Weigh­ing Trade-off Be­tween Growth and Sta­bil­ity


The Cen­tral Bank of Nige­ria (CBN) at its Mone­tary Pol­icy Com­mit­tee (MPC) meet­ing last week, de­cided to re­tain key pol­icy tools, with the Mone­tary Pol­icy Rate (MPR) still at 14 per cent, Cash Re­serve Ra­tio (CRR) at 22.5 per cent, Liq­uid­ity Ra­tio at 30.00 per cent, and the asym­met­ric cor­ri­dor at +200 and -500 ba­sis points around the MPR.

The MPC’s de­ci­sion has con­tin­ued to at­tract re­ac­tions from ex­perts. While some sup­ported the de­ci­sion by the cen­tral bank, say­ing mone­tary pol­icy has reached its limit, some held the view that re­tain­ing a re­stric­tive mone­tary pol­icy stance might im­pede ef­forts by the fis­cal au­thor­i­ties to re­flate the econ­omy.

The CBN Gov­er­nor, Mr. God­win Eme­fiele, while field­ing ques­tions from jour­nal­ists after the meet­ing, ex­plained that al­though chang­ing rates might have some pos­i­tive ef­fects, var­i­ous rea­sons were re­spon­si­ble for the re­ten­tion of the pol­icy rates.

“The MPC thinks that eas­ing at this point would sig­nal the com­mit­tee’s sen­si­tiv­ity to growth and em­ploy­ment con­cerns by en­cour­ag­ing the flow of credit to the real econ­omy. It would also pro­mote pol­icy con­sis­tency and cred­i­bil­ity of its de­ci­sions.

“Also, the com­mit­tee ob­served that eas­ing at this time would re­duce the cost of debt service, which is ac­tu­ally crowd­ing out gov­ern­ment ex­pen­di­ture.

“The risks to eas­ing, how­ever, would show in terms of up­stag­ing the mod­est sta­bil­ity achieved in the for­eign ex­change mar­ket, the pos­si­ble exit of for­eign port­fo­lio in­vestors as well as a resur­gence of in­fla­tion, fol­low­ing the in­ten­si­fied im­ple­men­ta­tion of the 2017 bud­get in the course of the year.

“The com­mit­tee also rea­soned that eas­ing would fur­ther pull the real in­ter­est rate down into neg­a­tive ter­ri­tory,” he said, point­ing out that the ar­gu­ment for hold­ing was largely premised on the need to safe­guard the sta­bil­ity achieved in the for­eign ex­change mar­ket, and to al­low time for past poli­cies to work through the econ­omy.

“Specif­i­cally, the MPC con­sid­ered the high bank­ing sys­tem liq­uid­ity level, the need to con­tinue to at­tract for­eign in­vest­ment in­flow to sup­port the for­eign ex­change mar­ket and eco­nomic ac­tiv­ity, the ex­pan­sive out­look for fis­cal pol­icy in the rest of the year, the prospec­tive elec­tion re­lated spend­ing which could cause a jump in sys­tem liq­uid­ity, etc,” the gov­er­nor ex­plained.

He said the MPC wel­comed the move by the fis­cal au­thor­i­ties to en­gage the ser­vices of as­set­trac­ing ex­perts to in­ves­ti­gate the tax pay­ment sta­tus of 150 firms and in­di­vid­u­als in an ef­fort to close some of the loop­holes in tax col­lec­tion, in or­der to im­prove gov­ern­ment rev­enue.

“How­ever, the com­mit­tee ex­pressed con­cern about the slow im­ple­men­ta­tion of the 2017 bud­get and called on the rel­e­vant au­thor­i­ties to en­sure timely im­ple­men­ta­tion, es­pe­cially of the cap­i­tal por­tion in or­der to re­alise the ob­jec­tives of the Eco­nomic Re­cov­ery and Growth Plan (ERGP).

“The MPC be­lieves that at this point, de­vel­op­ments in the macro-econ­omy sug­gest two pol­icy op­tions for the com­mit­tee: to hold or to ease the stance of mone­tary pol­icy,” he said, adding that avail­able fore­casts of key macroe­co­nomic in­di­ca­tors point to a frag­ile eco­nomic re­cov­ery in the sec­ond quar­ter of the year.

“The com­mit­tee cau­tioned that this re­cov­ery could re­lapse in a more pro­tracted re­ces­sion if strong and bold mone­tary and fis­cal poli­cies were not ac­ti­vated im­me­di­ately to sus­tain it.

