CBN to state govts, pay workers salaries to boost growth •Retains major policy rates

•Banks’ lending to real sector will remain low —Analysts


The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has urged states and local governments across the country to prioritise payment of their staff salaries as a way to reflate the economy.

The committee, at its 109th meeting which held on Monday and Tuesday in Abuja also voted to retain all the prevailing rates including Monetary Policy Rate (MPR) at 14.00 per cent; CRR at 22.5 per cent; Liquidity Ratio at 30 per cent; and Asymmetric Window at +200 and -500 basis points around the MPR.

And while acknowledging the weak macroeconomic performance and challenges confronting the economy MPC noted that it had consistently called attention to the implications of the absence of robust fiscal policy to complement monetary policy in the past.

At a media briefing to report the decisions of the Committee in Abuja on Tuesday, Governor of the bank, Mr Godwin Emefiele said the meeting further assessed the impact of its decision to tighten the stance of monetary policy by raising the MPR in July 2016.

He disclosed that new capital flows into the economy, approximately US$1 billion, had come in since July, while month-on-month inflation has declined continuously since May 2016.

The committee also expressed belief that as foreign exchange inflows improve, the naira exchange rate should further stabilize.

Overall, the major pressure points remain the challenges in the oil sector (production and prices), output contraction, and other financial system vulnerabilities as well as foreign exchange shortage.

“Members reemphasized the need to prioritize the use of monetary policy instruments in dealing essentially with stability issues around key prices (consumer prices and exchange rate) as prerequisites for growth.

“The MPC noted that stagflation is indeed a very difficult economic condition with no quick fixes: having been imposed by supply shocks as well as fiscal and current account (twin) deficits.

“Consequently, the policy framework must be reengineered urgently to provide a lever for reversing the negative growth trend. While the imperative for ensuring financial system stability remains, the MPC reiterated the fact that monetary policy alone cannot move the economy out of stagflation”, he stated.

While dismissing calls to reduce rates, as a way of spurring credit growth by both the private and public sector players, Emefiele said banks had in the past seized such opportunity to further selfish interests.

“In the past, the MPC had cut rates to achieve the above objectives; but found that rather than deploy the available liquidity to provide credit to agriculture and manufacturing sectors, the rate cuts provided opportunities for lending to traders who deployed the same liquidity in putting pressure on the foreign exchange market which had limited supply, thus pushing up the exchange rate.

“With respect to providing opportunity to the public sector to borrow at lower rates to boost consumption and investment spending, the Committee agreed that while it was expected to stimulate growth through aggressive spending, doing so without corresponding efforts to boost industrial output by taking actions to deepen foreign exchange supply for raw materials will not help reduce unemployment nor would it boost industrial capacities.”

He, however, promised that CBN will continue to deploy its development finance interventions to complement the overall effort of fiscal policy towards reinvigorating the economy.

Members emphasized that improved fiscal activities, especially, the active implementation of the 2016 Federal Budget, and payment of salaries by states and local governments, will go a long way in contributing to economic recovery.

In the same direction, the committee urged the fiscal authorities to consider tax incentives as a stimulus on both supply and demand sides of economic activities.

Meanwhile, following the decision by the Monetary Policy Committee(MPC) of the Central Bank of Nigeria to keep all rates unchanged, a herd of economic and finance analysts have said that commercial banks would rather choose to place their funds in government securities than lending to the real sector of the economy as the rate of non-performing loans continue to rise.

They also said it will help reduce inflationary pressure and buy time for fiscal authority to begin to complement efforts of the monetary authority.

Analysts at Cowry Assets Management Limited said in their reaction on Tuesday said:

“We believe the MPC decision was justified given the above considerations, especially with the limited tools available to CBN. This should help restrain inflationary pressure and buy time for fiscal authority to begin to complement efforts of the monetary authority.

“We expect the fiscal authority to complement monetary counterpart by improving ease of doing business and provide infrastructure to help boost productivity and hence spur economic growth. Government can also divest public sector assets to help boost external reserves with their dollar proceeds.”

This they said, will reduce forex rate which businesses need for importing machinery and non-locally sourced raw materials. Eventually, this will reduce cost push inflation and could thus encourage gradual ease of restrictive monetary policy which is needed for economic growth the Cowry Assets analysts stated.

The MPC of the Central Bank of Nigeria (CBN) met on September 19th and 20th.

The committee in line with the current happenings and realities facing the economy decided to: retain Monetary Policy Rate (MPR) at 14 percent; retain Cash Reserve Ratio (CRR) at 22.50 per cent; retain the Liquidity ratio at 30.00 per cent and retain the Asymmetric window at +200 basis point and -500 basis points, around the MPR.

According to analysts at Capital Bancorp Plc, having maintained status quo with the previous MPC decisions, “our earlier opinions stated on the 25th and 26th July 2016 MPC commentary about the Stock market, Interest rates, Bond market and the Macro economy remain unchanged.”

The Capital Bancorp, analysts had earlier said the level of MPR could lead to more activities in the fixed income segment of the financial market and that commercial banks would rather choose to place their funds in government securities than lending to the real sector of the economy as the rate of non-performing loans continue to rise.

They said the CBN decision to raise interest rates in July and retain it in September would positively affect the forex market as more Foreign Direct Investments (FDIs) will begin to flow into the country, targeting investments in government securities which will continue to return higher.

This should immediately improve liquidity in the forex market and reduce volatility.

The Bancorp analysts said: “However, we also expect most lending to the real sector of the economy to slow down given that the banks will be unwilling to lend to the real sector and rather place their funds in high yielding government securities which will in turn slow economic activities.

“In the short term, the profitability of some corporate entities will continue to be hampered as a result of high cost of sales and the high interest rate regime. Capital expenditure of governments will continue to remain slow for the remaining part of the year due to low government revenues.

“In summary, we believe that in a bid to initiate recovery, both fiscal and monetary policies need to be harmonized at the earliest time as well as a faster implementation of the 2016 Budget which is expected to spur economic activities and bridge the output gap.”

Also reacting, other analysts opine that the retention of benchmark interest rate at 14 per cent will continue to negatively impact the cost of borrowing to the real sector as banks reprice current interest rates on existing loans.

They said that by this action, the real sector will continue to suffer credit crunch due to high cost and the economy may further contract. On the other side, yields on fixed income instrument would increase providing opportunity for investment in Nigeria’s local treasuries and bonds.