July 9, 2018/CBN
- ADAMU, EDWARD LAMTEK
The May 2018 Monetary Policy Committee (MPC) meeting held against the backdrop of continued relative improvement of the global and domestic economic conditions. In spite of geopolitical tensions and trade issues, the outlook for global output growth remains positive. This outlook is essentially powered by widespread financial accommodation, investment recovery in advanced economies and improved commodity prices and export demand in emerging markets and developing economies (EMDEs). Beyond 2018, particularly first-half of 2019, global economic activity is expected to remain fairly robust on account of favourable market sentiments, loose financial conditions and expansive fiscal actions in advanced economies, particularly the United States. In the domestic economy, output recovery has remained firmly on track and inflation continues to trend downwards. Both developments are linked to, and greatly influenced by the sustained relative stability in the naira exchange rate.
At the May 2018 meeting of the MPC, I voted to retain all the policy parameters based on my assessment of developments since the current cyclical upswing began, and the challenges I see in the short- to medium-term.
My main considerations are outlined in the rest of the statement.
Although current global economic conditions appear to portend a favourable short-term outlook for oil prices, we have learned from experience that upswings in crude prices unwind, most times, sooner than forecasts suggest. There is no doubt, the recent rally in prices has had a positive impact on external reserves accretion and boosted the economy’s resilience and investor confidence. Partly as a consequence, inflows, especially of portfolio investment improved.
However, by their nature, such inflows are susceptible to sudden reversals; this
reality needs to be factored into policy considerations and actions today. In
effect, we need to build buffers on both fiscal and monetary sides in
preparation for a possible downturn. In the same vein, regulatory buffers are
needed to strengthen the capacity of banks to withstand a shock, should there
be one.
In the domestic economy, recovery remains firmly on course with real GDP
growth of 1.95 per cent in Q1, 2018. As shown by the latest data from the National Bureau of Statistics (NBS), the growth momentum appears to be broad
based – both oil and non-oil outputs grew in real terms during the quarter. The
outlook appears even stronger, on the assumption that inflation continues to
trend downwards, the exchange rate of the naira remains stable and supply of
foreign exchange for needed imports remain unconstrained. We equally cannot
discount the role of the CBN’s interventions in the growth poles as well as
government’s investments in infrastructure.
Headline inflation continued to decelerate in April 2018. Year-on-year, the
headline inflation index rose by 12.48 per cent compared to 13.34 per cent in
March. Food and core indices similarly rose by 14.80 and 10.92 per cent,
respectively in April 2018, compared with 16.08 and 11.18 per cent, respectively
in March. However, on month-on-month basis, both food and core inflation rose
in April. In fact core inflation rose consistently from January to April. Importantly,
at 12.48 per cent, the year-on-year headline inflation is still considerably higher
than the policy reference range of 6.0 – 9.0 per cent. While not downplaying the
marked deceleration since February 2017, it is to be noted that further
moderation is needed, just as a reversal of the trend in the month-on-month
core and food price changes remains an imperative for macroeconomic
stability. Economic growth and financial stability could benefit tremendously
from much lower levels of inflation.
Currently, the outlook for inflation in the rest of the year appears largely
uncertain owing to the likely surge in domestic liquidity arising mainly from
expected fiscal injections and election-related spending. At about N9.0 trillion,
the 2018 Appropriation passed by the National Assembly promises to be highly
expansionary. This is particularly so as a sizable portion of the budget, as is,
would have to be deficit-financed. In addition, the payment of contractor
debts, which is quite desirable from the standpoint of growth and financial
stability, and the prospects of a new minimum wage down the road, somewhat
further complicate the outlook for domestic liquidity. When these likely fiscal
injections are taken into account, the outlook for inflation that emerges
becomes scarier.
The Naira exchange rate continues to be an important influence on consumer
prices and output recovery. Stability in the naira exchange rate has been
sustained through appropriate policies and reforms of the exchange rate
market aimed at improving the supply of foreign exchange and reduction of
speculative and frivolous demands. Consequently, Nigeria’s stock of external
reserves continues to grow on account of reduced imports, increased
petrodollar inflows owing to more favorable oil prices and uninterrupted crude
production, and increased autonomous inflows through the Investors’ and
Exporters’ foreign exchange (I&E) window.
Though measured, there have been some improvements in the banking system.
Deteriorations in financial soundness indicators have been halted, and in some
cases reversed. For example, industry return on asset (ROA) and return on
earnings (ROE) rose quite significantly to 21.57 and 2.14 per cent, respectively, in
April, from 11.78 and 1.28 in February 2018. Likewise, the non-performing loans
(NPLs) ratio moderated slightly in April. These positive developments are broadly
connected to the improvement in the macroeconomic conditions including
stable exchange rate and declining inflation. Interestingly, banking system
stability is required for proper financial intermediation (including credit flow to
the real sector) which is needed to support recovery in output. The feedback
causation between the banking system and the real economy has to be
carefully managed always and especially so during this (recovery) phase of the
economy’s business cycle.
Therefore, from a financial stability standpoint, inflation threats or risks to the
naira exchange rate stability are to be mitigated upfront in order to sustain and
deepen the resilience of the industry. In my view, the expected surge in liquidity
and likely retrenchment in inflows on account of some external developments
appear to be the most potent threats to domestic economic and financial
stability in the short- to medium-term. In addressing these risks, policy
coordination is key. While public spending is needed to re-invigorate economic
growth, care must be taken to ensure that its essence is not defeated by unintended consequences. Proper coordination of monetary and fiscal policies
reduces uncertainty, thereby allowing for optimal deployment of instruments.
Like I stated in my April 2018 Statement, these threats call for a forward-looking
and cautious approach to monetary policy. I see clearly the need for a tight
monetary policy stance at this time to rein-in adverse price expectations. I
equally see the need to continue to give economic growth some space to
thrive, which leaves me rather hesitant to opt for further tightening. Nevertheless,
in voting to hold, I am persuaded that the current stance of policy is adequate
to sustain the trends in major indicators towards their desired levels.
Overall, I voted to retain all the policy parameters at their current levels.
