Business
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The Monetary Policy Committee has expressed confidence in the nation’s economy despite the global and internal threats mainly the decline revenue and falling foreign reserve which has eroded the value of the Naira that could derail it
| By Maureen Chigbo | Dec. 8, 2014 @ 01:00 GMT |
DESPITE the troubling decline in oil revenue to the country, the Monetary Policy Committee, MPC, rose from its two-day meeting confident that Nigeria’s economy growth will continue its upwards swing. The MPC based its confidence on the available data from the National Bureau of Statistics, NBS, which indicated that the domestic economy remains strong and resilient in the face of strong global headwinds. This is inspite of the key vulnerabilities that are emerging.
For instance, Real Gross Domestic Product, GDP, was estimated at 6.23 per cent for the third quarter of 2014. Although lower than the 6.54 per cent in the preceding quarter, it was higher than the 5.2 per cent achieved in the corresponding period of 2013. The MPC meeting considered a whole gamut of economic issues ranging from trends in inflation, exchange rates, foreign reserve, gross domestic product, financial and credits markets, employment among other things before reaching its conclusions.
According to the communiqué members of the MPC issued the non-oil sector has remained the major driver of growth, recording 7.5 per cent in contrast to the oil sector, which contracted by 3.6 per cent. Overall, output is projected to grow at about 7.0 per cent in 2014, compared with the 4.2 and 5.5 per cent, recorded in 2012 and 2013, respectively.
The MPC committee made up of top leadership of Banks in the country and Central Bank of Nigeria, CBN, officials in the communiqué after the meeting which started from Monday, November 24, to Tuesday 25, noted that the robust expansion in domestic output in the third quarter of 2014 against the tepid growth in the global economy was anchored by the improved performance in services, agriculture, trade, and industry.
The committee welcomed the impressive output growth performance but cautioned that the continuing insurgency in the North East in combination with other risks could adversely affect the growth outlook. Also it expressed concern over the continued decline in the contribution of the oil sector to growth and urged the National Assembly to speedily pass the Petroleum Industry Bill, PIB, to halt the trend.
It commended government’s efforts to sustain the tempo of the power sector reforms, especially the amortisation of the legacy debt owed to major stakeholders in the power value chain and enjoined the political authorities to fast track the implementation of other complementary measures that would improve power generation and distribution.
On the employment situation in the country, it said that the November 2014 national unemployment survey by the NBS revealed that a total of 349,343 new jobs were created in third quarter of 2014 compared with 259,353 jobs in the preceding quarter. The Central Bank of Nigeria’s development initiative under the N200 billion Commercial Agriculture Credit Scheme, CACS, has created 166,790 jobs since inception in September 2009. The Committee noted with satisfaction that the reforms in the power sector and other complementary policies if followed through; would promote investment and create the needed jobs for inclusive growth.
According to the committee, inflationary pressure moderated across the three measures of inflation during the review period. Consequently, headline inflation (year-on-year) declined further to 8.5, 8.3 and 8.1 per cent in August, September and October, respectively. Core and food inflation decelerated from 6.28 and 9.68 to 6.25 and 9.34 per cent in September and October, respectively.
The deceleration in food inflation was traced to the decrease in the prices of both processed foods (from 4.4 to 4.3 per cent) and farm produce (from 5.3 to 5.0 per cent). The Committee was satisfied with all the measures of inflation were within single digit. However, it recognized the upside risks to inflation in the near-term to include increased spending in the build up to the 2015 general elections, depreciated exchange rate arising from the falling oil prices accompanied by external reserves depletion, and food supply shocks arising from the increased insurgency activities in the major agricultural belts of the country. The Committee was satisfied, as indicated by staff forecasts that headline inflation would remain well anchored at single digit within the band at year-end if the necessary macroeconomic policy actions were taken.
On developments on monetary, credit and financial markets, the MPC said Broad money supply (M2) grew by 4.17 per cent in October 2014 over the level at end-December, 2013, which annualised to 5.01 per cent. The annualised growth rate reflects an improvement over the decline of 6.16 per cent achieved in the corresponding period of 2013 but lower than the growth benchmark of 15.02 per cent for 2014. Net domestic credit grew by 9.09 per cent in October relative to the end-December 2013 level. On annualised basis, net domestic credit rose by 10.91 per cent compared with the benchmark level of 28.5 per cent for 2014. “The sluggish growth in broad money was largely due to net foreign assets, which contracted by 18.74 per cent in October 2014. The tapered growth in money supply also helped in moderating inflationary pressures.
