Contrasting Views on the Economy, Markets & Monetary Policy - Doyin Salami v Godwin Emefiele


Friday, March 11, 2016 7.25AM / CBN

Here are the personal statements that has gotten analysts and economist talking on Nigeria



At the end of the MPC’s deliberations, members were invited to vote on either of these options:

(i) Maintain the status quo –in other words leave all parameters unchanged; or

(ii) Change the band around the Monetary Policy Rate (MPR) from +2/-7  to +2/-11 whilst retaining all other parameters unchanged.

I voted in support of keeping the Monetary Policy Rate (MPR), the Cash Reserve Ratio (CRR), Liquidity Ratio (LR) unchanged and retaining the asymmetric corridor around the MPR at +2/-7.

In addition, I had proposed, for the Committee’s consideration, that the

·         The mid-point of the exchange rate band be moved from N197/US$ to N220/US$; and

·         The exchange rate band be widened to +5/-5 percent around my proposed mid-point of N220/$.

My additions to the proposal gained no support.

In my mind, the questions facing the MPC at this meeting included:

         How to deal with rising cost in the face of slowing activity growth?

         What implications do the budget proposals for 2016 have for the framework goals and instruments of monetary policy management?

         Does the worsening international economic environment require a change in approach to, or direction of, monetary policy?

With headline inflation ending the year at 9.6 percent – making for a 2015 average of 9.01 percent in comparison to 8.0 percent in 2014, the challenge of rising cost continued to face both the design and implementation of monetary policy. Similar to the overall measure of prices, the rate of increase in the index of food prices increased from 10.3 percent recorded in the previous month to 10.6 percent in December 2015 – resulting in the year average rising to 9.9 percent from 9.5 percent the previous year.

At 8.7 percent, core inflation, remained unchanged between November and December 2015 – unlike the food and the overall indices of prices. However, the trend towards higher cost noted in the preceding paragraph also extended to core inflation when the year average is considered – this rose from 6.9 percent in 2014 to 8.2 percent in 2015.

Ordinarily, rising inflation would have required a tightening of monetary policy. Nonetheless, available evidence suggests that structural supply side weakness rather than any significant pick-up in demand (notwithstanding the payment of salary arrears, by some sub-national governments) explains rising prices.

Available income and expenditure side data, albeit limited to 1st half of 2015, shows that employee compensation, when compared to the same period the previous year, shrank by1.14 percent - approximately 10.00 percent when adjusted for inflation. In the same period, inflation rose faster than aggregate disposable income implying a ‘real’ contraction in disposable income of almost 5percent. Since then, anecdotal evidence supports significant staff layoff – especially in manufacturing.

Furthermore, in notes accompanying the figures for December 2015, the National Bureau of Statistics (NBS) drew attention to rising cost of imported food and the impact of disruptions to fuel supply as the primary factors in explaining rising prices at the end of 2015.

The NBS’ reference to the adverse effect on domestic inflation of rising cost of imported food is, in my view worthy of note. Given the continuing decline in the global food price index (including cereal and sugar which are our key food imports), higher domestic costs of these imports may suggest that the ‘fixed’ exchange rate at the CBN window may no longer be the basis for setting the domestic price of imports!

Indeed, review of the data available for exchange rates shows that the premium of between the CBN and non-CBN window closed 2015 at 33 percent for parallel market and 31 percent for bureau-de-change (BDC) – rising from 9 percent and 11 percent respectively at the end of 2014. By January 2016, however, this potential arbitrage window had furthered worsened to 54 percent and 47 percent respectively.

In other words, costs are now reflective of the difficulty of access to FOREX at the CBN window and thus have been determined by exchange rates at the non-CBN windows. This raises the additional question of whether the price of policy uncertainty and inconsistency is already translating to rising prices?

Beyond this unease over rising prices, my vote was also informed by worries over eroding confidence in the economy and financial system stability.

The increase in the yield on Nigeria’s 10yr Eurobond issue should be of concern. At 12.25 percent, Nigeria was, after Brazil, the 2nd riskiest issuer in a group of 20 Emerging and Frontier Markets. What is worrisome though is that between Dec 2015 and Jan 2016, the yield on Nigeria’s Eurobond rose 1.58 percent. The deterioration that this represents was by far the worst of the comparators adopted by Bank Staff. This, in my view, signals deteriorating market confidence in our economy.