That is:
- MPR at 14.0 per cent;
- CRR at 22.5 per cent
- Liquidity Ratio at 30.0 per cent; and
- Asymmetric corridor at +200 and -500 basis points around the MPR
- ADENIKINJU, ADEOLA FESTUS
In the meeting of the MPC in April, I voted for a hold of all the existing parameters of monetary policy. In the May Meeting, while there have been
some changes in both domestic and global economies, based on Staff
Presentations, on the probability of balance given the current and future
probabilities of occurrences of events, I am fully persuaded to retain my last
voting pattern which is to continue with existing monetary policy rate and other
monetary parameters.
International Developments
The global economy in a broad sense continues to post positive developments
in many areas. Global output growth based on the IMF World Economic Outlook
remains generally robust across the regional groupings. Global inflation remains
subdued, although noticeable pressures are building up across advanced
economies and emerging markets and developing economies, with sub
Saharan African economies as the only exception. Volatility in major stocks
markets remain amidst uncertainties in global economic and political directions.
USA and China reached tentative trade agreements to forestall possible trade
war. Oil prices remain high, partly due to rising global economic growth as well
as regional tensions and anticipated tightening of the global oil market supply
with American planned sanctions on Iran. All of which may keep the price of oil
in current bullish position.
However, there are headwinds in the global economy that should be of
concern to Nigeria. First the terms of agreements between China and USA
requires the former to substantially increase its imports of American goods,
especially, energy and agriculture, which may impact on Nigeria’s oil export
market. Second, there is the expectation that Saudi Arabia and other countries
with spare capacity may expand oil production to make up for the potential loss
of supply from Iran and Venezuela. Third, the current quota arrangements put in
place between OPEC, Russia and some Non-OPEC countries to control oil supply
may be relaxed leading to higher global oil supply.
The rising interest rate in
America may lure portfolio investors away from emerging economies, especially
Nigeria in a pre-election year. Staff presentations already show some reverse
capital movements. Nigeria stock market has suffered a hit since the beginning
of the year. In my view, the global economy remains uncertain, the prospects of
trade wars remains real, the tendency towards unilateral rather than multilateral
trade policies may moderate global economic growth rate. There is also in my
view, an upper limit to which oil prices will trend.
Domestic Developments
The domestic economic fundamentals remain largely positive and encouraging.
According to the data released by the NBS, First quarter 2018 GDP grew by 1.95
compared to -0.91 % in same period in 2017, although a slight decline from the
4th quarter of 2017. Growth is driven by agriculture, mining and quarrying, manufacturing, transportation and insurance and financial and insurance.
Foreign reserves continue to climb up although rate of accretion declined
between the last and current MPC meeting. The declining accretion in my view
is a reflection of a number of factors, first, reluctance of some portfolio investors
to roll over their investment in the economy and actually exiting the economy,
second, the existing contractual arrangements in the oil sector in favour of
Production Sharing Contract (PSC) as against the Joint Venture (JV) agreements
will continue to reduce government take as more oil production comes from
offshore and through the PSC. Hence, government may have to negotiate an
improved fiscal regime in the petroleum sector. Third, I am also concerned that
the rising fuel products imports and the under recovery will continue to impact
negatively on the fiscal position of the country.
Moreover, domestic inflation continues to trend downwards. All measures of
inflation, Headline, Core and Food inflation declined broadly compared to the
last MPC meeting. Inflation fell from 13.34% in March 2018 to 12.48% in April 2018.
The trending of inflation towards the growth consistent inflation level for Nigeria
estimated by the Bank is good news. However, the rate of decline in food
inflation remains fairly sticky at 14.80%. A major factor in my view is the present
security situation in the main food producing regions of the country, as well as
imported food inflation which actually rose from 16.08% in March 2018 to 16.17%
in April 2018. . This is another issue for government to urgently address. We must
reduce our dependence on imported food items by boosting local food production and addressing all the immediate challenges impacting on food
supply response.
The exchange rate markets remain stable, with small appreciation in the value
of the naira. The Bank must ensure convergence of the markets as soon as
practicable to allow for more transparency in the markets as well as provide
confidence to market operators.
The balance sheet of the banking sector has also improved relative to the last
MPC meeting. However, it is clear that banks are more eager to strengthen their
balance sheet than commit to new credits. The continuous preference of banks
for relatively safer fixed income assets rather than direct lending to the real
sector of the economy remains a critical challenge to current policy stance.
Simply tinkering with the MPR at this current state of the banking sector may not
simply translate into more credit for the economy unless there is a way to
creatively ‘de-risk’ the targeted real sectors of the economy. In general the
banking system witnessed growth in aggregate deposits in the first quarter of
2018, however, there was no corresponding increase in credit. This implies that
more liquidity in the system may not mean more credit as is widely believed in
the short term. The high operating expenses in the banking system need to be
carefully addressed to reduce the high cost environment which in my view
impacts more on lending rates than even the MPR.
The stock market continues to soften in spite of the relatively good performance
reported by many quoted companies. This suggests profit taking and capital
outflow especially by portfolio investors. This is a critical warning signal to me of
the possible trend in the coming months as elections uncertainty sets in.
I am also concerned that the 2018 appropriation bill has been increased by the
National Assembly from N8.612 trillion submitted by the executive to over N9.120
trillion. Although the President has not assented to the bill, however, I am not
only concerned by the overly high optimistic revenue expectations, the fact
that the country is currently operating the 2017 budget, which will be overlaid by
the 2018 budget when it becomes operational, the expected liquidity surfeit in a
year that is both a pre-general election year, party primary elections, and when
two critical state elections will be conducted, persuade me that it is better to
defend the current gains from existing tight monetary policy stance, which is
good for the economy in the medium term than to lower policy rate. We must
send strong signal to the economy of the CBN commitment to monetary and
exchange rate stability, which will allow economic agents to make rational
decisions. The current foreign reserves though remains high however may suffer
significant loss from expected reversal of capital outflow if investors outlook
turned negative.
