Coming at a time the federal government admitted that the
economy was ‘technically in recession’, the 251st edition of
the Monetary Policy Committee (MPC) of the Central Bank of
Nigeria (CBN) meeting which begins tomorrow will dwell on
measures to halt the gradual slide into recession and rising
inflation.
Discussions at the MPC meeting are also expected to dwell
on the appraisal of the newly introduced flexible forex policy,
energy shortages on productivity and effect of pipeline
vandalism on revenue accruing to the treasury. More
importantly, the forecast of the International Monetary Fund
(IMF) that the Nigerian economy would contract by 1.8 per
cent this year and the subsequent admission by the Minister
of Finance, Kemi Adeosun, that the economy was ‘technically
in recession’, are issues that would preoccupy tomorrow’s
MPC meeting.
Rising inflation, economic analysts observed, has been a
source of concern to policy makers. Just last week, the
National Bureau of Statistics (NBS) announced 16.6 per cent
as the figures for the June consumer price index (CPI), which
measures inflation. This month’s CPI, an 11-year high,
represents 0.9 per cent rise from 15.58 per cent of the
previous month and the increase marked the fifth time this
year inflation has climbed.
As part of measures to halt the upward trend, analysts are
canvassing for the retention of monetary policy rate (MPR),
the benchmark interest rate, at 12 per cent.
The MPC had at its meeting in May retained the MPR at 12
per cent with the asymmetric corridor at +200basis points and
-700basis points and also left the cash reserve requirement
(CRR) and liquidity ratio (LR) unchanged at 22.50 per cent
and 30 respectively
According to analysts at FSDH Merchant Bank Ltd, “Looking
at the macroeconomic developments in the economy, we
expect that the MPC members will vote to maintain the MPR,
CRR and LR at the current levels.
“However, complementary fiscal measures are required to
restore investors’ confidence and pull the economy out of
recession.”
The analysts explained: “There are arguments to support an
increase and a hold in rates when the Monetary Policy
Committee (MPC) of the Central Bank of Nigeria (CBN) meets
on July 25-26, 2016. Meanwhile, there is no argument in
support of rates cut given the current economic situation.
“The impending recession in the Nigerian economy supports a
hold in rates at the current level while the fiscal measures to
reflate the economy are implemented.”
The FSDH analysts noted that the Nigerian economy was
moving towards a recession as “economic activities have
significantly slowed down.”
“The GDP contracted by 0.36 per cent in Q1 2016, compared
with the growth of 2.11 per cent in Q4 2015. The Nigerian
economy faces risks from shortage of foreign exchange and
weak consumer demand. We expect a higher level of
contraction in Q2 2016, when the National Bureau of Statistics
(NBS) releases the Q2 2016 GDP figure on August 25, 2016.”
They, therefore, believed that “the impending further
contraction in the GDP was the major risk the economy faces
at the moment, and a hike in the MPR will worsen the
outlook. A hold decision with complementary fiscal
expansionary measures should stimulate the economy.”
The FSDH analysts also noted that, “the pressure on the
external reserves remained unabated since the last MPC
meeting in May 2016.
According to them, “The external reserves have not received
the anticipated boost from the adoption of a flexible exchange
rate policy in June 2016. The external reserve is still strongly
dependent on oil earnings, which has been inadequate
because of the output shortfall. The 30-day moving average
external reserves declined marginally by 0.49 per cent from
US$26.48billion at the last MPC meeting to US$26.35billion
as at July 18, 2016. We expect the MPC to adopt a hold
decision.”
Similarly, analysts at Dunn Loren Merrifield Asset
Management Ltd suggested that the MPC retain the MPR at
12 per cent.
According to them, “Ahead of the meeting of the Monetary
Policy Committee (MPC) slated for the 25th and 26th of July
2016, we are of the opinion that the body is likely to maintain
the status quo.
“We are of the view that a further hike in MPR will be
insufficient in itself to spur foreign inflows given liquidity
concerns of the interbank foreign exchange market. This is in
addition to the ‘neutral’ mode adopted by most foreign
investors as the naira is anticipated to inch towards what is
being considered to be its fair value.
Whilst we believe that a gradual reduction in interest rate is
expedient for investment and economic growth, we envisage
that the committee will retain the MPR at 12.00 per cent.”
The DLM analysts noted: “Pending the release of the nation’s
gross domestic product estimates by the National Bureau of
Statistics in the coming month, weakened fundamentals
suggests that fragile growth will be sustained in the second
quarter. We forecast a further contraction to c.-1.00 per cent
in 2Q2016 – hitting new historical lows – from -0.36 per cent
in the first quarter of the year. Our forecast is primarily driven
by the various shocks transmitted from energy shortages,
significant price hikes, lower productivity, low industrial
output, scarcity of foreign exchange and depressed consumer
demand among others. This likely contraction will officially
signal an economic recession.
