic that despite the tight fiscal space and slightly pressured external
sector, the scope for policy options to support growth is enhanced by emerging
trend in the domestic economy.
Global and Domestic Economic
Developments
The global economy is troubled by low inflation in
developed economies, international trade uncertainties, unstable commodity
market and a global financial condition that signals buildup of
vulnerabilities. Generally, Less than 2.0 per cent inflation in the developed
economies is a disincentive to investment and therefore constituted major drag
on global growth. In the Emerging and Developing Economies, mixed developments
in prices and moderate growth, on the back of volatile commodity market, has
been inadequate to boost global growth. The protracted trade impasse between US
and China, is another destabilising factor to global growth.
On the domestic scene, consistent improvement in
banking industry's prudential ratios and significant increase in credit by the
banking system is heartwarming. With industry non-performing loan ratio at 6.6
per cent in October 2019, down from 11.68 per cent at the end of 2018 and,
capital adequacy and liquidity ratios above the minimum threshold, the
industry's resilience has greatly improved. Also, of note is the growth in
credit as a result of the loan-to-deposit ratio and differentiated cash reserve
ratio based measures. The recent upward movement in the general price levels is
not unexpected, as the drivers appear to be temporary or at best transitory.
Inflation notable rose to 11.61 per cent at end-October 2019, from 11.24 per
cent in the previous month, following the sudden turn in September 2019, after
three successive periods of decline.
Rise in food inflation the major driver of the
increase, cannot be divorced from the impact of seasonal factor and the land
border closure by Nigeria, the side effect of which is expected to be
shortlived and eventually lead to improved productivity with lower domestic
prices. Moreover, as harvest activities intensify, food supply is expected to
improve with implications for moderation in prices. Core inflation, however,
declined marginally to 8.88 per cent, from 8.94 per cent in the previous month,
reversing the temporary rise in September 2019 after 8 consecutive months of
decline from January to August 2019. I expect that the downward trend in core
inflation will be preserved as exchange rate stability is sustained.
Recently released data by the National Bureau of
Statistics (NBS) put output growth at 2.28 per cent in Q3:2019, reflecting
modest expansion in the non-oil sector and considerable growth of the oil
sector. Activities in the non-oil sector, driven by construction, agriculture
and services sub-sectors is gradually picking up, but gaps in sectoral
inter-linkages highlights the need to intensify the efforts aimed at expanding
capacity and improving productivity. Sustained exchange rate stability has
continued to preserve steady price of imported goods, and encouraged
investment, though the external sector remained challenged by slowing capital
inflow. The situation is made worse by the tight fiscal space, on account of
persisting revenue shortfall, absence of fiscal buffer and elevated debt
profile. In both instances, volatile international oil market, characterised by
re-balancing of the direction of global demand, low price regime and lower than
expected domestic crude oil output, have heightened uncertainty around oil
revenue and foreign exchange flow. Offtarget performance of overall monetary
aggregate, in spite of overshoot in aggregate domestic credit growth, may have
undermined the achievement of target levels of macroeconomic variables,
particularly growth and inflation.
Overall Considerations and Decision
Data on developments in the economy show encouraging
trend and positive outcome of extant monetary policy stance and supporting
measures. With the GDP expanding, on the back of stronger agriculture and
manufacturing sectors, lower interest rate and exchange rate stability, the
present state is indicative of an economy on the turn towards sustainable
growth. The manner of growth in the non-oil sector suggests progress in the
drive towards import substitution and highlights opportunities for improved
sectoral interlinkages in the agricultural and manufacturing value chain. The
uptick in inflation is in fact less than expected and indicates that domestic
supply is already closing the gap in the supply of some commodities due to
border closure. Perhaps, the temporary increase served as incentive for
increased domestic production. It is expected that the inflationary pressure
will trend downwards, as domestic output increases further. Improved resilience
of the financial system, accompanied by rising credit and lower interest rate
is a testament to the efficacy of current measures to improve financial
intermediation.