As I watch for the right opportunity for gradual relaxation of monetary policy
from existing stance in order to contribute to growth and reduce current high unemployment rate, the many uncertainties in the global and the local
economies in the next few months weigh heavily in my mind as to their impacts
on inflation expectations and capital outflow. I prefer to hedge my bet in favour
of sustaining current monetary and exchange rate stability than take a sharp
leap into the unknown with potential negative outcome. As we go further into
the year, the fiscal behaviour of the government and the management of the
electoral process will show whether previous spending patterns in previous
elections will likely change.
I continue to support a creative way to encourage credit creation and reward
banks that actively lend to the real sector of the economy rather than take
positions in safer havens in fixed interest security.
Hence I vote to maintain existing policy stance:
- Keep MPR at 14 per cent
- Maintain CRR at 22.5 per cent
- Keep asymmetry corridor at +200 to -500 basis points around the MPR.
AHMAD, AISHAH
Introduction
The May 2018 MPC meeting held against the backdrop of gradual economic
recovery given four consecutive quarters of positive GDP growth, coupled with
steady decline in inflation, stable exchange rate and a positive outlook for the
Nigerian economy in 2018.
Whilst macroeconomic fundamentals were headed in the right direction,
inflation was still above its long run target and there are global and domestic
headwinds which appear increasingly within sight. These developments were
key considerations for policy decisions at the May MPC.
Domestic GDP growth continues to strengthen, at 1.95% in the first quarter (Q1) of
2018, much higher than a contraction of -0.52% in Q1 of 2017.
Though the Q1 2018 figure is slightly lower than previous quarter GDP growth of 2.12%,
continued optimism of a positive outlook for the rest of the quarters is not
misplaced given 11 months consecutive increase in the Purchasers Managers
Index (PMI), and a positive output forecast by the IMF of 2.1% for 2018. Global
growth prospects also remained strong, even in the face of potential negative
effects of increased trade protectionism on global growth and inflation.
Headline inflation declined for the 15th consecutive month to 12.34% in April
from 13.34% in March 2018 according to recently released data from the National Bureau of Statistics.
This has been driven by relative stability in the exchange rate whilst food and core inflation at 10.9% and 14.80% respectively,
in April 2018, also continue to moderate. Potential risks to the positive trend for
inflation include the ongoing implementation of the 2017 budget, substantial
implementation of the 2018 Federal budget within a limited time frame; and the
2019 election season, which have historically had some inflationary impact.
External sector indices retained their positive trajectory given relative stability in
the exchange rate and further accretion to foreign reserves, albeit at a slower
pace. Rising crude oil prices – from US$69/b in March 2018 to US78/b in May 2018
and committed interventions by the CBN have been largely responsible for
exchange rate stability even as we must brace ourselves for this resilience to be
tested. In view of the continued increases in interest rates by the US Federal
Reserve, a reversal in foreign portfolio investment may occur, as has been the
case in a number of emerging markets. This could immediately put pressure on
the exchange rate, a situation that would be better managed with healthy
fiscal buffers and a more diversified source of foreign exchange over the long
term.
Policy rate hikes in the US and other advanced economies increase the
likelihood of these reversals. Yields on the US 10 year treasury notes crossed the
3% mark in April 2018 for the first time in four years, whilst further monetary policy
rate hikes are expected through 2018. These higher rates in the US, coupled with reducing supply of Nigerian sovereign debt instruments (as the fiscal authorities
restructure the debt stock) amidst slightly declining yields, have led to mild
foreign portfolio flow reversals which are bad for exchange rate stability
particularly in the short term. Thus far, the CBN has been successful in meeting
foreign exchange demand and defending the Naira via its reserves. However, it
is expected that the reserves will take a further hit should portfolio investors react
to global yields rising much further.
The recent US$2.5 billion currency swap deal between the CBN and People’s
Bank of China in addition to the CBN’s other initiatives, is expected to help
reduce the pressure on the exchange rate in this respect. Also, the continued
rise in crude oil prices presents an opportunity to strengthen our fiscal buffers in
view of the inherent volatilities in commodity prices and external sector
vicissitudes.
The economic recovery is slow to reflect on the financial system; as banking
sector Non-Performing Loans (NPLs) concentrated in a few sectors, remain a bit
higher than we would like; whilst credit to the private sector contracted by 0.16
per cent in April 2018, compared to the provisional annual growth benchmark of
5.64 per cent. Bank lending rates also remained significantly high – all indicative
that the banking industry requires more impetus to substantially reflect the
benefits of the ongoing recovery. Thus, the monetary authority must work with
the relevant financial institutions to entrench innovative measures to safely increase credit to the real sector. In addition and as a matter of urgency,
prompt settlement of outstanding contractor arrears as earlier promised by the
Federal Government will significantly moderate asset quality pressures and
further improve resilience of the financial system.
The fiscal rebalancing going forward is commendable; whilst the growing total
sovereign debt stock must be prudently managed, efforts at restructuring
domestic versus foreign debt stock are applauded, especially as it portends to
reduce debt service costs, reverse crowding out in domestic debt markets, and
improve the fiscal financial condition. Low fiscal buffers, delays with passing the
2018 budget (including the supplementary budget), unspent balance of 2017
budget and 2019 election activities are imminent headwinds mentioned earlier.
Granted, some spending will stimulate growth; but, excess spending beyond the
economy’s absorptive capacity has potential negative consequences,
particularly with respect to inflation.
Policy Decision
The positive trajectory of key economic variables such as growth, inflation and exchange rates is gratifying. However, we must keep our eyes on further threats to these gains, either in the form of a potential US-China Trade War, inflationary fiscal shocks, or flow reversals from actions by the US Fed. Although a further tightening of the monetary policy stance is not out of
place at this time, an increase in the policy rate is not absolutely necessary to maintain this vigilance.
Thus, in view of the above, I vote to maintain the MPR at 14%; Cash Reserve Ratio at 22.5%; Liquidity Ratio at 30% and Asymmetric corridor at -500 and +200 basis points around the MPR.
- ASOGWA, ROBERT CHIKWENDU
Decision:
At this May 2018 meeting of the Monetary Policy Committee, I vote to hold all
parameters as they are.