With respect to financial system stability, my concern, similar to that of other colleagues on the MPC, is to ensure that there is no repeat of the systemic distress arising from poor risk asset quality that gave rise to the creation of the Asset Management Corporation of Nigeria (AMCON). In considering this possibility, I pay especial attention to the:

(i)    Ability of Deposit Money Banks (DMBs) to intermediate; and

(ii) Effectiveness of intermediation.

In my view, the financial system, especially our banks continue to face a multiplicity of growing external threats, not unlike those facing the national macro-economy.

With banking system liquidity ending 2015 at 48.63 percent – the highest level since Dec. 2013, it is easy to conclude that there is no threat to the banks’ intermediation ability. However, given slow growth in the economy and the state of confidence, it is not surprising to note that Bank deposits declined by 2.89 percent (which, when adjusted for inflation, translates to almost 13percent reduction).

Furthermore, it is also not surprising to observe deposit holders responding to a riskier environment by switching from demand deposits to tenured deposits – thereby raising the cost of intermediation. While data also shows a reduction in domiciliary account holdings, this figure may be an understatement of foreign currency holding – especially given that domiciliary account holdings were, until recently, discouraged.

Bank Staff report show that at NGN5,783bn, the volume of new credit dropped almost 30percent in 2015 compared to a year earlier. The quality of asset acquired in the process of intermediation and the systemic risk posed appear to be worsening.

The Banking System Report presented by Bank Staff shows the following highlights:

         78.8 percent rise in Non-Performing Loans (NPLs) to N649.63bn in the year since December 2014;

         NPL ratio ending 2015 at 4.88 percent – relative to a threshold of 5percent; and

         Loan-loss provision of N514bn already made against NPLs.

In the normal course of events, the loss-loss provisions already made should assuage any concern. However, granular inspection of the data shows that between 2014 and 2015:

·         The number of banks with NPL ratio in excess of the 5 percent threshold rose from 3 to 8. Furthermore, NPL in 3 of these banks exceeded 10percent; and

·         NPLs rose in 18 of the 22 buckets into which the CBN classifies Deposit Money Bank (DMB) lending.

Worsening NPLs reflect a combination of external and internal factors. These include: Low and volatile Oil prices; uncertainty about severe fiscal imbalance at the sub-national level of government; weak output growth; and eroding investor confidence.

Reflecting on the nature of these threats, notwithstanding reassurance provided by Bank Staff based on the outcome of various stress and contagion tests, I cannot help but remain concerned about the possibility of under-reporting of NPLs. The weakened ability of the CBN, represented by the structure of its balance Sheet, to deal with a recurrence of crisis in the banking sector requires heightened vigilance by Bank Staff.

In closing this review of outcomes that influenced my vote, it is important to note near-term inconsistencies of which sight must not be lost:

         Current FX policy is inconsistent with Fiscal Policy. After negative revenue shocks, such as our economy has experienced, using fixed exchange rates to rectify external account imbalances demands that fiscal spending contracts or, at least, that policy brakes are applied in fiscal consolidation, not expansion;

         Furthermore, the presence of twin deficits - fiscal and current account deficit is inconsistent with the on-going maintenance of fixed exchange rate;

         Interest Rate Policy has become inconsistent with the Inflation Policyobjective. The Central Bank’s concentration on FX Rate stability seems to have led to abandonment of its price  stability/inflation objective. This may be understandably construed to be a temporary trade-off in our pursuit of stronger growth and employment. But interest rate policy has also been subordinated to Financial Sector Stability, and Credit Policies of the Bank. Witness the Bank’s interventions on poor credit decisions in banking, and the subsidization of interest rates in its implementation of real sector initiatives. In the meantime, signs of a turnaround in trajectories for growth, employment and inflation remains to be seen.