“Whilst a recovery is expected towards the end of the fiscal
year,” the DLM analysts said, “we highlight that this
expectation is largely hinged on the deployment of fiscal
stimulus to spur growth.”
They noted that this supports the argument for policies
directed towards a positive and stable macro environment
conducive for growth.
Noting that the headline inflation for June 2016 came in at
16.48 per cent, representing an increase of 90bps from 15.58
per cent recorded in the preceding month, they said higher
electricity rates, energy prices and imported items remain key
drivers of inflationary pressures seen during the month.
“We re-iterate that until the underlying drivers of the upward
price movements are addressed, raising rates will be
counterproductive.”
Holding the same position with those at FSDH and DLM,
analysts at Time Economics, also advocated retention of the
MPR. “We do not expect the Monetary Policy Committee of
the Central Bank of Nigeria to tighten rates when its meets
next week in response to the latest CPI data. Having left rates
unchanged in her last policy meeting in May and followed up
with the introduction of a flexible exchange rate regime on
June 23rd, we think the Committee will likely see through
short term inflationary pressures and focus more on growth.
Efforts will be directed towards combating recession and
returning the economy to a positive growth trajectory.
“Secondly, even as we expect benchmark interest rates to
remain unchanged in the face of rising inflation, we do not
think the decision hurt bank earnings very significantly since,
typically, lending rates being charged by the banks tend to be
inflation adjusted,” they said.
Likewise, the Director-General, West African Institute for
Financial and Economic Management (WAIFEM), Prof. Akpan
Ekpo, expected “the MPC to leave all rates the way they are
and allow the implementation of robust fiscal policy with
monetary policy playing an accommodating role for now.”
Particularly, Ekpo said he expected “the MPC to x-ray the
economy within the context of the present recession.”
“Inflation is now 16 per cent hence it is unlikely for the MPC
to raise the monetary policy rate. The so-called Forex market
framework would be examined to access the impact so far.
The new forex regime has increased speculation and raise the
level of uncertainty so the price stability function of the apex
bank remains a challenge. The recession is of a special time –
insufficient demand and structural. If the recession persists
then monetary policy may become ineffective. Fiscal stimulus
is necessary to cushion the adverse impact of the recession.
“It may be too short a time to alter the new Forex framework.
It may necessary to wait for a while to assess its impact,” he
explained.
For former Managing Director of Guinness Nigeria, Seni Adetu,
these are incredibly difficult times in Nigeria, economically.
Adetu said: “All the macro indices that support economic
growth are going in the wrong direction – export earnings,
foreign exchange, inflation, etc. There is such massive
deterioration of our external reserves that investor confidence
which has been waning over the last couple of years is
maintaining that worrisome trend. It is disturbing to see that
the adoption of a flexible exchange rate policy has not yielded
any appreciable benefit in curtailing the erosion of our
currency value, and worse still the gap between the “official”
rate and parallel market remains wide, in spite of the best
effort of the CBN.
The formal announcement this week by the Minister of
Finance that the economy is in recession has perhaps
heightened the tension amongst local and foreign investors
desperate to better understand the direction of our economy.
“Against this backdrop, the Monetary Policy Committee
members have their work cut out this week. I expect that the
challenges around currency rate and availability, or lack
thereof and the run-away inflationary trends will be of
immense focus. I do not necessarily expect they will vote to
change the MPR or CRR, but they should have some
interesting discussion around the liquidity ratio, I suppose.
However, whatever they do, they should be looking to provide
some assurance to the investing and consuming
communities.”
According to him, “Nigerians, especially manufacturers, are
counting on the Monetary Policy Committee to intervene by
pulling the required policy levers needed to safeguard the
Naira from further depreciation. Without the right policy
intervention, the Nigerian economy faces risks of bigger
shortage of foreign exchange and weaker consumer demand.”
However, the Executive Director, Corporate Finance, BGL
Capital Ltd, Femi Ademola, held a contrary view.
According to him, “The current situation is that of liquidity
tightening on both the side of the monetary authority and the
fiscal authority. Although, there are other reasons for the high
inflation, it is clear that liquidity surfeit is not one of them.
Rather it appears that lack of funding for domestic production
and the lack of infrastructure and support structural reforms
are the culprits.”
He further stated that: “While the fiscal authority appears
helpless in resolving the infrastructural challenges, the
monetary authority could help with easing the general
economic pressure through monetary accommodation. It
would therefore be nice to see a reduction in the MPR at the
next MPC meeting.”
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