- Retain the MPR at 14.0 percent
- Retain the CRR at 22.5%
- Retain the Asymmetric Corridor at +200/-500 basis points and
- Retain Liquidity Ratio at 30.0%
My decision follows careful considerations of the domestic and international
economic outlooks as well as emerging risks to these outlooks all of which
warrant that monetary policy rate should remain unchanged for now. On the
domestic outlook, the key issues are the current levels and expectations of
inflation, the current levels and forecasts of GDP as well as the domestic
exchange rate trend. On the international outlook, the official interest rate
changes in some countries abroad, the growth forecasts as well as the
inflationary trend are the issues of note. There are also emerging downside risks
of the outlook especially at the domestic front including the mixed performance
of banking sector indicators and the increasing public debt levels, both with
strong potentials of reversing any remarkable gains of the current monetary
policy stance.
Domestic Economic Outlook:
First, the trend decline in headline and core inflation continued with headline
inflation decreasing from 14.33% in February 2018 to 13.34% in March 2018 and
further to 12.48% in April 2018 while core inflation lowered to 10.92% in April 2018
from the 11.18% level in March 2018. This decline which resulted in positive real
interest rates for the first time in several months would ordinarily provide some
space for monetary policy easing. Given that the medium term risks to the
inflation outlook is broadly tilted to the upside, with increasing inflation
expectation arising from expected elections spending and the massive 2018
budget injections to the economy also expected in the latter parts of the year,
a decision to maintain the monetary policy rate while monitoring developments
in the near-term is most appropriate.
Second, GDP growth momentum has been maintained in the first quarter of
2018 following exit from recession. Provisional GDP estimates for 2018 first quarter
from the National Bureau of Statistics indicate that the economy grew by 1.95%
which is good even though slightly lower than the revised 2017 fourth quarter
GDP growth at 2.11%. Of particular interest is the solid non-oil growth especially
the manufacturing sector which picked up massively in the first quarter of 2018
recording a 3.39 percent growth, compared with 0.14 in the fourth quarter of
2017. This uptick in output is supported by the CBN computed manufacturing
and non-manufacturing Purchasing Managers Index (PMI). In April 2018, the manufacturing and non-manufacturing PMIs stood at 56.9 and 57.5 index points
respectively which indicate expansion in the economy and for the 13th and 12th
consecutive months respectively. These are positive signs showing that
confidence remains high and pointing to positive expectations on growth
prospects and realization of business expectations which are not necessarily
predicated on an expansionary monetary policy.
A third factor is the significant external reserves build up which continues to
provide additional buffers to the domestic currency market. With the external
reserves rising to US$47.50 billion by mid May 2018 from US$39.35 billion at end of
December 2017, the Naira has remained relatively stable against the dollar
even though some temporary demand pressures were noticed in the later part
of May 2018. Clearly this relative stability in the Naira reflects the net foreign
exchange flows in the economy which has remained positive because of the
improvements in the macroeconomic fundamentals, the improved current
account position and the existing monetary policy regime.
International Economic Outlook:
There has been a continued divergence in the magnitude of monetary policy
rate adjustments among key developed economies. In March 2018, the United
States Federal Reserve raised policy rates by 25 basis points to 1.5-1.75 % raising
its expectations for two further hikes in 2018 while the Bank of England has
signaled a possible further rate hike in 2018 citing inflation concerns.
By contrast, the European Central Bank and Japan are expected to keep policy rates at the current historical zero and near zero levels in the near term. While a few large
commodity exporters like Argentina, Brazil, Russia, and South Africa have
lowered interest rates in early 2018, several other countries especially in East and
South Asia such as Korea, Malaysia and Pakistan have actually raised policy
rates in 2018. A cautious monetary policy approach remains appropriate for
Nigeria at this period given the weakened domestic currency in the mist of the
external uncertainties as this will help to avoid any possible reverse flow of
capital which can be in vast amounts.
Global output had a rebound in 2017 at 3.8% when compared to 3.2% in 2016
and this trend is expected to be sustained in 2018 even though first quarter real
GDP growth rates in several countries retracted similar to that of Nigeria. CBN
Staff report show that in the US, real GDP slowed to 2.3% in the first quarter of
2018 as compared to the 2.9% growth witnessed in quarter 4 of 2017. In the Euro
Area, real GDP also slowed to 0.4% in quarter one of 2018 from 0.7% in quarter 4
of 2017. Similar 2018 quarter 1 GDP slowdown was recorded in the UK and in
China as compared to the fourth quarter of 2017.
An uptick in growth is however expected in many of developed and developing counties in the remaining
quarters of 2018 on the strength of accelerating wage growth, favourable
investment conditions, pickup in global trade and the recovery of commodity
prices despite the risks of trade policy disputes. The expected improvements in
global growth in 2018 mean more uncertainty in the monetary policy adjustment. The US has already lifted its projections to possibly three interest rate
hikes in 2019.
Inflationary pressures remain contained across many developed and
developing countries despite the modest rise in global commodity prices. CBN
Staff Report show that similar to Nigeria, inflation also moderated in the Euro
Area, UK, China, Japan, South Africa, Ghana and Kenya. There was however a
marginal rise in inflation in the US to 2.5% in April 2018 from 2.4% in March 2018.
With further moderation in global inflation expected in the remaining months of
2018, the choice of monetary policy rate in Nigeria will be key to ensuring that
domestic inflation does not persistently outpace the global inflation.
Emerging Risks to the Outlook:
Similar to the observation in my personal statement at the last MPC meeting,
while inflation, output, interest rate and exchange rates at both the domestic
and international levels may be key focus areas in shaping the monetary policy
decision at this time, there are significant downside risks with the potential to
reverse any expected maximum impact of the monetary policy decision at this
meeting. I would like to highlight at least two of these risks, just as I did in my last
personal statement. Mixed Performance of Banking Sector Indicators and the Stock Market.
The banking industry on aggregate has remained strong with increases in
profitability, liquidity, total assets and total deposits especially between February
2018 and April 2018. During this period also, the Banks’ Capital Adequacy Ratio
(CAR) increased while the non- performing loans ratio which from CBN staff
report had increased to about 16.21% in February 2018 declined to 14.15% in
April 2018.