         Market policies in general are becoming inconsistent with Investment Promotion policies. Public resource allocation decisions appear to be distorting and not leveling the playing field; i.e. not promoting broad-based equitable opportunities. They are instead entrenching the abilities of mono and oligopolies, in public and private spaces, to undermine core prerequisites for growth and economic diversification. Such decisions are imposing administered constraints that are in effect choking the free flow of increasingly scarce private capital and material to existing, varied capacities in the economy.

In addition to policy inconsistencies, some of the approval processes within the Central Bank may inadvertently be worsening access to forex. Under CBN Guidelines, import applications not requiring FOREX from the CBN window – referred to as ‘Not valid for FOREX’ - should be processed within 48hrs. Given that our FOREX challenge is a shortage of supply, it is difficult to understand why the CBN is not ensuring strict compliance with its guidelines. These applications represent a supply of FOREX that would ease, however insignificantly, the present constraints.

While the foregoing review of outcomes gives room for significant concern, monetary policy being forward looking, the outlook is even more worrisome.

It is clear that the changed dynamics of the oil market – strengthening US$ and OPEC’s switch to aggressive competition for market share in the face of the reality that shale oil is unlikely to go away anytime soon - coupled with the growing friendship between the USA and Iran and the simmering animosity between Saudi Arabia and Iran suggest oil prices will remain volatile and low for longer than usual.

In consequence FOREX inflow, which have already dropped from US$3.2bn/month to US$1.0bn/month, will also remain far below ‘normal’ year levels.

The fiscal proposals in the Federal Government’s (FG) 2016 budget will pose a significant challenge to monetary policy in the year ahead. While the expansionary nature of the budget is appropriate in the face of slowing activity growth, it conflicts, as I noted above, with the fixed exchange rate regime presently in force.

The example of Saudi Arabia, another Oil Producing Country, with a fixed Exchange Rate regime may be instructive. Saudi Arabia’s defense of exchange rates for its currency, the riyal, features spending cuts and not increases. The unprecedented range of recent Saudi government spending cuts may be considered as testimony to the severity of the revenue shock experienced by oil-producing States around the world.

Furthermore, the FG’s 2016 budget, as presented, will see the deficit increase of almost 82 percent. Ignoring the resulting sharp increase in debt service payments – which in Budget 2016 may rise to 35percent of revenue, the crowding out impact on the domestic economy’s private sector borrowing need cannot be similarly ignored.

Assuming that budget funding is executed as planned, I expect domestic interest rates to rise in the year ahead adversely affecting availability and cost of credit. If, as is possible, much of this deficit is, contrary to plan funded intern ally, the pressure on available credit and its cost will heighten significantly.

Significant as the issues surrounding the FG’s budget are, attention must also be paid to the fiscal conditions of the sub-national tiers of government. It is clearly evident that, as I had argued in September, the bailout afforded the States in July 2015 provided greater succor to their bank creditors. With the State Governments getting no significant new resources, their precarious fiscal condition continues to bubble just below the surface. The impact of this issue on the outlook cannot be understated. Its adverse effect on demand and non-performing loan stock of banks should be issues for sober reflection.

In the absence of new resources, I expect State Governments to face the hard reality and make the choices that significantly reduce costs and enhance productivity.

Beyond oil and the challenge which funding the budget deficit pose, the absence of exchange rate management policy has diminished Nigeria’s attractiveness as a destination for international capital flows. This policy challenge is worsened by the seeming inability of the CBN to effectively use the interest rate corridor as an effective policy tool.

With respect to exchange rate management policy, I have on several occasions drawn attention to the need for an exchange rate management policy. In my judgment, the framework of effective exchange rate provides the most appropriate vehicle for determining exchange rates. The present system of rationing without the establishment of clear criteria doubtless creates uncertainties, inconsistent outcomes and is open to abuse!

Returning to the MPC mandate of inflation management, forecast by Bank Staff show inflation, under present conditions, continuing to rise in 2016 – average inflation rate of 9.2 percent.

In my view, as earlier stated, prices are already rising in response to the supply shortages arising from difficulty of accessing FOREX officially and the resort to non-CBN markets where exchange rates are significantly higher. There is a sense in which it appears the CBN may have lost control of the ‘market’ exchange rate and perhaps inflation management.

