- Recession, rising inflation, review of new forex regime may top agenda
As the 251st edition of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meeting begins today, Monday, July 25, 2016, rising inflation, how to tackle the threat of recession and the review of the impact of the newly introduced flexible exchange rate, are likely to be the issues that would dominate the meeting.
The International Monetary Fund (IMF) two weeks back predicted that the Nigerian economy would contract by 1.8 per cent this year and the Minister of Finance, Mrs Kemi Adeosun, somehow agreed with the international body when she said that the economy was ‘technically in recession’. These make the issue of finding solution to the problem of recession an urgent issue to be tackled.
Apart from the forecast of IMF and the ‘tactical admission’ of the minister, the National Bureau of Statistics (NBS) equally announced earlier 16.6 per cent inflation figure for June. This month’s Consumer Price Index (CPI), an 11-year high, represents 0.9 per cent rise from 15.58 per cent of the previous month and the increase marked the fifth time this year inflation has climbed. The NBS statistics revealed these.
To tackle the problem of baffling inflation, analysts have been calling for retention of Monetary Policy Rate (MPR) which is the benchmark interest rate, at 12 per cent. In May, MPC retained the MPR at 12 per cent with the asymmetric corridor at +200 basis points and -700 basis points and also left the cash reserve requirement (CRR) and liquidity ratio (LR) unchanged at 22.50 per cent and 30 respectively
For instance, analysts at FSDH Merchant Bank Ltd say this about the situation, “Looking at the macroeconomic developments in the economy, we expect that the MPC members will vote to maintain the MPR, CRR and LR at the current levels.
“However, complementary fiscal measures are required to restore investors’ confidence and pull the economy out of recession.”
“There are arguments to support an increase and a hold in rates when the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) meets on July 25-26, 2016. Meanwhile, there is no argument in support of rates cut given the current economic situation.
“The impending recession in the Nigerian economy supports a hold in rates at the current level while the fiscal measures to reflate the economy are implemented. Economic activities have significantly slowed down.”
“The GDP contracted by 0.36 per cent in Q1 2016, compared with the growth of 2.11 per cent 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.”
According to them, “the impending further contraction in the GDP was 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.” They noted further; “the pressure on the external reserves remained unabated since the last MPC meeting in May 2016.
FSDH analysts further said: “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 per cent from US$26.48billion at the last MPC meeting to US$26.35billion as at July 18, 2016. We expect the MPC to adopt a hold decision.”
Also, analysts at Dunn Loren Merrifield Asset Management Ltd are of the view that the MPC should retain the MPR at 12 per cent. “Ahead of the meeting of the Monetary Policy Committee (MPC) slated for the 25th and 26th of July 2016, we are of the opinion that the body is likely to maintain the status quo.
“We are of the view that a further hike in MPR will be insufficient in itself to spur foreign inflows given liquidity concerns of the interbank foreign exchange market. This is in addition to the ‘neutral’ mode adopted by most foreign investors as the naira is anticipated to inch towards what is being considered to be its fair value.
Whilst we believe that a gradual reduction in interest rate is expedient for investment and economic growth, we envisage that the committee will retain the MPR at 12.00 per cent.”
According to them, “Pending the release of the nation’s gross domestic product estimates by the National Bureau of Statistics in the coming month, weakened fundamentals suggests that fragile growth will be sustained in the second quarter. We forecast a further contraction to c.-1.00 per cent in 2Q2016 – hitting new historical lows – from -0.36 per cent in the first quarter of the year. Our forecast is primarily driven by the various shocks transmitted from energy shortages, significant price hikes, lower productivity, low industrial output, scarcity of foreign exchange and depressed consumer demand among others. This likely contraction will officially signal an economic recession.
“Whilst a recovery is expected towards the end of the fiscal year,” the DLM analysts said, “we highlight that this expectation is largely hinged on the deployment of fiscal stimulus to spur growth.”
“We re-iterate that until the underlying drivers of the upward price movements are addressed, raising rates will be counterproductive.”
Even the analysts at Time Economics are in support of retention of MPR at its current rate. “We do not expect the Monetary Policy Committee of the Central Bank of Nigeria to tighten rates when its meets next week in response to the latest CPI data. Having left rates unchanged in her last policy meeting in May and followed up with the introduction of a flexible exchange rate regime on June 23rd, we think the Committee will likely see through short term inflationary pressures and focus more on growth. Efforts will be directed towards combating recession and returning the economy to a positive growth trajectory.
“Secondly, even as we expect benchmark interest rates to remain unchanged in the face of rising inflation, we do not think the decision hurt bank earnings very significantly since, typically, lending rates being charged by the banks tend to be inflation adjusted,” they said.