While these financial soundness indicators recorded some
improvements since the last MPC meeting, the rise in average daily request of
deposit money banks from the Standing Lending Facility (SLF) window despite
the fact that interbank call and OBB rates in April 2018 declined drastically to
3.34% and 2.96% respectively from 15.16% and 12.69% in March 2018 remains a
concern. As I also noted in my personal statement at the last MPC meeting,
these are all early warning signs of future threats to stability in the banking
industry and as such, any significant reduction of MPR at this time could even
further weaken the solvency position of these deposit money banks.
Of greater concern is the size of banking sector credit to the private sector
which is now declining and even at poorer levels when compared to the
situation at the last MPC meeting. CBN Staff report show that the industry gross
credit recorded a 3.63% decrease in April 2018 and the lowest total ever since
January 2017 and this happened despite the reported increases in total industry
deposits.
The earlier expectation that with economic recession over in 2017 and
with recovery signs, credit to the private sector will pick up in the early parts of
2018 is yet to happen. Since a reduction in the monetary policy rate may not likely result in any increases in private sector credit, non-interest rate based
strategies for stimulating private sector credit will be required at this time. This
can be achieved through targeted indirect policy instruments which will surely
be worthwhile in the immediate period and can be complemented by other
short term measures as the current CBN development financing support to few
critical sectors.
On the Stock Market, the high weekly volatility of the All Share Index and the
Market Capitalization since 2018 as compared to 2017 acts as a reminder that
vulnerabilities still exist in the Nigerian financial market. Even when monetary
policy rates have remained unchanged for a long period, sudden capital
injections and withdrawals in the stock market shows the sector is still exposed to
little movements in risk aversion.
High and Rising levels of Debt:
Similar to the concern I raised in my personal statement at the last MPC
meeting, the threat of rising public debt in the midst of declining government
revenues remains potent. With continued decline of oil and non-oil revenue,
government has desperately relied on domestic and external borrowing to
finance the increasing budget expenditure targets. With the addition of FGN
Savings Bond and FGN Sukuk to the expanding FGN Bonds and FGN Savings
Bond, the stock of domestic debt increased significantly between June 2017
and December 2017.
The same scenario happened with external debt which had increased significantly partly due to additional Eurobonds sale. While
government has regularly defended the elevated debt levels citing the debt-to
GDP ratio which is still at internationally accepted levels, it is clear that public
debt not backed by productive assets can pose serious financial risk and will
always be a potential danger to the economy in the near future.
- BALAMI, DAHIRU HASSAN
Although it was the second meeting of the Monetary Policy Committee (MPC) in
2018, it was clear that the Nigerian economy had made some progress, though
not all the trends in the macroeconomic variables have been positive.
Inflation continued to trend downwards from 13.34% in March 2018 to 12.48% in April
2018, as monetary policy tightening was sustained. Economic growth was also
reported at 1.95% in the first quarter of 2018. It therefore, shows that the current
growth rate remains fragile. The major growth drivers of the economy in the first
quarter of 2018 include transport and storage (due to the non-disruption in fuel
supply); mining and quarrying; crude oil and gas; agriculture; the financial
sector, as well as the manufacturing sub-sector, which picked up substantially.
Therefore, a lot was still required for Nigeria’s growth to move above 5%.
The critical question now is how do we stimulate growth in the economy? This
cannot be achieved without a trade-off because the growth policy would be
counter-productive if its leads to inflation. In addition, the extent of Nigeria’s
mono-export and import dependence poses a threat to the economy,
whenever there is an external shock. There is also the importance of signaling to
provide clarity when the CBN adjust its economic policies in relation to growth,
inflation, and exchange rate. An effective policy should be directed at
achieving low inflation and stable exchange rate.
From the outlook in the second half of 2018, inflation is threatened by election
related expenditure and also from the outflow of capital which the economy
seriously needs. The normalization in the US also shows that there is likely to be a
pressure that could arise from the external sector and result in the depletion of
our reserves (capital flight). In the domestic economy, adverse shocks from
electioneering campaigns expenditure; injections from 2017 budget which is still
being implemented as well as from the 2018 budget which is yet to be passed
but is likely to be ready by June/July 2018 are also sources of reversal of the
downward trend in inflation.
We must therefore adopt unconventional monetary policy strategies to promote
growth. For example, in the month of April 2018, the public sector did not crowd
out the private sector, the NTB rate went down to 10% (90 day), from 18%. The
CBN followed up by bringing down the OMO rate, even though it became
counter-productive. If fiscal policy is pumping liquidity into the economy, the
CBN has to sell dollar in the market to mop-up. In the last three weeks of April
2018, more than US$500 million was sold. This happened for two reasons: (1) the
lack of instrument of high interest rate for foreign investors (2) outflow of funds to
the US encouraged by rising interest rate. It should be noted that within Africa,
the emerging economies such as South Africa, Ghana and Egypt are also likely
destinations for investable funds.
Developments in the Banking Sector
The lending rates by banks remain high and credit to the real sector continue to
be low. The DMBs should be further encouraged to take advantage of the
derisking on lending provided by the CBN to grow credit in the economy. Banks
should also be encouraged to improve their roles in the economy through the
provision of a secondary market for buying DMBs bad loans to clear their
balance sheets.
Fiscal Side
There are so many unknowns on the fiscal side, particularly on when the
implementation of the 2017 budget would cease and when the 2018
appropriation would be approved and implemented. However, the indication is
that there would be high injection from campaign expenditure as 2019 election
approaches.
Also, many contractors are likely to get 40% to 70% payment of
their contracts if 2018 budget is approved and this may be inflationary. The
danger with the fiscal side is the absence of a fiscal buffer to cushion the effect
of a sudden outflow of capital. Although interest rates had remained high and
there is a need to lower the rates and service the external debt.
The CBN, therefore, must sustain the sale of OMO bills to maintain tightening and
promote capital inflow into the economy. With projections that the economy
would be awashed with liquidity, fiscal and monetary cooperation at this time is
critical to maintaining macroeconomic stability. It is more expedient with the bearish performance of the capital market in the month of April, as investors
gradually divest to foreign markets offering higher yields.
