Unconventional Monetary Policy Requires Complementary Fiscal Measures


Tuesday, August 07, 2018 7:00PM / FSDH Research


Domestic Scene: 

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) maintained rates at the end of its July 2018 meeting. However, it intends to deploy unconventional strategies to boost credit creation and economic growth. The MPC encouraged large corporations to issue Commercial Papers (CPs); the CBN may buy the CPs if necessary. FSDH Research believe this measure will increase the issuance of CPs in Nigeria in HY2, 2018. The yields on the CPs may also drop or trail the yields on Nigerian Treasury Bills (NTBs).

Similarly, the CBN plans to implement measures to direct Cash Reserve Requirement (CRR) fund to the manufacturing and agriculture sectors of the Nigerian economy at 9% interest rate with a minimum tenor of 7 years and moratorium period of 2 years. FSDH Research believes that the CBN’s proposed policy measures may increase credit creation and business expansion to stimulate growth. However, complementary fiscal measures are required to de-risk the economy.

FSDH Research’s analysis of Nigeria’s Balance of Payments (BOP) position as at Q1 2018 confirms our view that the country’s external position remains strong but vulnerable to developments in the crude oil and gas market.

FSDH Research recommends that government at all levels must intensify efforts to implement policies which would grow the non-oil sectors of the economy. The Purchasing Managers’ Index (PMI) published for the month of July 2018 by the CBN shows an expansion. The slowdown in the PMI reiterates FSDH Research earlier position on the weak economic recovery in Nigeria.

The favourable crude oil price offers support to the accretion to the external reserves in the short-term, despite the slowdown in foreign capital inflows . FSDH Research forecasts a further drop in the inflation rate to 11.01% in July 2018. Looking at the movements in food prices in June, the inflation rate may remain in double digits in 2018.

Investors can gradually enter the equity market through cost averaging investment strategy. Some stocks in the banking, consumer goods, building materials and oil and gas sectors of the equity market are attractive at their current prices. The yields on the FGN Bonds may inch up from current levels, as government increases its borrowing from the Bond market to finance the 2018 budget and the yields in the international market increase.

International Scene:

The International Monetary Fund (IMF), in its July 2018 World Economic Outlook (WEO) update notes that global growth remains strong and in line with April 2018 forecast at 3.9% both for 2018 and 2019. The positive outlook for the global economy should sustain a high crude oil price. This will prolong stability in the Nigerian foreign exchange market.

The Federal Open Market Committee (FOMC) of the United States (US) Federal Reserve (The Fed) maintained its anchor interest rate at 1.75%-2.00% at the end of its July 2018 meeting. We expect two more rate hikes in September and December 2018. This may increase the yields in the international market and offer attractive opportunities for investors with foreign currency. It may also make borrowing from the international market unattractive.

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