FG optimistic of recovery in Q4, but analysts disagree

… MPC retains benchmark interest rate at 11.5%

Nigeria’s central bank on Tuesday after the two-day Monetary Policy Committee (MPC) meeting in Abuja retained the benchmark interest rate at 11.5 percent, while sounding optimistic of economy recovery in the fourth quarter (Q4) of 2020.

The economy is expected to recover from recession by the end of 2020, while inflation is projected to moderate by the end of first quarter of 2021, Godwin Emefiele, governor, CBN, who announced the decision on Tuesday, said.

In reaction, analysts in the financial services sector disagree with the CBN. “They are very optimistic that inflation will moderate in 2021, because of the harvest. I do not think that will happen. I think that the impact of pass-through effect of exchange rate scarcity will also hold inflation. So, we see inflation going to 16 percent, and that will make interest rate to change its position at the next meeting,” Bismarck Rewane, CEO, Financial Derivatives Company, said.

The 10 members of the committee present at the meeting unanimously voted to retain the Cash Reserve Ratio (CRR) at 27.5 percent, liquidity ratio at 30 percent and the asymmetric corridor around the monetary policy rate at +100 bps/ -700bps.

“Little surprise in the CBN’S decision to keep all parameters on hold at its November meeting, given the recent acceleration in inflation,” Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said.

The CBN still attributes the rising inflation to nondemand factors, and expects some improvement in food prices with the harvest, and better security, she said. The CBN sounded an optimistic note on the recovery trajectory of the economy, predicting that Q4 2020 GDP growth would likely improve.

“Of greatest relevance for markets – not only was there little adjustment in monetary policy parameters that might lift market interest rates from current low levels, but the CBN reiterated its commitment to FX stability, as other reforms in fuel pricing and the power sector proceed. The overall read on this supports our view that we should expect little in the way of any devaluation intent on Nigeria’s official FX markets in the near-term,” Khan said.

Committee’ s considerations remain focused around tailwinds impacting upward pressure to domestic prices and key headwinds to output growth. The committee noted that inflation continued to be driven by supply side disruptions arising from Covid-19 pandemic and other legacy factors. Key among these are security challenges in some parts of the country, increase in food prices and recent hike in pump price and electricity tariff.

Nnamadi Nwizu, co-managing partner, Comercio Partners, said, “Most of us did not really except any action from the MPC. Secondly, it was instructive to note that Emefiele

totally seemed to ignore the FX crisis in the parallel market that we are facing. No measure was said on how they are going to stem that pressure. For inflation, he talked about structural issues, logistics, supply chain issue, power and Covid-19 pandemic. I would have expected that they talked about the currency, because it is a big issue.”

Concerning recovery from recession next month, Nwizu said, “I believe that they are optimists. I think the big chunk of the work will lie much on the fiscal side. I think the monetary policy side is almost at its end. It is too optimistic to expect that everything will disappear by next month. We need to see what actions they will take and when budget will get approved to see how things will plan out starting from next year.”

Emefiele noted that total gross credit to the economy stood at N19.54 trillion as of November 13, 2020.

Responding to this, Rewane said, “N19 trillion as a percentage of total GDP of 155 trillion is not going to have an impact significantly on GDP and output growth. Nominally, it is okay but in terms of impact, it is not going to change the outcome.”

The coordination between fiscal and monetary policy to accomplish what is set out is quite interesting, he said .“i think both the fiscal and monetary authorities are too optimistic about the outcomes. i think that, yes, we will recover in 2021, but it is extremely optimistic to think that by next month, and don’t forget that quarter you had the #ENDSARS. To me, recovery will take slightly longer,” he said.