The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday warned that weak economic fundamentals currently being shown by the economy were putting the country’s exit from recession under threat. The Nigerian economy exited recession in 2017 after suffering contraction for five
consecutive quarters.
Addressing journalists shortly after the two-day meeting of the MPC members held at the headquarters of the apex bank, the CBN Governor, Mr Godwin Emefiele, said the economy had started showing signs of weakness. For instance, he said the committee was concerned that there was a fresh threat of recession as the economy recorded growth rate of 1.95 per cent and 1.5 per cent during the first and the second quarters of this year, respectively He noted that the slowdown emanated from the oil sector, with strong linkages to employment and growth.
For instance, the apex bank boss said the late implementation of the 2018 budget, weakening demand and consumer spending, rising contractor debts, and low minimum wage were some of the risks to output growth.
Others, according to him, are the impact of flooding on agricultural output, continued security challenges in the North-East and North-Central zones, and growing level of sovereign debts. Emefiele stated, “The MPC observed that despite the underperformance of key monetary aggregates, headline inflation inched up to 11.23 per cent in August 2018 from 11.14 per cent in July 2018. “The near time upside risks to inflation remain the dissipation of the base effect expected from 2019 election-related spending, continued herdsmen attacks on farmers and episode of flooding, which destroyed farmlands and affected food supply ultimately.
In this regard, the committee urges the fiscal authorities to sustain implementation of the 2018 budget to relieve the supply side growth constraints so that they can address the flooding, which has become perennial on a permanent basis. “Relative stability has returned to the foreign exchange market buoyed by the robust external reserves, with inflation trending downward for the 18th consecutive month.” He added, “The gains so far achieved appeared to be under threat following the new data, which provides evidence of weakening fundamentals. The committee identified the rise in inflation and pressure on the external reserves created by the capital flows reversals as the current challenges to growth. “It noted that the underlying pressures have started rebuilding and capital flows reversals have intensified as shown by the bearish trend in the equities’ market even though the exchange rate remains very stable. “The committee was concerned that the exit from recession may be under threat as the economy slid to 1.95 per cent and 1.5 per cent during the first and the second quarters of 2018, respectively.
“The committee noted that the slowdown emanated from the oil sector with strong linkages to employment and growth.” On what could be done to stimulate economic activities, the CBN governor said that though growth remained weak, the effective implementation of the 2018 Federal Government budget and policies that would encourage credit delivery to the real sector of the economy might boost aggregate demand, stimulate economic activity and reduce unemployment in the country.
The CBN governor said the committee urged the government to take advantage of the current rising trend in oil prices to rebuild fiscal buffers, strengthen government finances in the medium term and reverse the current trend of decline in output growth. The MPC, according to him, also called on the fiscal authority to intensify the implementation of the Economic Recovery and Growth Plan to stimulate economic activities, bridge the output gap and create employment. The apex bank boss said the MPC expressed concern over the potential impact of liquidity injection from election-related spending and increase in federal allocations, which are rising in tandem with the increase in oil receipts.
Emefiele added that the committee was concerned with the rising level of non- performing loans in the banking system, and urged the banks to closely monitor and address the situation.
He also expressed concern over the weak intermediation by Deposit Money Banks and its adverse impact on credit expansion as well as investment growth by the private sector.
While revealing the outcome of the meeting, Emefiele explained that seven out of the 10 members of the committee agreed to maintain the current monetary policy stance, while three voted to increase the rates. According to him, the MPC decided to leave the Monetary Policy Rate unchanged at 14 per cent. Apart from the MPR, which was retained at 14 per cent, the committee also retained the Cash Reserves Ratio at 22.5 per cent.
Also retained were the Liquidity Ratio which was left at 30 per cent; and the Asymmetric Window, which was left at +200 and -500 basis points around the MPR. Explaining the rationale for the decision, the CBN governor said, “Tightening will tame inflationary pressure, tame the reversal of portfolio capital, improve the external reserves, and maintain stability in the foreign exchange market.
“Conversely, the committee also noted that raising rate would further weaken growth, as credit would become more expensive, the non-performing loan would increase further, leading to a deceleration in output. “In the committee opinion, the upward adjustment would not only signal the bank’s commitment to price stability, but also its desire to maintain all policy interest rates.” He added, “A decision to hold all policy parameters will sustain natural improvement in output growth.
“There is a need to maintain the current policy stand and await a clearer understanding of the quantum and timing of liquidity injection into the economy before deciding on possible adjustment.”
When asked about the state of the Nigerian banking system following the withdrawal of the licence of the defunct Skye Bank Plc, the governor insisted that the Nigerian banking system remained “sound and healthy.” He said, “In every chain, there will always be strong points and weak points in a chain, but what we will continue to do is to make sure that that chain remains strong in all aspects of it. Notwithstanding that, as we see areas where there are weaknesses, we will do everything possible to make sure that we keep the chain linked together, and that is what we did with Skye Bank. “As I have said before, I will love to see a situation where banks are not liquidated, that we have to think outside the box to see how much we can ensure that we have more banks in the country than have less number of banks in the country and that is what we are doing.
Source: Punch Newspaper