China – US Negotiations at the Global Level: The China – US negotiations at the
global level has implications for the Nigerian economy. It is likely that China
would sacrifice imports from other countries such as Nigeria’s oil in the ongoing
arrangement. The Federal Government’s capacity to fund the 2018 budget
would therefore be constrained.
Policy Choice
On the choice of policy options, I believe that raising the CRR could suffocate
industries and the banking sector. Ordinarily, one would go for policy tightening
as available data and information showed that loosening can worsen the
inflationary pressure arising from liquidity surfeit (FAC, IGR, and Borrowing). The
possibility of destabilising the foreign exchange market which had been stable
for some time is also high. Since the beginning of 2018, however, it is my opinion
that the current tightening stance with the MPR at 14% and CRR at 22.5% are
adequate. Again at this point in time, the fiscal injection should provide the
much needed liquidity in the economy. On the basis of this I vote to hold which
implies retaining:
- MPR at 14%;
- CRR at 22.5%;
iii. LR at 30%;
- Asymmetric corridor +200 /- 500 basis point around the MPR.
- NNANNA, OKWU JOSEPH
Enhanced external reserves and fiscal buffers, combined with rising crude oil
production and high oil prices will continue to fuel Nigeria’s economic recovery
over the coming quarters. Key PMI indicators point to improvement in the
economy. Specifically, manufacturing and non-manufacturing PMIs stood at
56.9 and 57.5 index points in April 2018, indicating expansion for the thirteenth
and twelfth consecutive months, respectively. Nevertheless, the fragile growth
so far recorded is not inclusive as the rate of unemployment – especially
amongst the youth remains unacceptably high. Employment level in the
manufacturing and non-manufacturing sectors stood at 55 and 55.3 points,
respectively, at end-April 2018. This indicated growth for the twelfth consecutive
month in both sectors.
Contractionary monetary policy is yielding the expected results. Inflationary
pressures have remained subdued owing to stable exchange rate and the
positive effect of development financing in the agricultural sector. Headline
inflation declined to 12.48 per cent in April 2018 from 13.34 and 17.24 per cent
recorded in the previous month and corresponding month of 2017, respectively.
Food inflation decreased, modestly to 14.80 per cent at end-April 2018, from
16.08 per cent in the preceding month.
The month-on-month headline and core inflation, however increased marginally in the month of April, due, mainly, to
increase in price of staple foods; and price of fuel and lubricants, respectively Growth in the monetary aggregates and the relative stability in the financial
system continue to produce positive sentiments and yield in the financial
markets. Broad money (M2) grew by 2.16%, at end-April 2018, compared with
the growth of 1.26%, and in contrast to a decline of 7.7% growth recorded at
end-March 2018 and corresponding year, respectively. Overall, M2 grew by
6.48% on annualized basis.
Commercial banks aversion to lending to the real sector continues as claims on
the core private sector declined by 1.9% at end-April 2018. Conversely, net
claims on the Federal Government grew by 46.1%, compared with 6.98% and
8.1% growth at end-March 2018, and corresponding year, respectively. De
risking lending to the growth promoting private sectors remains a viable option
towards encouraging banks intermediation.
The banking industry continues to grapple with low profitability and a high ratio
of non-performing loans (NPLs) weighing on any recovery in credit growth. The
industry is still reeling from the impact of the collapse in oil prices between 2014
and 2016. The oil sector which accounted for about 7.2% of Nigeria’s real GDP in
Q4 2017, and accounted for a major channels of credit demand and foreign
currency revenue is yet to fully recover. While the recovery in oil prices offers
hope to the banking industry, this may not likely impact on lending and asset
quality in the next few months. Consequently, the combination of rising oil
prices, settlement of federal government contractual obligations to the private sector creditors including stronger economic growth may reduce NPLs, improve
asset quality and sustain financial stability.
Despite subdued positive sentiment due to improved macroeconomic
conditions and the optimism for improvement in the expected GDP numbers in
the first quarter of 2018, market correction which began in February 2018, has
continued in the review period. Aggregate volume and value of traded
securities in April 2018 were 8.5 billion shares and N106.1 billion, respectively, in
92,807 deals, compared with 10.2 billion shares and N136.2 billion in 103,258
deals in March 2018. However, as at May 14, 2018 aggregate volume and value
of traded securities were 2.7 billion shares and N44.1 billion, respectively, in
39,220 deals. The NSE All-Share index was 40,677.61 as at May 14, 2018,
compared with 41,268.01 at end-April 2018. Aggregate market capitalisation
(bonds and equities) was N24.9 trillion, as at May 14, 2018, compared with N25.1
trillion, at end-April 2018. Market capitalisation of listed equities was N14.7 trillion,
as at May 14, 2018, compared with N14.9 trillion at end-April 2018 and
constituted 59.0 per cent of the aggregate market capitalisation, while listed
bonds and the ETF accounted for the balance.
The outlook for global growth in 2018 remains positive. While there are obvious
signs that growth in many advanced markets is gradually attaining its peak
levels suggesting a lull in expansion in economic activity, growth in the US, Eurozone and Japan is on the uptick. Also, recovery in the emerging market is
gathering momentum. Although geopolitical tensions and financial market
disruptions represent downside risks to global growth – overall, global economic
expansion is expected to remain positive. The expected stronger dollar, coupled
with higher Treasury yields highlights the potential for capital reversal.
Geopolitical tensions and fear of protectionism remain the major downside risks
to global economic growth.
We envisage an expansionary fiscal policy in the domestic economy in the near
term following the increase in FY 2018 Budget by the National Assembly.
Together with the electioneering campaigns, the threat to macroeconomic
stability must be taken very seriously by the monetary authority. And the urge to
avoid the adoption of time inconsistent policy must be resisted. Overall, any
positive trickle-down effect of government spending can be undermined by
higher borrowing cost and unproductive public sector spending. The delayed
passage and implementation in the 2018 budget affirms substantial uptick in
spending in the latter months of 2018 and unbudgeted election spending is likely
to upset domestic price stability.
