MPC: FG Not Conscious of Saving for Rainy Day
Retains policy rate at 14% Creates incentives to boost banks’ lending
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) rose from its meeting yesterday with the verdict that the federal government was not saving for the rainy day, considering the increasing allocations from the Federation Account Allocation Committee ( FAAC) in recent months.
The MPC expressed concern about the liquidity impact of the 2018 expansionary fiscal budget and increasing FAAC distributions due to rising prices of crude oil as well as the 2019 elections- related activities.
The CBN Governor, Mr. Godwin Emefiele, who read the communiqué at the end of the two-day meeting in Abuja, said the committee observed that as the prices of crude oil increased in 2017 and 2018, the monthly allocation to various levels of government also increased.
This, the committee noted, suggested that the federal government was not conscious of saving for the rainy day.
The committee therefore, advised the fiscal authorities to build the buffers, especially now that the prices of crude oil is relatively high.
The MPC noted with satisfaction, the fourth consecutive quarters of growth of real Gross Domestic Product (GDP) and the positive growth outlook in the domestic economy.
According to the committee, this was shown by the sustained improvement in the manufacturing and non-manufacturing indices in the second quarter of the year.
The MPC commended the approval of the 2018 budget, and called for an accelerated implementation to further support the fragile growth recovery.
The committee also called for sustained implementation of the Economic Recovery and Growth Plan (ERGP) to further stimulate output growth.
It also noted the sustained moderation in inflation pressure, especially the headline inflation as well as stability in the foreign exchange market.
However, the MPC expressed concern on the threat posed by incessant herders-farmers’ crisis in some key food producing states, adding that the negative impact on some key food supplies chain, will continue to exact pressures on food prices.
For the 12th consecutive time, the committee retained the Monetary Policy Rate (MPR) at 14 per cent, and Cash Reserve Ratio (CRR) at 22.5 per cent.
It also retained the Liquidity Ratio at 30 per cent and the asymmetric corridor at +200 and --500 basis points around the MPR.
Emefiele explained that seven of the 10 members at the meeting voted in favour of the retention of the policy rate at 14 per cent, while two opted for a reduction, just as one member was in favour of hiking the rate.
The committee, he stated, strongly considered the option of tightening, believing that doing so would curtail the threat of a rise in inflation, even as the injection from the fiscal authorities will still provide the economy with substantial liquidity.
“Notwithstanding the deceleration in headline inflation, the current double digit inflation remains above the bank’s six to nine per cent target rate. In addition, the committee is of the view that tightening will help stem the tide of capital flow reversal in the face of sustained monetary policy nominalisation in some advanced economies.
“This, the committee believes, will rein in inflationary pressure and moderate inflation rate to single digit levels, increase real interest rate, build investors confidence and further stabilise the country’s exchange rate.
“On the contrary, the committee is of the view that raising interest rate at this time will weaken consumption and raise the cost of borrowing to investors in the domestic economy.
“In addition, the decision the policy will trigger the re-pricing of financial assets by money deposit banks and further constricting to the real sector that will promote non inclusive growth without development,” he said.
According to him, in considering the option of loosening, the committee assessed the potential effect of stimulating aggregate demand through lower cost of capital, adding that this could stimulate consumption and aggregate demand.
“The committee, however, considered its potential relevance, taking into account, the expected liquidity injection from the 2018 budget, and increased FAAC disbursements and election related spending ahead of 2019 general elections.
“If this cristalisis, it will increase inflationary and exchange rate pressures as well as return interest rates into trajectory. Moreover, lowering policy rate may not translate to an automatic reduction in market rate due to poor transmission mechanisms
“The committee is also of the view that loosening will reverse the gains already made with reduced importation which has strengthened the current account balance, and lower bank risk appetite and possible rise in NPLs which could negatively impact on the banking industry stability.
“In the discussion for a hold, it was noted that risk to the macroeconomic and financial environment appears fairly balanced with improvement in output growth and inflation,” he stated.
The argument in favour of maintaining the current policy stand, he added, was to monitor the magnitude of the liquidity impact of the fiscal injections and elections- related expenditures ahead of the 2019 polls.
He disclosed that the committee decided to initiate a novel way of incentivising the Deposit Money Banks (DMBs) to increase lending to the real sector.
The CBN governor noted that credit to the sector had decreased in recent times, adding that the MPC
deliberated extensively on what could be done to encourage banks to increase credit.
“At this meeting, we found a somewhat improvemnt which is gratifying but we feel that we must still do what we need to do. Two approaches were considered,” Emefiele said.
The first approach, where we said, in order to achieve the objective of lowering interest rate particularly to those priority sectors--manufacturing sectors, agric sector that we will encourage large corporates to issue commercial papers to the market and there will be a memorandum that will detail explanations of what they are going to do with that money.
“In order to complement the effort of the banks, we will expect that these commercial papers will come at low rate at single digit of 9 per cent or below that, and for long tenor at a period of seven years with a specific purpose for that loan.
If the central bank sees those kind of notes in the market, we will complement the effort of the banks through a mechanism to support that bank that lends to
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