The recent turnaround in the capital market, a direct
effect of the measures taken by the CBN to sanitize the money market, is
expected to strengthen conditions that encourage asset reallocation towards the
equity segment to support the real sector. These provides greater scope for
policy maneuver to improve economy. 43 Low prospects of crude oil prices
constitutes major headwind and a challenge to domestic policy dynamics. Its
impact, through external reserves depletion and tight fiscal space, both
critical sources of stimulus for the domestic economy, portends significant
risk. It is therefore imperative that, while pursuing price stability and promoting
growth to reduce unemployment, monetary policy must engender buildup of
domestic buffer, in case the risk crystalises. We must take bold steps to
further encourage domestic "capital" investment by taking advantage of
available resources in the pension fund and stock market to consolidate the
gains of loan-to-deposit ratio and differentiated cash reserve ratio measures.
The resources must be directed at addressing shortages in utilities and
responding to the fact that recent positive outcomes in the short term
underscores the importance of investment. Robust domestic investment will go a
long way to sustain foreign investors' interest in the Nigerian economy. To
sustain and move the growth process forward, we must become aggressive on
further reducing the imports of finished goods and items we can produce
locally.
I want to also suggest that we explore production
methods that combine abundant cheap labour with minimum high cost resources
like power. I would encourage the fiscal authority to step up on critical
reforms and vigorously explore alternative financing models to provide the
needed stimulus to support monetary policy. The fiscal authority is advised to
consider strengthening the framework for Public Private Partnerships, so as to
overcome the limitations of tight fiscal space, reduce project cost and ensure
more efficient spending.
I am delighted with the outcomes of the current
measures and therefore advocate for the present policy posture to be sustained
for the benefits to fully materialise. I agree that we need to be more
aggressive and further loosen the policy environment, but considering that
impact of rate adjustment is low in economies with structural hiccups, I will
rather advocate that we continue the de-risking process to further encourage
investment and promote growth.
I therefore vote to retain the:
Emefiele, Godwin I.
Governor Of The Central Bank Of
Nigeria And Chairman, Monetary Policy Committee
Global macroeconomic condition remained tepid
throughout 2019 as weak demand, rising uncertainties, and levitating risks
continued to dampen prospects. International trade and investments have
moderated, encumbered by continued trade tensions especially between the US and
China and exacerbated by the Brexit impasse. Near-term outlook thus remained
fragile as global growth momentum is expected to further diminish amidst
persistent vulnerabilities and depressed demand in key advanced economies.
Accordingly, the IMF downgraded its 2019 global growth forecast to 3.0 percent,
yet again, from a previous projection of 3.2 percent. The stuttering global
impetus implicitly indented emerging market and developing economies whose
growth in 2019 projection was also lowered by 0.2 percentage point to 3.9
percent.
The prevailing headwinds kept global inflation and
interest rates trends southwards even as financial markets vulnerabilities,
trade fragilities, capital flows vacillations heightened, and diminished growth
prospects. For the domestic economy, short-term outlook remained modest, as
output growth recovery is expected to trudge-on beyond 2019. Year-end growth
for 2019 is projected at about 2.3 percent by the IMF and 2.2 percent by
in-house estimates. This could be accompanied by moderate inflation over the
shortterm due to cyclical and supply factors in the domestic space.
Macroeconomic recovery remained positive, but fragile so far in 2019. Real GDP
growth rate quickened from about 2.1 percent in 2019q2 to nearly 2.3 percent in
2019q3. Analyses indicate that, though the oil sector grew by 6.5 percent
during the quarter, it only contributed about 0.6 percentage point to total
growth. Non-oil sector, with a growth of 1.9 percent during the quarter,
however, accounted for the balance of nearly 1.7 percentage points of overall
real growth.
I note that whilst the performance of the oil sector
is satisfying, the non-oil sector remained the bedrock of a more structurally
balanced and well diversified economy. Efforts at bolstering non-oil sector
productivity must be sustained and intensified for a sturdy long-run outturns.
