Nigeria’s Central Bank decided to leave its benchmark interest rate unchanged yesterday, November 22 despite the announcement by the National Bureau of Statistics (NBS) that the country has sunk deeper into a recession.
Analysts say there is little more the Central Bank of Nigeria (CBN) can do to stimulate growth, calling on the government to take on the mantle to pull the Nigerian economy out of recession.
Bismarck Rewane, an economist and CEO of Financial Derivatives Company Limited, said, “It is now over to the “fiscalists” to rejig the economy.”
Godwin Emefiele, the CBN governor, yesterday announced the MPC’s decision to retain interest rates at 14 percent, Cash Reserve Ratio at 22.50 percent and the Liquidity Ratio at 30 percent.
The CBN attributed slow growth in the economy to some undercurrent issues, including foreign exchange shortages, low fiscal activity, high energy prices, and the accumulation of salary arrears, especially at the subnational level of governments, which continued in the third quarter of the year.
“Members noted that those conditions could not have been ameliorated directly with monetary policy instruments, but recognised the need to continue to set monetary policies in such a way as to enable fiscal policy the required space to improve public investment in public infrastructure” said Emefiele.
On inflation, the CBN governor said MPC members are of the view “that the incessant pressure on consumer prices continues to come from structural factors including high cost of power and energy, transport, production factors, as well as rising prices of imports which are equally not directly linked with monetary policy decisions.”
Emefiele added that, “Members stressed the need for a robust and more keenly coordinated macroeconomic policy framework that would restart output growth, stimulate aggregate demand and rein in inflation expectations.”
The MPC’s decision comes a day after the NBS stated that the country’s GDP contracted a further 2.24% in the third quarter, stretching negative growth of 0.36% and 2.06% recorded in the first and second quarters respectively.
“The CBN has exhausted its conventional monetary policy options for improving growth in the Nigerian economy. This is since the causes of weak growth in the Nigerian economy, including militant activities in the Niger Delta, foreign exchange scarcity and reducing the CBN’s policy rates cannot solve low fiscal spending,” said Ogho Okiti, CEO Time Economics.
Okiti explained , “In times of a recession such as these, the CBN is supposed to cut its policy rate. However, reducing the MPR further at this time, will take real interest rates further into negative territory, which will aggravate the foreign exchange scarcity problem. Lower rates are also unlikely to have much of an effect on government spending since the causes of low government spending have more to do with a revenue shortfall and legislative gridlock. “Additionally, the problem of high and rising inflation means that the CBN has little room to loosen monetary policy without completely disregarding its price stability mandate,” Okiti added.
To stimulate economic growth, the CBN governor called on the Federal Government to pay up on debts owed to local contractors to help the economy find growth again.
“These accumulated debts,” Emefiele said, “are adversely affecting economic activity,” and have become a strain on the financial sector.
“There’s no doubt that the size of government’s domestic debt is worsening the economic lull in the country and if addressed, would soften the non-performing loans in the financial sector and help banks lend more, which is key, amid a recession,” said Kyari Bukar, chairman of Nigeria Economic Summit Group (NESG).
Emefiele urged the government to issue promissory notes to contractors to reduce the debt burden and stimulate economic growth. Babatunde Fashola, minister of Power Works and Housing, recently disclosed that the Federal Government owed local contractors about N1 trillion for 200 on-going road projects. Power companies are also owed about N400 billion and many of these represent bad debts on the books of Nigerian banks, constraining their capacity to extend credit and threatening financial system stability.
Nigeria’s economy fell into recession in the second quarter of 2016, after contracting by 0.36 percent and 2.06 percent in the first and second quarters of 2016 respectively. The NBS, however, in its third quarter report released on Monday, November 21, showed that the economy fell deeper into recession, contracting by 2.24 percent, dragged down by significant contraction in the oil and manufacturing sectors of the economy.
“With the current shortage of dollars clearly having a detrimental effect on growth, there is little evidence of any meaningful monetary policy initiative that might be able to resolve this,” said Suleiman Abubakar, executive director, Sterling Bank plc.
Abubakar recalled that a year ago, the MPC said it was getting close to the limit of it decisions. “You cannot try to change a rule at the height of crisis. The CBN should be waiting for the fiscal authority to come on board.”
Nigeria’s MPC decision, which is the last for 2016, was keenly awaited, to see whether the CBN would bow to the third quarter 2.24 percent contraction in GDP and slash interest rates, or maintain a tightening stance in reaction to rising inflation, which rose to an 11-year high in October, at 18.3 percent.
Some analysts had expected some rate easing to spur growth but Emefiele acknowledged that outlook for growth and inflation in the medium term continues to be challenging, but the factors instigating them are largely outside monetary policy.
“Risks remain highly elevated on both price and output but considering the importance of price stability and being mindful of the limitations of the monetary policy in influencing output and employment under the conditions of stagflation, members noted that those conditions could not have been ameliorated directly with monetary policy instruments, but however recognised the need to continue to set monetary policies in such a way as to enable fiscal policy the required space to improve public investment in public infrastructure,” the governor said.
BusinessDay analysis shows that the CBN’s monetary tightening stance has been able to curtail the pace of inflation, albeit month-on-month.
Month-on-month inflation had slowed in the months from July, after the rate hike by 200 basis points to 14 percent from 12 percent.
The CBN, through the anchor borrowers scheme, which boosted crop production, also aided growth in the agricultural sector, which grew 4.5 percent in the third quarter, according to the NBS.
“That is how far Nigeria’s monetary policies can go, the fiscal side must now up its game to rescue the economy from the rut it is stuck in,” said an economist who did not want to be named.
Emefiele also noted that “security agencies would sustain their checks on BDC traders to ensure they observed the terms of their license to operate in Nigeria’s foreign exchange market,” while he dismissed talk that the CBN was working to review the foreign exchange act that had filtered through social media.
Razia Khan, the Managing Director and Chief Economist, Africa Global Research, Standard Chartered, said the clarification on the foreign exchange act was important for investor confidence, “given the rumors that have gripped Nigeria in recent days related to the Law Reform Commission’s review of foreign exchange regulations,” said Khan, who also said it was no surprise the MPC voted to retain all policy rates.
Nigeria’s decision to hold rates is in line with the forecast of two of the 15 economists surveyed by BusinessDay.
Analysts at FSDH Merchant Bank had said “With the latest GDP contraction, it would be difficult for the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to justify an increase in interest rate.”
The CBN hiked rates for the first time this year in July, pushing it by 200 basis points to 14 percent from 12 percent the previous month, as it sought to take down rising inflation.
Inflation blasted past the required thresholds this year, breaking into double digits in February, to 11.4 percent from 9.6 percent in January and has been striding on since then.
Nigeria’s government had said in October that it expected the economy to expand by 0.35 percent in 2016 from 2.8 percent in 2015, because of a bumper rice harvest, even as the International Monetary Fund forecast a contraction of 1.7 percent, the first full-year contraction since 1991
Nigeria’s 14 percent interest rate compares with Ghana’s 22.5 percent, Mexico’s 5.25 percent, Kazakstan’s 12 percent and Egypt’s 14.75 percent, who have all decided in November.
South Africa is due for a policy rate announcement on November 24, while the US Federal Reserve is scheduled to meet on December 14.
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