My proposal to move the mid-point of the exchange rate band by 10 percent to N220/US$ is based on the value of the 6month Non-Deliverable Forwards (NDF). In my view, unlike the NDFs, the prevailing price for US Dollars outside the CBN window - at almost N300/US$, grossly undervalues the Naira. It unsurprisingly reflects the impact of scarcity of US$ and the unnecessary uncertainty in policy around the determination of exchange rate and the access to foreign currency.

Using my preferred measure of effective exchange rate, the Naira, as at the time of this meeting is 10 percent percent overvalued. The covered interest parity framework also points to a 10 percent overvaluation of the Naira.

For the avoidance of doubt, while I am clear that flexibility in exchange rate management is desirable, it is not a silver bullet! Its effectiveness in enhancing and sustaining productivity in our national economy depends on a collective willingness to undertake fundamental reforms, which at the very least include –

1.       Reduction of government monopoly participation in economic activity and consequently expand the scope of private sector participation in the economy;

2.      Improve labour productivity;

3.      Re-organise the regime of subsidies to target production rather than consumption; and

4.      Ensure internal coherence and consistency between objectives and policy actions.

I have spent much of the period since September 2015 arguing that our willingness and ability, as a nation, to adjust to new realities will determine how well our national economy weathers the turbulence occasioned by low crude oil prices. I am increasingly concerned that we are unwilling to recognise the new realities and meaningfully deal with them. In consequence, we are, unnecessarily, paying – in the form of eroding confidence, slowing growth and increasing joblessness of our population – a needlessly heavy price!


The year 2015 was a tumultuous one for many financial markets and economies. Accordingly, expected global growth for the year was revised downward from 3.9 percent 3.1 percent in the IMF’s World Economic Outlook (WEO) of January 2016. Amidst subdued demand and rising uncertainties, growth momentum over the medium-term outlook has remained fragile. However, global economic activities are envisaged to recover marginally in 2016 with a projected growth rate of 3.4 percent.

The expected outcomes of global growth continued to reflect the fragility of key emerging market economies, especially the deteriorating output gap in China, softening commodities and oil prices, the uneven rebound in advanced economies and the rising geopolitical tensions in some strategic international trade routes.

For advanced economies, a modest and uneven recovery continued for much of 2015 with estimated growth revised downward marginally by 0.1 percentage point to 1.9 percent. Amidst broadly accommodative monetary conditions in these countries, growth prospect is expected to pick-up slightly with a projection of 2.1 percent for both 2016 and 2017 for the group. Individually, The United States, United Kingdom and the Euro Area economies are expected to continue their recoveries into the medium-term albeit at uneven pace. The recovery in key advanced economies largely reflects the increasing demand, the falling production costs due to cheaper energy, rising investments (both domestic and foreign) due to benign monetary conditions, and fiscal ease (in Europe) due to the refugee crisis. Despite the third quarter relapse, the Japanese economy is expected to record a positive but modest growth of 0.6 - 0.8 percent in 2015 with a medium-term growth projection of 1.0 percent and 0.3 percent in 2016 and 2017, respectively. The asset purchase programmes of the ECB, the Bank of England, and the Bank of Japan and expected to continue into the future with variegated ramifications for the financial markets in emerging and developing economies.

Following the continued fall in commodity prices, structural imbalances, worsening vulnerabilities, volatile financial markets, weakening demand, and diminishing policy buffers, a generalised growth deceleration was observed among emerging markets and developing economies in 2015.

Average economic growth for countries in this group fell from 4.6 percent in 2014 to 4.0 percent in 2015 with a tepid outlook for 2016. With the exception of India, all countries in the BRICS classification lost growth momentum in 2015, which could continue into 2016. In China, a sharper than envisaged lull in international trades due to sluggish aggregate demand, weaker investment and flagging manufacturing culminated in a sub-par growth of 6.9 percent in 2015 from 7.3 percent in 2014. Similarly, the growth rate of the South African economy is estimated to decline by 0.2 percentage point to 1.3 percent in 2015. Brazil and Russia are experiencing intense contractions with negative growths of 3.8 percent and 3.7 percent, respectively, estimated for 2015 in contrast to positive growths recorded in the preceding year. In sub-Saharan Africa, economic growth rate is estimated to slow to 3.5 percent in 2015 from 5.0 percent recorded in 2014.

