CBN May Retain Rates To Grow Economy Out Of Recession | Independent Newspapers Limited
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CBN May Retain Rates To Grow Economy Out Of Recession

Sokoto, CBN; Collateral
Posted: Jul 25, 2016 at 4:31 am   /   by   /   comments (0)

Bamidele Ogunwusi


Lagos – The Central Bank of Nigeria (CBN), going into its fourth Monetary Policy Committee meeting this year on July 25 to 26, may need to be cautious of the impact of its decision on the stagnating economy, according to analysts and experts.

Though there are divergent views on whether the monetary regulator should increase or retain rates, there appears to be a consensus that the CBN should retain or hold rates to encourage the real sector grow the economy out of recession.

Prior to Kemi Adeosun, Finance Minister’s declaration that the economy is technically in recession, most analysts were rooting for a hike in monetary policy rate to attract foreign portfolio inflows.

The MPR at 12 percent is seen as negative since official inflation rate as at end May trended 15.6 percent. This, according to economic watchers, makes real yields equally negative, serving as disincentive for foreign portfolio investments. They aver that for the new foreign exchange policy to succeed, the CBN may need greater foreign portfolio inflows.

“The success of Nigeria’s currency liberalisation effort is likely to depend on its ability to attract greater foreign portfolio inflows. Further monetary policy tightening that restores positive real returns is necessary for Nigeria to attract more FX-sensitive, yield-seeking flows. It is also necessary to instill greater domestic confidence in the national currency, the naira,” analysts at Standard Chartered said.

At the end of its May 2016 meeting, the MPC retained the Monetary Policy Rate (MPR) at 12 percent with the asymmetric corridor at +200 basis points and -700 basis points. It also retained the Cash Reserve Requirement (CRR) and Liquidity Ratio (LR) at 22.50 percent and 30 percent, respectively.

However, there seems to be no argument in support of rates cut given the current economic situation but the impending recession in the Nigerian economy, according of experts from FSDH Merchant Bank, support a hold in rates at the current level while the fiscal measures to reflate the economy are implemented.

“The current high double digit inflation rate supports a rate hike. We, however, believe that the MPC and other government agencies will pursue growth and trade-off high inflation”, FSDH experts said.

The global economy faces significant risk from the United Kingdom’s (UK) decision to leave the European Union as the decision has created additional instability in the global economy.

The International Monetary Fund (IMF) revised its global Gross Domestic Product (GDP) growth forecasts downwards by 0.1 percent relative to its April 2016 forecast. The global economy is now to grow at 3.1 percent and 3.4 percent for 2016 and 2017, respectively. The latest forecast as contained in the IMF WEO Update July 2016 edition, which stated that the outlook appears worse for the advanced economies, majorly due to the Brexit.

However, the outlook remains broadly unchanged for emerging and developing economies. The IMF added that the GDP in Nigeria is expected to contract in 2016 because of the lower oil receipts, lower power generation, and weak investors’ confidence. Growth in China and India are also expected to be lower in 2016, compared with 2015.

The weak global economic growth would lead to downward pressure on the oil price.

“The Nigerian economy is moving towards a recession as economic activities have significantly slowed down. The GDP contracted by 0.36 percent in Q1 2016, compared with the growth of 2.11 percent in Q4 2015. The Nigerian economy faces risks from shortage of foreign exchange and weak consumer demand. We expect a higher level of contraction in Q2 2016, when the National Bureau of Statistics (NBS) releases the Q2 2016 GDP figure on August 25, 2016. We believe that the impending further contraction in the GDP is the major risk the economy faces at the moment, and a hike in the MPR will worsen the outlook. A hold decision with complementary fiscal expansionary measures should stimulate the economy”, noted FSDH.

The inflation rate remains on an upward trajectory in 2016, with the momentum driven by both domestic and external factors. The inflation rate in June 2016 shot up to an 11-year high of 16.48 percent, from 15.58 percent in May 2016.

“We expect the inflation rate to remain high and in double digit in 2016. The current and short-term inflation rate outlook is higher than the CBN inflation rate target of 6 percent to 9 percent. This should warrant a policy action in the form of a rate increase. However, the need to stimulate economic growth may prevent the MPC from hiking rates at this meeting. It may trade-off high inflation rate for economic growth”, the experts said.

The pressure on the external reserves remains unabated since the last MPC meeting in May 2016. The external reserves have not received the anticipated boost from the adoption of a flexible exchange rate policy in June 2016. The external reserve is still strongly dependent on oil earnings, which has been inadequate because of the output shortfall.

The 30-day moving average external reserves declined marginally by 0.49 percent from US$26.48 billion at the last MPC meeting to US$26.35 billion as at July 18, 2016. They expect the MPC to adopt a hold decision.

The money supply and credits to the private sector grew in the first five months of the year below the annualised target rates for 2016. This represents a pullback in credit creation because of the perceived business risk in the economy. There is a need for better engagement of all stakeholders to restore confidence in the economy. The broad money supply (M2) increased by 3.46 percent to N20.72 trillion in May 2016 from N20.03 trillion in December 2015; an annualised growth of 8.29 percent. The provisional growth benchmark for 2016 is 10.98 percent, they noted.