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The Monetary Policy Committee says the macroeconomic environment in Nigeria remains fragile and that the country could go into recession if the necessary actions to boost it are not taken
THE Monetary Policy Committee, MPC, rose from its Tuesday meeting stating that the overall macroeconomic environment remained fragile. The economy further slowed in the second quarter of the year, making it the second consecutive quarterly less-than-expected performance. The MPC noted that growth had come under severe strains arising from declining private and public expenditures. In particular, it noted the impact of non-payment of salaries at the state and local government levels as a key dampening factor on consumer demand.
According to the communiqué signed by Godwin Emefiele, governor of the Central Bank of Nigeria, year-on-year headline inflation continued to trend upwards, although the month-on-month measure moderated. Demand pressure in the foreign exchange market remained significant as oil prices continued to decline.
Arising from these developments, there were indications that some of the banking sector performance indicators could be stressed if conditions worsen further, the communique said. Specifically, the MPC noted that liquidity withdrawals following the implementation of the Treasury Single Account, TSA, elongation of the tenure of state government loans as well as loans to the oil and gas sectors could aggravate liquidity conditions in banks and impair their financial intermediation role, thus affecting economic growth, unless some actions were immediately taken to ease liquidity conditions in the markets.
Having seen two consecutive quarters of slow growth, the committee recognised that the economy could slip into recession in 2016 if proactive steps were not taken to revive growth in key sectors of the economy.
In the face of prevailing circumstances, the Committee acknowledged that synergy between monetary and fiscal policies remained the most potent option to sustainable growth. The Committee further observed that the impact of the persistent decline in global crude oil prices on the fiscal position of government continues to reflect in rising credit to government.
The Committee also noted that the initial market reaction to the decision by JP Morgan to exclude the country from its Government Bond Index for Emerging Economies, GBI-EM, had largely dissipated as yields soon adjusted to their pre-announcement levels’ adding that there may be second round effects over the next two months as the economy adjusts to that decision.
The committee reiterated its unwavering commitment to naira exchange rate stability despite the pressures. “Mindful of the possibility of diversion of any extra liquidity to the foreign exchange market, the committee urged the Bank to closely monitor the nature and sources of demand pressure in the foreign exchange market to ensure that funds were not diverted to demand for foreign exchange but applied to specific growth-enhancing asset creation lending by banks.”
It further noted that sectors such as agriculture and medium and small scale enterprises, MSMEs, were sectors for rapid generation of productive employment and wealth creation, and must therefore, be painstakingly encouraged.
On inflation, the committee was optimistic that as harvests progress in the coming months, pressure on food prices would gradually recede, while growth enhancing measures would over the medium term have some moderating effect on food prices.
Overall, the Committee expressed optimism that business confidence would continue to improve as the Government continues to unfold its economic plans. In addition, some of the reassuring measures of the administration including efforts aimed at resolving fiscal challenges at the sub-national levels, and the fight against corruption and improving the business environment would unlock the inflow of foreign direct investment.
The committee also underscored the imperative of growing and protecting the country’s foreign reserves and building fiscal buffers in the process of strengthening confidence in the economy, which is essential for promoting growth and stability.
The MPC also observed that despite the TSA, banking system liquidity ratio remained moderate. Consequently, the committee advised on the urgent imperative of banks to aggressively support the efforts of government at job creation by channeling available liquidity into target growth enhancing sectors of the economy such as agriculture and manufacturing. This is with a view to promoting employment creation through conscious efforts aimed at directing lending to the growth enhancing sectors of the economy. The Committee considered that the Bank and deposit money banks, must strive to reverse the slowing GDP trajectory by actively stepping up their efforts in catalyzing the economy with substantial new loans to the target sectors earlier highlighted.
The committee after considering the underlying fundamentals of the economy, particularly the declining output growth, rising unemployment, evolving international economic environment as well as the need to properly position the economy on a sustainable growth path, the MPC decided by a vote of 7 to reduce the Cash Reserve Requirement, CRR, from 31 per cent to 25 per cent while 3 voted to hold. By a unanimous vote, the MPC voted to retain the MPR at 13 per cent.
In summary, the MPC voted to: reduce the CRR from 31 to 25 per cent; Retain the MPR at 13 per cent; retain the symmetric corridor of 200 basis points around the MPR; and retain the Liquidity Ratio at 30 per cent, the communique which was made available to Realnews on September 22, said.
— Oct 5, 2015 @ 01:00 GMT
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