Accordingly, while the cheapening commodity prices are easing production costs and supporting consumer demands in many advanced economies it continues to worsen structural imbalances and exchange market pressure in many emerging market and developing economies as the gravitational pull on the exchange rates intensifies. Nonetheless, I note that in the wake of the prevalent fragilities in the global economy, monetary policy has generally shifted short-to medium-term emphasis to growth stabilisation as the against the de jure objective of price stability.

This is reflected in the widespread accommodative stance of monetary policy except in the USA where a resilient recovery heralded a gradual tightening with the rescinding of the zero-bound interest rate. Strained by the headwinds of the exacerbating global developments particularly the plunging crude oil prices, the strengthening US dollar and the slowing Chinese economy, the Nigerian economy continued to experience unsavoury challenges. As long as these exogenous developments persist, the grey outlook is not expected to lift fully in the near-term. With a third quarter growth rate of 2.8 percent and an average growth rate of 3.1 percent in the first three quarters of 2015, economic growth for the entire 2015 may not exceed 3.5 percent.

Though growth could pick-up slightly in 2016 if global conditions improve, various forecasts including staff estimates predict a range of 3.7 to 4.1 percent. I note that the expected growth rates for 2015 and 2016 are substantially below the average of over 5.5 percent recorded in the preceding five years. These growths are expected to be largely driven by the non-oil sector, especially Services and Agriculture. Aside the multiplier effects of falling oil prices and capital flow reversals (reflecting the normalisation of the US monetary policy), poor lending to the real sector remains a major threat to short-term growth prospects.

On domestic prices, the year-on-year headline inflation rose marginally to 9.6 percent in December 2015 from 9.4 percent in November. Though single digit, the rate stayed above the Bank’s tolerance range of 6—9 percent. The Consumer Price Index report of the National Bureau of Statistics indicated that headline inflation has remained above the range for eight consecutive months since the upper threshold was first breached in May 2015. The uptick in headline inflation during the month reflected the 0.3 percentage point increase in food inflation to 10.6 percent even as core inflation remained unchanged at 8.7 percent. This outcome is broadly attributable to the archetypal seasonal impulses of the Yuletide festivities. This was reinforced by the acute scarcity of premium motor spirit experienced during month, the drawn-out consequences of disruptions to food supply due to insurgency in important agricultural zones of the country, and the lingering pass-through from a strengthening US dollar.

Available data on domestic monetary, credit and financial conditions indicated that broad money supply (M2) expanded, year-on-year, by 5.9 percent in December 2015 relative to a programmed target of 15.2 percent. Similarly, net domestic credit (NDC) increased by 12.1 percent; a shortfall of 17.2 percentage points from the 29.30 percent growth targeted for 2015. The growth in domestic credits reflected the 151.6 percent expansion in net claims on the Federal Government.

I note that irrespective of the sluggish monetary expansion and poor credit to the private sector, the money market was relatively awash with liquidity, as key interest rates in the market remained significantly low and outside the asymmetric policy corridor. Starting at 1.0 and 1.5 percent on 25 November, the interbank call and OBB rates recorded averages of 0.8 and 1.0 percent by end-December 2015. The incongruity of a surplus liquidity at the money market vis-à-vis a meagre credit to the private sector reflects in part the apathy at lending to the real sector of the economy.

At the capital market, the bearish conditions persisted at the equity segment. This reflected the prolonged capital withdrawals from the economy in the aftermath of the normalised US monetary policy and austere sentiments associated with falling oil prices. Closing at 23,826.5 points on 22 January 2016, the All-Share Index of the Nigerian Stock Exchanged declined by 13.2 percent from the 27,435.6 points it recorded at end-November. Over the same period, Market Capitalisation dropped from ₦9.4 trillion to ₦8.2 trillion. During the review period, the exchange rate of the Naira to the US dollar stabilised at the interbank market around ₦197.00/US$ with a daily average of ₦196.99/US$ between 23 November 2015 and 11 January 2016. This reflected the CBN’s commitment to safeguard the domestic currency using a mix of administrative policies and market instruments.