“Thus, the ex­pected fis­cal stim­u­lus and nonoil fed­eral re­ceipts, as well as im­prove­ments in econ­omy-wide non-oil ex­ports, es­pe­cially agriculture, man­u­fac­tur­ing, ser­vices and light in­dus­tries, all ex­pected to drive the growth im­pe­tus for the rest of the year must be pur­sued re­lent­lessly.

“The com­mit­tee ex­pects that timely im­ple­men­ta­tion of the 2017 bud­get, im­proved man­age­ment of for­eign ex­change, as well as the se­cu­rity gains across the coun­try, es­pe­cially in the Niger Delta and North-eastern axis, should be firmly an­chored to en­hance con­fi­dence and sus­tain­abil­ity of eco­nomic re­cov­ery.” Be­tween Sta­bil­ity and Growth

To FXTM Re­search An­a­lyst, Mr. Luk­man Otunuga, Nige­ria’s on-go­ing mis­sion to di­ver­sify away from oil re­liance, as well as a sharp drop in oil prices, en­cour­aged the CBN to main­tain its key in­ter­est rates at 14 per cent.

Ac­cord­ing to Otunuga, al­though the na­tion still re­mains ex­posed to ex­ter­nal risks, there has been op­ti­mism over the eco­nomic land­scape sta­bil­is­ing, with the im­prov­ing macro fun­da­men­tals fu­elling spec­u­la­tions of a po­ten­tial eco­nomic re­bound by the end of 2017.

“Al­though CBN’s re­peated in­ter­ven­tion has played a sig­nif­i­cant role in the naira’s re­cov­ery against the dol­lar on the par­al­lel ex­change, con­fi­dence over Nige­ria’s eco­nomic re­cov­ery con­tin­ues to play a lead­ing role.

“A po­ten­tial eco­nomic re­bound by year end and fur­ther signs of sta­bil­ity at home may prompt the Cen­tral Bank of Nige­ria to cut in­ter­est rates in the medium to longer term,” he added.

To Afrin­vest West Africa Lim­ited, sta­tus quo was main­tained on all key rates be­cause the com­mit­tee noted that re­cent gains recorded in the eco­nomic land­scape re­main frag­ile and could be dis­rupted if ad­e­quate fis­cal and mone­tary poli­cies are not im­ple­mented to com­ple­ment the re­cov­ery.

“In our view, the de­ci­sion was the most ap­pro­pri­ate op­tion open to the MPC in light of the frag­ile state of the econ­omy de­spite the re­cent im­prove­ments in the forex mar­ket as well as gen­eral price lev­els.

“Given the broad con­sen­sus on the ex­pected out­come of the meet­ing, the im­pact of the de­ci­sions across the var­i­ous mar­kets has been muted,” they added.

In the fixed in­come mar­ket, yields have re­mained el­e­vated de­spite mod­er­at­ing head­line in­fla­tion rate, and so the an­tic­i­pa­tion is that the CBN would likely keep fi­nan­cial sys­tem liq­uid­ity tight – via ag­gres­sive open mar­ket op­er­a­tions (OMO) auc­tions - in or­der to at­tract port­fo­lio flows and main­tain sta­bil­ity in the forex mar­ket.

“With only two MPC meet­ings left for the year, in Septem­ber and November, there is an in­creas­ing like­li­hood that sta­tus quo would be main­tained on all pol­icy rates till the end of the year, given the frag­ile na­ture of the forex mar­ket re­bound and neg­a­tive in­fla­tion sur­prises in the past five months,” Afrin­vest an­a­lysts added.

To Lon­don-based Chief Economist, Africa, Standard Char­tered Bank, Razia Khan, there was lit­tle sur­prise in the de­ci­sion of the MPC to keep all its key mone­tary rates un­changed.

She noted that al­though in­fla­tion had de­cel­er­ated, the MPC com­men­tary still sug­gested that it might be sub­stan­tially due to a base ef­fect, which may not be long-last­ing.

Ac­cord­ing to Khan, what was noteworthy about the MPC out­come was: “First, the rhetoric around the eco­nomic re­cov­ery has changed very sub­tly. It is no longer seen as some­thing that might hap­pen on au­topi­lot.

“Risks to the 2017 re­cov­ery are seen to be more sub­stan­tial. There are on-go­ing con­cerns about the weak­ness of fi­nan­cial in­ter­me­di­a­tion.

“Fis­cal stim­u­lus is viewed by the MPC to be rel­a­tively un­tar­geted. There are con­cerns about the scale of the FG deficit. Re­cov­ery will not be with­out its risks.

“Sec­ond, the unan­i­mous ‘hold’ de­ci­sion of the May MPC meet­ing has now given way to a 6-2 vote in favour of main­tain­ing the cur­rent mone­tary pol­icy stance.