“Interest rates in all segments of the money market showed further moderation between September and October 2014, reflecting persisting liquidity surfeit in the banking system. Average interbank call rate moderated from 10.96 to 10.81 per cent while the collaterised Open Buy Back, OBB, rate moderated from 10.76 to 10.48 per cent during the period. Both rates hovered around the lower band of the MPR during the period,” the communiqué said.
The Committee, however, noted that the structure of rates at the retail end of the credit market did not significantly reflect banking system liquidity conditions as both the prime and maximum lending rates remained largely elevated. The maximum lending rate declined marginally from 25.77 to 25.75 per cent between September and October while the prime lending rate on the other hand increased from 16.44 to 16.48 per cent. The high interest rates notwithstanding, credit to private sector rose by 7.75 per cent during the period. To improve the efficiency of monetary policy, the committee, urged the bank to -ensure that credit levels reflected liquidity conditions in the banking system.
The communiqué said that the bearish conditions in the capital market continued as the equities market indicators trended downwards in the review period. The All-Share Index, ASI, declined by 17.9 per cent from 41,329.19 to 33,962.18 between December 31, 2013, and November 21, 2014. Also, market capitalisation, MC, decreased by 20.1 per cent from N13.23 trillion to N11.24 trillion during the same period. The decline in equities market performance was largely due to increased capital outflows, as some foreign investors sold off, amidst concerns over currency depreciation in the face of the steady declines in external reserves and international crude oil prices.
The communiqué said that developments in the external sector since September 2014, manifested in the buildup of pressures in the foreign exchange market. While the Bank sustained its efforts to maintain the stability of the naira exchange rate at the rDAS window, a considerable degree of weakening was recorded at both the interbank and Bureau de Change, BDCs segments.
“The exchange rate at the rDAS window during the review period opened at N157.31/US$ and closed at N157.32/US$, reflecting a marginal depreciation of N0.01k. To maintain and stabilize the exchange rate at that level, gross official reserves declined from US$40.7 billion on 17th September, 2014 to $36.75 billion at end-October 2014. From year to date, substantial currency depreciation has occurred in comparator oil exporting countries but the naira has depreciated by only 1.74 per cent”, it said.
At the interbank segment, the naira depreciated by N1.75k or 1.06 per cent to $/N165.55 from $/N163.80. In the same vein, the exchange rate depreciated by N1.00 or 1.19 per cent from US$/N169.00 to $/N170.00 at the BDC segment. The depreciation at both the interbank and the BDC segments largely reflected recent demand pressures arising from the falling oil prices and dwindling external reserves. As part of the demand management measures, the Bank in two recent circulars excluded certain import items from the rDAS window. Despite the tight measures, the high demand for foreign exchange has continued unabated, This demand does not seem to have any bearing on the genuine foreign exchange needs of the country, which the Bank stands ready and has the capacity to meet. The current level of external reserves provides approximately 7 months of imports cover.
The Committee noted with satisfaction the deceleration in all the three measures of inflation since September 2014; a development which has provided headroom for policy flexibility and maneuver. The robust output expansion amidst strong headwinds arising from a weakening of the international oil market gives credence to the efficacy of our macroeconomic policy. The Committee also noted that unlike in previous episodes, the current downturn in oil prices is not transitory but appears to be permanent; being a product of technological advancement. Currently, the US which use to be Nigeria’s former major oil export destination now meets on average 80 per cent of its domestic oil demand from local shale oil retorting technology production and exports over 8 million barrels of crude oil daily.
The Committee found credence in the permanency theory of current oil price dynamics in the fact that the political restiveness in the Middle East and North Africa, MENA, region has not created uncertainty in oil supplies as both Libya and Iraq (Southern) have open and strong supply lines in the market. A nuclear deal with Iran could further complicate the situation, opening up the supply space for new oil supplies from Iran.
Available data shows that a number of six-month oil futures are currently signed at below $70/barrel while improvements in technology have driven down the break-even cost of shale oil production to an average range of $52-$70 per barrel. In the light of this development, the Committee is of the view that the oil price benchmark of $73/barrel proposed in the 2015 federal government budget may be overly optimistic, requiring considerable caution on the budget’s revenue projections. A weak public finance may impinge adversely on growth prospects as it shows up in reduction in critical public and private consumption and investment spending.
Without prejudice to this position, the Committee is of the view that the softening crude oil prices could provide necessary leverage for the fiscal authority to reduce budgetary outlays on fuel subsidy and channel such savings to growth enhancing sectors of the economy. The Committee took note of the supportive fiscal stance in this regard and public commitment to take advantage of the low oil price to reduce fuel subsidy spending and liberalise prices as in many emerging economies.
