The Central Bank of Nigeria (CBN) has advised that Nigeria’s fragile growth risks falling back into recession.
Addressing reporters at the end of the bi-monthly Monetary Policy
Committee Meeting in Abuja yesterday, CBN Governor Godwin Emefiele said
“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 are
not activated immediately to sustain it,” he stressed.
To guard against this, the MPC noted that “the expected fiscal
stimulus and non-oil 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 said it “expects that timely implementation of the 2017
Budget, improved management of foreign exchange, as well as
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”.
The MPC of the CBN also expressed concern over
the increasing fiscal deficit estimated at N2.51 trillion in the first
half of this year.
Emefiele lamented “the crowding out effect of high government borrowing.”
He called for “fiscal restraint to check the growing deficit” and
also disclosed that the committee had once again resolved to retain
lending rates at 14%.
The Committee welcomed the government’s proposal
to issue sovereign-backed promissory notes of about N3.4 trillion for
the settlement of accumulated local debt and contractors arrears.
The Committee advised the CBN “to monitor the release process of the
promissory notes to avoid an excessive injection of liquidity into the
system, thereby offsetting the gains so far achieved in inflation and
exchange rate stability”.
On why the MPC chose to retain Monetary Policy Rate (MPR) for so
long, Emefiele noted that “there is a need for a low interest rate
because we know that low interest rate will make it easy for people who
want to borrow money to borrow at low rates, we know it will inject
liquidity into the system but we are saying that inflation at 18.8% and
even today at 16.1% is still considered very high in the light of
studies that have been conducted”.
He explained that “there are acceptable models for computing the
inflation threshold and this models have computed inflation threshold
for Nigeria at a range of between 10%-12%; what that means is that when
inflation rises above 12%, no matter the action that you take to
stimulate growth, it will retard growth.”
Emefiele said the authorities “need to look at how we reverse the
trend in inflation and we’re happy that we have done so from 18.8%-16.1%
and we are hopeful that it will continue to trend downwards and as this
is achieved, we also believe that there is a need to ease rate and also
bring interest rate down”.
Defending the decision to retain interest rate at 14%, Emefiele noted
that “we’re truly not there yet because of the reasons I have stated
but also more importantly because we believe that easing now or reducing
interest rate will pull the real interest rate further into the
negative territory which is a disincentive to investment”. “Those are
some of the fundamental issues,” he added.
A disincentive to investment, he stressed “will hurt our stability
that we have so far achieved in the forex market and there is a need for
us to ensure that this does not happen”.
“That is the rationale and we would continue as much as possible to
continue to provide this explanation. We understand the pain but the
actions of the MPC will be reflected in whatever direction that we think
is good for Nigeria.”
At the end of the meeting, members of the MPC resolved to retain the
MPR at 14 per cent; retain the Cash Reserve Ratio (CRR) at 22.5 per
cent; retain the Liquidity Ratio at 30.00 per cent; and retain the
Asymmetric corridor at +200 and -500 basis points around the MPR.
The Committee is satisfied with the gradual but
consistent decline in inflationary pressure in the domestic
economy, noting ”its substantial base effect,continuous improvements in
the naira exchange rate across all segments of the foreign exchange
market, and considerable signs of improved i nvestments inflow”.
Emefiele said “the Committee welcomed the move by the
fiscal authorities to engage the services of asset-tracing experts to
investigate the tax payment status of 150 firms and
individuals in an effort to close some of the loopholes in tax
collection, towards i mproving government revenue”.
However, the Committee expressed concern about the slow
implementation of the 2017 Budget and called on the authorities to
ensure timely implementation, especially, of the capital portion to
realise the objectives of the Economic Recovery and Growth Plan (ERGP).
Regarding complaints by banks of liquidity constraints caused by the
apex bank’s mop-up activities, Emefiele said he was once there (private
sector banking system), adding that “their business is to complain
because they’re economic agents that are interested in making profit”.
“We, as regulators looking at all the data that confront us, certainly
know that we must be alive to our responsibilities and do our work.”
Doing their work, he said “means we must do what we have done to
continue to achieve the sliding trend in inflation and stabilise the
forex market, that is what we are doing and we will continue to do so”.
On the forex trend the CBN governor the apex bank had “left that now
for the market”. “The market will decide. Gone are the days when CBN
will be seen to be leaning on somebody as to whatever he thinks is the
direction of the market will be,” he said.
However, the CBN, Emefiele said, “remains a player and from
time-to-time, given our sensitivities regarding where we think the
market will be, we would intervene and that is why you are seeing the
level of intervention in the last five months. The intensity of that
intervention will continue”.
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