“The de­bate on the MPC is grow­ing, with at least two mem­bers see­ing room for a more ac­com­moda­tive pol­icy.

“Our base case re­mains for Nige­ria’s pol­icy rate to be kept on hold at 14 per cent through to the end of 2017, even as year-on-year in­fla­tion de­cel­er­ates fur­ther.

“This will be nec­es­sary in or­der to sup­port the nascent NAFEX forex regime, es­pe­cially with the pledge to cap Nige­ria’s oil out­put at 1.8mil­lion bar­rels per day.”

Khan ob­served that sta­bil­is­ing the econ­omy re­quires on-go­ing con­fi­dence in the avail­abil­ity of forex, say­ing that given ex­ter­nal pres­sure, the only way to achieve this would be for a mod­est real tight­en­ing of the pol­icy stance.

“In our view, the MPC was cor­rect to avoid the temp­ta­tion to ease pol­icy pre­ma­turely,” she added.

The Direc­tor Gen­eral of the West African In­sti­tute for Fi­nan­cial and Eco­nomic Man­age­ment (WAIFEM), Prof. Ak­pan Ekpo, said the MPC did “the cor­rect thing to have left the in­ter­est rate un­changed”.

Ac­cord­ing to Ekpo, “Right now, we are in a re­ces­sion and mone­tary pol­icy can­not do any­thing. What we need now is more of a fis­cal stim­u­lus and there should be no de­lay in pol­icy im­ple­men­ta­tion. We need struc­tural re­forms now.”

How­ever, Ekpo ad­vised that once the econ­omy comes out of re­ces­sion, the cen­tral bank should con­cen­trate on us­ing mone­tary pol­icy to en­hance growth in­stead of fight­ing in­fla­tion.

But the Chief Ex­ec­u­tive Of­fi­cer of Fi­nan­cial Deriva­tives Com­pany Lim­ited, Mr.. Bis­marck Re­wane, ex­pressed a con­trary opinion, say­ing that what the MPC did was to main­tain a tight­ened mone­tary pol­icy stance at a time when the econ­omy needs liq­uid­ity to stim­u­late ac­tiv­i­ties.

Al­though Re­wane ac­knowl­edged the risk of in­fla­tion­ary pres­sure, he ar­gued that the MPC ought to be more au­da­cious.

Ac­cord­ing to him, the MPC could have sig­nalled its in­ten­tion to start eas­ing mone­tary pol­icy by ei­ther re­duc­ing slightly the CRR or re­strain its squeeze on liq­uid­ity.

“If you are deal­ing with pro­tect­ing the naira, then main­tain­ing the sta­tus quo would be con­sid­ered to be an op­tion. But if you really want to deal with growth, then there would have been the need to direc­tion­ally show that you want to move in that di­rec­tion.

“If you say you can’t do any­thing at this point, then at what point are you go­ing to do some­thing? Then there is no clar­ity on that,” he added.

Re­act­ing to the com­ment by the WAIFEM boss that mone­tary pol­icy has reached its limit, Re­wane in­sisted: “But mone­tary pol­icy can­not can­ni­balise fis­cal pol­icy.

“What you have now is that you are can­ni­bal­is­ing fis­cal pol­icy. Fis­cal pol­icy should be growth ori­ented and pro-cycli­cal. The MPC de­ci­sions are counter-cycli­cal.

“So mone­tary pol­icy can­not be counter-cycli­cal be­cause what is needed as a stim­u­lus to im­prove eco­nomic ac­tiv­i­ties is a pro-cycli­cal stance.

“How­ever, the cen­tral bank has said there are risks, and I agree. But there is a need for the cen­tral bank to be clear as to where must in­fla­tion get to be­fore they start the eas­ing process? We can­not be left in the air.

“So what they have done is to leave a cer­tain amount of mone­tary pol­icy un­cer­tainty as to when the di­rec­tion of in­ter­est rate would change.”

On their part, Lagos-based CSL Stock­bro­kers Lim­ited, noted that things ap­pear to be play­ing out in the CBN’s favour as far as ex­change rates are con­cerned.

Ac­cord­ing to them, re­cent CBN’s pol­icy have closed the gap be­tween the of­fi­cial and par­al­lel mar­ket, keep rates sta­ble, and most im­por­tantly im­prove forex liq­uid­ity.

Ac­cess to for­eign ex­change by Nige­rian banks has im­proved sig­nif­i­cantly since the in­tro­duc­tion of new forex poli­cies by the CBN in Fe­bru­ary this year.


A view of Lagos fi­nan­cial dis­trict

CBN Gov­er­nor, God­win Eme­fiele

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