Given the flexible exchange rate regime which is in place, the balance of
payments will remain healthy. The current account surplus observed in recent
times will be sustained on account of recovery in oil prices, high export revenues and import substitution. The average exchange rate at the I&E window as at
May 14, 2018 was ₦360.86/US$, representing a depreciation of some 0.2 per
cent from end-April 2018. As at May 14, 2018, the naira exchange rate at the
retail SMIS window and the BDC segment remained unchanged respectively at
₦330.00/US$ and ₦362.00/US$ as at May 14, 2018 from end-April 2018.
In my opinion, the greatest threat to macroeconomic and price stability in the
near term is the apparent expansionary fiscal program with its attendant
election related spending.
Against this backdrop, I vote to raise the MPR by 50 basis points and to hold the
other policy metrics. This is to signal the need to anchor inflation expectations
and maintain positive interest rates to encourage inflow of portfolio and direct
foreign investments.
- SANUSI, ALIYU RAFINDADI
1 Decision:
At today’s meeting, I voted to keep the current monetary policy stance. This
decision was based on my interpretation of the available data as well as my
analysis of the implications of key anticipated domestic and global economic
developments on the evolution of domestic inflation and output. In the medium
term, domestic economic and political developments, such as election
spending and aggressive implementation of federal government budget, are
expected to significantly inject liquidity into the economy, which boost output
but may reverse gains made in the current disinflation process. Global
developments, such as the improving long term yield in the US and UK as well as
the expected domestic political activities also have potentially important
implications for exchange rate stability. Given the combination of these
domestic and global developments, monetary policy should continue to be
tight in order to sustain the current disinflation gains without hurting output
growth.
2 Background and Justification
2.1 Global Economic Development
The projected increase in asset prices and long-term yields in major financial
markets have implications for capital flows, exchange rate stability and,
therefore, domestic inflation. World output, which grew by 3.8 per cent in 2017, is anticipated to raise by 3.9 per cent in 2018. This is hinged on expected
improvements in aggregate demand led by recovering commodity prices, rising
asset prices and long-term yield in major financial markets as well as rebound in
global investment, manufacturing output and trade. Although global inflation
remains subdued, pressures are rebuilding as a result of rising energy prices and
moderate currency depreciations in some emerging economies. Global
inflation is expected to rise to 3.2 per cent in 2018, further justifying the continued
monetary policy normalization in advanced markets. A possible implication of
these developments is reduction in capital flows into emerging markets and
developing economies, including Nigeria, as a sizeable amount of capital is
retained in the advanced economies.
2.2 Domestic Economic Development
Domestic economic outlook appears positive for output growth, but threatening
to the current disinflation process. Available data shows that output grew by
1.95 per cent during the first quarter of 2018 compared to -0.93 percent in the
first quarter of 2017. Output growth, which started since the third quarter of 2017
was therefore sustained during the first quarter of 2018, and is expected to
further rise in 2018. Data on purchasing manager’s index (PMI) suggests that
domestic production activities have continued to rise in April, 2018. Forecasts by
the IMF and World Bank suggest that output will grow by 2.1 per cent and 2.5
per cent, respectively, in 2018.
Headline inflation continued to moderate as it declined (year-on-year) from
14.33 per cent in February, 2018 to 12.48 per cent in April, 2018. This is
attributable to fall in food and non-alcoholic beverages as well as the relative
stability of the foreign exchange market. Available staff forecasts show that
inflation would return the single digit mark in October, 2018. Both core and food
inflation rates have also moderated. Core inflation has declined from 11.71 per
cent in February, 2018 to 10.92 per cent in April, 2018 mainly due to
improvements in the supply of petroleum products. It is forecasted to reach
single digit in June, 2018. Food inflation has also declined from 17.59 per cent in
February, 2018 to 14.8 per cent in March, 2018 due to decline in the prices of
processed food.
External sector developments are positive, with the exchange rates remaining
generally stable and external reserves rising from US$46.699 billion as at March
22, 2018 to US$47.5billion as at May 16, 2018. Although the net foreign exchange
flow through the economy has remained positive, there are still some vulnerabilities.
Political developments are likely to shape domestic fiscal outlook for the rest of
the year. As the 2019 general elections approach, significant injection of liquidity
from the fiscal authorities is expected through aggressive implementation of the unspent part of the 2017 appropriation, as well as implementation of a
significant portion of the 2018 proposed 9.12 trillion Naira. In addition, the
political activities that will start in the next few months would also inject
significant amount of liquidity into the system. While these injections are
expected to boost output, they could knock inflation out of its current trajectory.
In addition, these liquidity injections could have adverse effects on foreign
exchange stability as the excess liquidity seeps into the foreign exchange
market.
3 Basis for My Policy Choice
My interpretation of the key global developments, dominated by the possibility
of rising asset prices and long-term yields in major financial markets, raised my
concern for the possibility of reduced capital flows to emerging economies,
including Nigeria. These concerns are further raised by the prospects of
increased political risks associated with pre-election years. Capital flows have
significant implications on exchange rate stability and, consequently, inflation.
Optimal monetary policy choice should, therefore, not seek to further reduce
the domestic yields by loosening. Monetary policy should, hence, remain tight to
keep domestic yields attractive.
Domestic factors, especially the anticipated aggressive implementation of the
unspent part of the 2017 budget and a good chunk of the proposed 2018
budget, as well as the rise in spending by politicians, would significantly boost aggregate demand in the short to medium term. In addition, some of the
injected liquidity will seep into the foreign exchange market to raise pressure on
the exchange rate. This suggests that loosening the monetary policy stance
now will not only be pro-cyclical, but will also be inconsistent with the overriding
objective of monetary policy.
On the one hand, although inflation has continued to moderate, it remains
above the single-digit target and is threatened by the anticipated global and
domestic developments identified above. On the other hand, although the
positive output growth remains fragile, the anticipated domestic liquidity
injections will boost aggregate demand and output in the medium term.
Consequently, I am of the view that the current policy stance is tight enough to
balance the objective of price stability, exchange rate stability and output
stabilization.
