The MPC and Encouraging Non-Oil GDP Growth | Independent Newspapers Limited
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The MPC and Encouraging Non-Oil GDP Growth

Posted: Mar 16, 2016 at 1:00 am   /   by   /   comments (0)

Temitope Oshikoya

The Monetary Policy Committee (MPC) is cut between the hard rock and the deep sea. Inflation in February is likely to be much higher than originally anticipated given the volatility in the parallel market during that month. The huge differential between the parallel and interbank rate in February and recent fuel scarcity would likely result in significant one-off step increases in inflation.

The MPC should be looking for signs as to whether or not this is a one-off temporary surge in inflation as the exchange rate differential has narrowed in March. Inflation numbers for March and April would provide the clues. This would likely make the MPC to hold on the MPR at 11% at this meeting.

While several analysts have focused on the year-on-year growth of the overall GDP growth, the real non-oil GDP growth rates for Q4 2015 were not that bad, most were above 3%, especially when compared sequentially with Q3 2015. While the oil sector and construction sub-sector posted poor growth rates, Manufacturing, agriculture, and key services sectors of education, trade, financial services, and telecoms posted decent numbers, which suggest some semblance of economic stability in Q4 of 2015.

These non-oil GDP growth rates contradict the prevailing avalanche of economic pessimism. The real growth rates need to move higher though for a recovery phase to be well established, and fiscal spending from April with the passage of the budget should help, especially the construction sector.

Oil prices have rebounded sharply from their January lows as the bottom appeared to have formed. It is estimated that U.S. oil rig counts reached a 2009 low at 382. We should, however, expect some retracements from recent rally. Recent oil price rally should help the oil sector, but we need to worry about oil production not meeting budget estimates.

It will be interesting to see what Q1 2016 numbers would show for the non-oil sector to confirm the relative economic stability or further slippages before the MPC decides on the next course of action on MPR.

The CBN is probably weighing options on the exchange rates in view of the fiscal constraints. Given the preference of the fiscal authorities, however, the official exchange rate would likely stay the same at this MPC meeting. There may be some pronouncements relating to some limited flexibility on administrative controls.

Within the context of the monetary policy trilemma, the CBN hands are tied on the naira exchange rate by the fiscal authorities, on the MPR by the stagflation indicators and its accommodative monetary policy stance, on the CRR by the rising NPLs and banks fragility due to exposure to the oil and gas sector, which leave basically only administrative controls tools to maneuver on.

For those who think that the monetary trilemma proposition is simply a theoretical construct, they should read the piece on China trilemma by Ben Barnanke, former chairman of the U.S. Federal Reserves.