MPC: Trying To Hold On To Butterflies


Thursday, May  24, 2018, 5:50 PM / Proshare Research  


The Monetary Policy Committee (MPC) convene for the second time in 2018 on 21st and 22nd of May 2018. The monetary anchor was left unchanged as the committee stuck to its usual hawkish stance.  

The committee opined that tangential injections by the fiscal authorities fused with election spending taking steam in the second half of the year. Therefore, the committee envisaged spending from the fiscal side will drive prices up which will cause the Naira to develop blight. Sincerely the bank has not lost its charm, a soft way of reminding economic agents of expectational theory.  

The committee was of the belief that retaining rate in a position of   expected constrain by leaving all existing levers unchanged, was best suited for the moment.  Therefore, harping on a more cautious stance, well for an institution   that has a reputation for leaning on the cycle. The hold card wasn’t farfetched in the kitty, it was always nearby.   

In a twist,  the committee once again admitted that credit deepening is shallow and there is a need to bolster credit deepening. In the same line reaffirming the convictions of many that there is a need for innovative measures to bolster credit deepening. 

The grim reality is that the present hold card which is rooted in an extreme   perception of time consistency has brought the bank to the middle and can’t take it any bit further. Just like any other policy it has long run its course, besides there is a limit on how far stabilization can go especially with credit creation. 

Clearly the bank has placed itself in a position of limited discretion where monetary independence have been constrained by its preference for hot money coupled with a base money that is under the pressure of a high cash reserve ratio.  

The obvious fact is that there is little room to go any further as long the butterfly syndrome (preference for hot money) remain the centerpiece of monetary policy and there is an unwillingness on the part of the bank to provide incentives to drive credit deepening.     


What Has Changed?  

Money Supply and Domestic Credit 

Fig 1: Money supply and Credit to private sector

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Source: CBN


Money supply in the month of April rose from N24.3 trillion in March to N24.5 trillion in April, thereby reflecting   a tepid increase of 0.8% in money supply in the month of April.

The 1.88% growth in net foreign asset was enough to offset the 2.26% decline in narrow to produce a tepid increase in money supply.  Regardless, money supply has continued to travel sideways over the last 4 months.  

Narrow money (M1), in the month of April fell from N10.96 trillion to N10.62 trillion, implying a dip of 2.2% in narrow money. The decline in narrow money was due to 1.9% slip in demand deposit and 6.53% dip in currency outside the bank. Net Credit to government have continue to maintain an upward trajectory as it rose from N3.823 trillion in March to N5. 22trillion in April, reflective of 36.7% rise in Net credit to government in the month of April.  

However, credit to the private fell from N22.4 trillion to N22.25 trillion, implying a 0.7% dip in credit to the private sector. Credit to the private sector have not recovered from the bump that hit its trend in September 2016: when it stood at N22.8 trillion. Pinpointing to the fact that, credit to private sector has not recovered from the downswing.


Prices and Real Savings 

Fig 2:  MPR, Treasury bill and Inflation   

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 Source: CBN


Headline inflation have been on a nose dive as the trajectory cave further inwards from   13.34% to 12.46%, due to base effect and successive slump In food inflation.  Headline has decelerated by 6.9% when compared to the heist of 18.75% in January 2017, evidently shedding off two third of the momentum churned up earlier when inflation was at its heist. 

Presently, the treasury bill rate stand at 11.43%, shedding 353 basis point compared to August 2016. At that point, T-bill rate had climaxed overshooting the MPR (natural rate). Currently, the rate seem to be moving in tandem with inflation, thereby putting an end to the convexity that earlier existed.  

Certainly, the long touted positive real saving has emerged as inflation lay below MPR, broadly both T-bill and inflation trend behind the natural rate.  Thereby the earlier humped shaped yield curve that erupted in late 2016 has been largely reverse. 

As a more inverse yield curve take hold. However, the natural rate still remained the threshold for glitch edge, even though the convexity initially witnessed in T-bill has been eroded.   


Purchasers Manager Index 

 Fig 3: PMI

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    Source: CBN


The purchasing manager’s index’s for the month of April expanded at a stronger momentum from 56.7 in March to 56.9 in April, thereby the Purchasing managers index has expanded for 13 consecutive months. 

However, input price experienced a blip as it accelerated from 61.4 in March to 64.4 in April.  Output prices return to the earlier trajectory after a sudden deviation in March by expanding   moderately from 59.1 to 58.6.  

Holistically, the successive expansion in purchasing managers’ index hinges largely on the deceleration in prices.  Business activity climbed to its highest level in 2018 in the month of April to expand from 58.7 to 58.8, after a substantial deceleration in January. The deceleration was due to seasonal effects.   


Foreign Exchange   

Fig 4: Foreign Exchange and IEX

Proshare Nigeria Pvt. Ltd.

Source; FMDQ


In the month of April, foreign exchange trade stood at $16.47 billion, thereby dipping by 15.47% compared to the previous month which stood at $18.67 billion. The dip was a product of a fall in foreign exchange traded in the investors and exporters (I&E) FX window from $6.06 billion to $4.7 billion fell by as 28.8%.  

The surge in the effective rate on March 25th    (fig 5) in the United States tampered down activity in the investors and exporters window for the month of April, Nigeria was not alone as most emerging markets were rattled by the surge.     


Fig 5: Effective Rate and Fund Rate

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Source Fed Reserve bank


However foreign reserve rose slightly from $47.496 billion in April to $47.75 billion in May. Obviously with oil price far beyond ahead of the 70$ per barrel Rubicon coupled with stronger Net foreign asset.  


Let establish some facts and we will do it strongly.  Firstly, Nigeria is battling with acute growth gaps and how?  The recent GDP figures of 1.92% is a proof of such. Evidently, the growth has no real impact on the nations per capital income. 

Capturing the ongoing disconnect between quantitative growth and the social well- being of the citizenry. Of course why would we forget?  The nation faces huge credit gaps, at least every one agree on that even the Central Bank. How do you then solve surfeit supply or improve private contribution to gross capital formation?    

Secondly, oil is presently trading above 70$ per barrel coupled with foreign exchange trade averaging $11 billion per month. Thereby implying both an improvement in Dollar liquidity and the state of current account. The scenario provides the bank some maneuvering space.    

A country that has a stable currency in circulation path coupled with a low currency out of bank to money supply ratio. Premising inflation phobia on fiscal injections could be overtly exaggerated.   

Lastly, portfolio investors are desirable and necessary, they grease supply following finance. However, in a dynamic where the United States Fed is on a hiking season with price movement deviating materially from their threshold and the effective rate in the United States trending south. 

Calibrating monetary policy with the intent of retaining portfolio investors under such circumstances always end sour and why?  The central bank does not have the chest to provide the premium that will keep them, they just can’t resist the premium offshore. 

Whether we like it or not we can’t hold on to these butterflies at this point of the cycle.  They can’t resist the temptation to perch the richer nectar offshore.           


Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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