Again, I underscore the imperatives of a cautious and well-balanced policy.
This is particularly noteworthy as growth stayed below potential and key
socioeconomic metrics including per capita income, incidence of poverty, total
45 factor productivity and unemployment rate linger at unacceptable levels. Though,
short-term outlook is positive, it is threatened by subdued oil price trends,
fragile domestic contexts, and adverse global conditions. I remain convinced
that an adequate mitigation of these risks, buoyed by sustained foreign
exchange stability, appropriate credit policy to the domestic real sector,
sustained nonconventional development financing by the CBN, and expected
implementation of the 2020 capital budget will enhance short-term outlook. Data
on domestic prices showed a marginal uptick in year-on year headline inflation
rate from 11.2 percent in September 2019 to 11.6 percent in October 2019, with
near-term outlook suggesting a slight build-up of inflationary pressure by
2020q1.
The rise in domestic inflation is attributable to the
dawn of year-end festive spending and the transient knock-on effects of the
border closure on food supply. Accordingly, the observed uptick reflected the
0.6 percentage point increase in food inflation to 14.09 percent relative to
the preceding month even as core inflation fell 0.06 percentage point to 8.9
percent. Analysis of month-on-month inflation, also, showed similar trend for
the three components during the review month. Regardless, long-run trend of
inflation remained asymptotically downward due to continued stability in the
foreign exchange market. On liquidity conditions, subpar outcomes continued in
October 2019 with an annualised expansion of 6.9 percent in broader money
supply (M3) below the benchmark of 16.1 percent.
A cursory analysis indicated that this was supported
by the accelerated expansion of private sector credit which quickened from 12.5
percent in September 2019 to 13.1 percent in October even as government credit
decelerated during that period. The improvement in private sector credit is
attributable to the recent stance on loan-to-deposit ratio. This policy will be
sustained and strengthened to ensure the attainment of an inclusive,
diversified and sustainable growth. The CBN will continue to seek ways to
de-risk key high-impact non-oil private sector activities. The Bank will also
sustain its development finance intervention so as to channel vital funds to
the real sector to boost local productivity, spur job creation, and moderate
poverty. In my consideration, I note that the domestic economic recovery
remained positive regardless of prevailing global headwinds. Global growth
prospect is tepid with continued downgrading of forecasts.
This is on the backdrop of lingering trade and
geo-political tensions with an underlying effect on crude prices. Oil prices
remained relatively weak and may not exceed US$65pb in 2020; a considerable
downside risk for Nigeria. Accordingly, I reiterate the 46 need to intensify,
refocus and become more aggressive with our efforts to structurally rebalance
and diversify the economy from oil. We need to strengthen our FX reserves on
the fortitude of the non-oil sector. In this regard, the success of the 43
items in bouying productivity is fervently acknowledged. I emphasise once more
the need to maintain our unconventional approach to tackling macroeconomic
challenges. We have seen a pickup in real growth rate up to 2019q3, traceable
to improved credits and higher LDR.
This is even more pleasing as NPL continued to decline
even with higher credits, due primarily to regulatory mechanisms. We also
observed marginal uptick in inflation rate due to supply hitches heralded by
border closures. Given the price stability mandate of the CBN, it is foremost
to keep inflationary concerns within sight while remaining mindful of the need
to correct the output gap. Hence, on a balance of evidence and probability, it
may be more judicious to hold all parameters at this time. Given the subsisting
global risks, any policy shock now may be impetuous and distabilising,
especially as the year-end festivity spendings could impact on domestic prices,
output and the exchange rate. The consequences of border closure on supply and
economic trajectory also need to be heeded. At this time, I am also cognisant
of the budgetary cycle and fiscal dynamics and their real effects on our
impulse-response function and outcomes. I am wholly confident that the current
level of real policy rate is appropriate to balance the objectives of exchange
rate stability, price stability and output stabilisation without introducing
disruptive policy shocks. Therefore, I vote to:
Godwin I. Emefiele, CON
Governor
November 2019
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