Also, the Committee expressed satisfaction with the recent demand management measures announced by the fiscal authorities to contain pressure in both the goods and money markets and provide some respite in the near term.
Notwithstanding, efforts should be geared towards addressing the binding supply side constraints such as the insecurity, infrastructural, and institutional challenges. The Committee also noted the gradual improvement in labor market condition which resulted in the additional employment of 349,343 in the third quarter of 2014. The dominance of the informal sector in the new jobs profile, suggests the preponderance of underemployment over the unemployment phenomenon, requiring intensification of reforms to unlock the growth potential of the formal sector.
Given the not too impressive fiscal revenue outlook, the Committee challenged the sub-national governments to seize this unique opportunity to reduce reliance on allocations from the Federation Account in funding their operations. To this end, the Committee commended the efforts of some states which recorded unprecedented growth in internally generated revenues, IGRs, in 2013. Consequently, the Committee enjoined other states of the Federation to emulate these states by strengthening their IGR mechanisms with a view to minimising reliance on FAAC allocations with attendant disruptions to their budget implementation arising from dwindling oil revenues.
A major issue considered by the Committee, however, was the declining level of external reserves, which arose from demand and supply constraints. On the supply side, the falling oil price has considerably reduced the accretion to external reserves thus constraining the ability of the Bank to continually defend the naira and sustain the stability of the naira exchange rate. The supply side is further weakened by the commencement of normalisation of monetary policy by the US Federal Reserve following the termination of the third quantitative easing on 29th October, 2014; a development which has accentuated capital outflows. These developments are against the backdrop of considerable loss of fiscal space following from our inability to build sufficient reserves during the boom days.
On the demand side, the pressures in the foreign exchange market were aided mostly by the excess liquidity conditions in the banking system and speculative activities. It has become increasingly worrisome that improvement in liquidity conditions in the banking system, designed to enhance the resilience and stability of the banking system, has not translated to increased credit expansion to the real sector to engender inclusive growth and boost employment. Rather, it has led to an upward pressure in the foreign exchange market and Standing Deposit Facility window of the apex bank while banks continually exercise a cautious approach to lending.
Against this background, the Committee is of the view that the current challenge requires bold policy moves on both the demand and supply sides of the foreign exchange market. Consequently, bold policy and administrative measures in the management of the nation’s stock of foreign exchange reserves have become inevitable in order to align the market towards its long-run equilibrium path.
On this, the Committee reiterated that the Bank remains committed to a stable exchange rate within the limits of available resources and would continue to maintain sufficiently strong level of external reserves to meet its short term obligations and other regular balance of payments commitments. Without prejudice to this commitment, our foreign exchange management framework would have zero tolerance for infractions and would penalize economic agents whose primary objective is to speculate in the Nigerian market.
The Committee is fully aware of the short run implications of a tight monetary policy stance on lending and growth. However, available data indicates that banking system liquidity has been lavishly deployed in pursuit of speculative foreign exchange trading at the short-end of the market. While the Committee remains fully committed to the goal of promoting inclusive growth through lower interest rates in the medium- to long-term, banks as agents of financial intermediation have a critical role to play in the nation’s development process. A banking system with an overly high profit motive negates the core tenets of banking and purpose of a banking license. Under the circumstance, monetary policy must be bold and emphatic on the goals macroeconomic management seeks to achieve and encourage the flow of credit along those lines.
The current situation demands that the Bank confronts the issue of declining external reserves head-on in order to strengthen the value of the domestic currency. Consequently, stabilizing prices and maintaining exchange rate stability and charting a sustainable path for medium to long-term growth are the immediate top priorities. The Committee remains committed to these in order to sustain the credibility of our policies and anchor the expectations of our core stakeholders.
In the Committee’s opinion, a more flexible naira in the face of non-existent fiscal buffers was the most viable policy option at a time of heightened demand pressure for foreign exchange and falling oil prices. The Committee was, therefore, of the view that if it failed in taking the right policy actions now, the market would force the Bank to take more drastic actions in the future with far less foreign exchange reserves. Also, given the level of excess liquidity in the banking system, it becomes imperative for the Bank to address the sources of the foreign exchange demand pressure.
In the light of the above considerations, the Committee was of the opinion that the economy stood to gain by:
Further tightening of monetary policy stance to anchor inflation expectations; and
Allowing some flexibility in the exchange rate to stem speculative activities and depletion of reserves.
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