I therefore vote to:
- Retain the MPR at 14.0 per cent;
- Retain the CRR at 22.5 per cent;
- Retain the asymmetric corridor at +200/–500 basis points; and
- Retain liquidity ratio at 30.0 per cent.
- EMEFIELE, GODWIN GOVERNOR OF THE CENTRAL BANK OF NIGERIA AND CHAIRMAN, MONETARY POLICY COMMITTEE
My considerations at today’s meeting were largely driven by the need to
ensure long-run price stability ––guided by short-term outlook and expectations.
Though realised inflation is declining, analysis suggests a probable rise in
inflation expectations due to potential future shocks to the domestic economy.
Over the next seven months, huge fiscal injections and electioneering spending
are projected to considerably impact on systemic liquidity, aggregate
demand, inflation and exchange rate in the domestic economy. Besides, the
recent tightening stance of the US Fed, if not sufficiently mitigated, has
significant implications for price and exchange rate stability in Nigeria.
My immediate predisposition is for further tightening of domestic policy stance to
rein in expected inflation and ensure FX market stability. However, given the
continued permeation of previous policy tightening and the improvements in
key macroeconomic variables, it is prudent at this time to avoid policy impulses.
The recovery of the global macroeconomy continued to strengthen with
better-than-expected outcomes in 2017 and brightening short-term outlook.
Reflecting a broad-based upswing, the IMF’s global growth projection rose to
3.9 percent in 2018 from 3.8 percent in 2017 ––with advanced economies at 2.5
percent and emerging market and developing economies at 4.9 percent from
2.3 and 4.8 percent, respectively. Growth in sub-Saharan Africa is also projected to rise in 2018 by 0.6 percentage points to 3.4 percent. The global
growth impetus is largely attributable to supportive financial conditions and
rising aggregate demand.
Macroeconomic conditions in the domestic economy also continued to
improve, although potential downside risks threaten short-term prospects. Real
GDP growth rate stood at nearly 2.0 percent in 2018q1 from 2.1 percent in
2017q4. A breakdown of this figure indicates that the oil sector contributed 1.4
percent to the 2018q1 outcome while the non-oil sector added the balance of
about 0.6 percent. Further decomposition shows that the agriculture sector
contributed 0.7 percent to overall growth, industries accounted for 1.6 percent
while the services sector supplied -0.3 percent. With improving conditions in the
international oil market and the expected surge in fiscal cum elections related
spending, short-term growth outlook remains somewhat modest. Given that
Nigeria’s GDP growth rate is typically lowest in quarter one, there is prospect for
better outcomes in the remaining three quarters of 2018. To reinforce the
cyclical rebound of the economy, prudent and well-balanced
macroeconomic policies are essential.
The pace of disinflation steadied as headline inflation fell further to 12.5 percent
in April 2018 from 13.3 percent in March. Similar declines were recorded for core
and food inflation from 11.2 and 16.1 percent, respectively, to 10.9 and 14.8
percent over the same period. While the trend of disinflation is encouraging, I note that the level of inflation is still significantly outside the Bank’s tolerance
range. The observed moderation in inflationary pressure is, however,
threatened by waning base-effects and the liquidity injections anticipated in
the second-half of the year. It is therefore imperative to ensure that the path of
disinflation is not reversed.
Analysis of monetary developments indicates a 9.9 percent annualised
contraction of narrow money supply (M1) in April 2018 in contrast to the
targeted expansion of 8.0 percent. Broad money supply (M2), however, grew
at an annualised rate 6.5 percent vis-à-vis the 10.5 percent benchmark. The
expansion in M2 was fundamentally driven by the 138.4 percent annualised
growth of net claims on government, which outstripped the programmed
target of 54.9 percent for the year. I note with disappointment the continued
sombre outcome of private sector credit with an annualised contraction of 0.5
percent as against a programmed expansion of 5.6 percent. The lacklustre
growth of private sector credit reflects the risk aversion of banks especially
given the higher NPLs recorded during the last recession. I note that supply of
credit to the private sector is primarily determined by risk perception while
interest rates merely affect its demand. Hence, it is important to ensure that
private sector lending is sufficiently de-risked so as to accelerate economic
diversification and ensure inclusive growth. Thus, the CBN will continue to develop initiatives to optimally channel vital credits to pivotal sectors of the
economy.
On the whole, I note the continuing improvement in macroeconomic
conditions. I also note the potential shocks that could undermine the near-term
prospects. Specifically, I note that (i) the cyclical recovery of real GDP is still
fragile, (ii) inflation is declining but it remains high and outside acceptable
band – with probable risk of upturn in the short-term, (iii) the relative stability in
the exchange rate and the external reserves accumulation are satisfactory.
However, the current budget outlay of over N9trillion which is expected to be
rapidly implemented in the last half of the year, the anticipated huge elections
spending, and the on-going interest rate hike by the US Fed threaten the
favourable macroeconomic in the short-term if these risks are not adequately
hedged.
While concurrence of exchange rate stability, low inflation and low interest is
desirable, it is not feasible at this time given the structural realities of our
economy. While I remain resolute on the imperatives of a stable equilibrium
hinged on price stability, I re-emphasise my certitude for cautious policy
decisions. For a few analysts, the observed moderation in inflation rate provides
justification for policy ease. However, the prevailing realities especially the
double-digit inflation and elevated short-term inflation expectations do not
support this. To maintain stability in the FX market and curb inflation expectations, my original standpoint was for further tightening of monetary
conditions. However, this could inadvertently introduce impulsive policy shocks.
I am of the opinion that the prevailing level of real policy interest rate is
appropriate to balance the objectives of exchange rate stability, price stability
and output stabilisation. I also believe that the effect of past policies changes is
still permeating the system. Consequently, in order to mitigate against potential
near-term risks while avoiding disruptive policy shocks, I vote to:
- Retain the MPR at 14.0 percent;
2. Retain the CRR at 22.5 percent;
3. Retain the asymmetric corridor at +200/–500 basis points; and
4. Retain liquidity ratio at 30.0 percent
GODWIN I. EMEFIELE, CON
Governor
May 2018