However, I note the need to improve foreign exchange supply from autonomous sources. This will relieve the pressure on our gross official reserves, which fell from an average of US$29.9 billion at end-November 2015 to an average of US$28.3 billion on 22 January 2016.

On the whole, I note that the headwinds impacting the Nigerian economy, especially those related to falling oil prices and weakening global demand are revealing the structural inadequacies of the economy. As I have maintained in the past, the current fall in price of crude oil represents a shift in equilibrium and as such is not transient.

Besides, even at the new lower equilibrium, oil prices are not expected to recover anytime soon. I am convinced that the challenges confronting the Nigerian economy are largely structural, though with some cyclical undercurrents. Given that monetary policy is essentially deployed to fine-tune short-term cyclical variations, this implies that monetary policy is not equipped to singlehandedly tackle the structural base of these problems effectively. This underscores the inevitability of a coordinated and consistent macroeconomic policy framework.

While the Nigerian economy is significantly diversified, the dependence on oil for foreign exchange and fiscal revenue needs to be speedily corrected. I note once again that the lopsided dependences on external markets underlie the gradual but unrelenting erosion of Nigeria’s productive base. It is important that the Nigerian economy not only reverts to more sustainable sources of fiscal and foreign exchange revenue but also increase support for local production. We must make hard choices with respect to foreign exchange management and structural re-alignment of the economy.

I am of the view that at this critical time monetary policy must methodically consider the trade-off between inflation and output growth and its implications of this trade-off for the macroeconomy. In view of the rising inflation and slowing economic growth, policy must give priority to the growth recovery without letting inflation out of sight. If we fail to prop growth up at this critical moment, the hysteresis effect may lower our growth potential, which will imply a permanent fall in the growth trajectory. It remains expedient to ensure that there are no encumbrances to the drive to support the real sector and the productive base of the economy.

While it is imperative to maintain a regime of accommodative monetary policy, it is even more important to ensure that the surfeit liquidity from the easy stance of policy is channelled to boost lending to the private sector. This would ensure more optimal outcomes of growth, inflation and employment. I note therefore that the concurrence of surfeit liquidity in the money markets and low credits to the private sector is unwelcome.

I enjoin the banking system to do more in ensuring that more lending is channelled to the real sectors particularly in agriculture, manufacturing, and SMEs.

I am of the view that the effects on inflation, growth and employment of decisions at the last MPC are still been transmitted in the economy. It is important to allow the economy absorb the previous impulses fully before further adjustments. It is in this regard that I vote to retain:

1.       The Conditional CRR at 20.0 percent;

2.      The MPR at 11.0 percent;

3.      The asymmetric corridor at +200 basis points and –700 basis points, around the mid-point of the MPR; and

4.      The Liquidity Ratio at 30 percent.


Related NEWS

1.          Personal Statements of Members at the 105 MPC Meeting of Jan. 25-26, 2016

2.         CBN Communiqué No. 105 of MPC Meeting – Jan 25-26, 2016

3.         CBN Communiqué No. 104 of MPC Meeting – Nov 23-24, 2015

4.         CBN Communiqué No. 103 of MPC Meeting – Sep 21-22, 2015

5.         CBN Communique No. 102 of MPC Meeting of July 23 and 24, 2015

6.         Personal Statements of Members at the 101 MPC Meeting – June 03, 2015

7.         CBN Communiqué No. 101 of MPC Meeting – May 18-19, 2015

8.        CBN Communiqué No. 100 of MPC Meeting – Mar 23-24, 2015

9.         CBN Communique No. 99 of MPC Meeting – Jan 19-20, 2015

10.     CBN Communiqué No. 98 of MPC Meeting   – Nov 25, 2014

11.      CBN Communiqué No. 97 of MPC Meeting  – Sep 19, 2014

12.     CBN Communique No. 96 of MPC Meeting – Jul 22, 2014

13.     CBN Communique No. 95 of MPC Meeting  – May 20, 2014

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