CBN urges FG to reduce $57 budget 2020 benchmark

The Monetary Policy Committee (MPC) of Central Bank of Nigeria (CBN) on Tuesday urged the Federal Government to reconsider its 2020 budget oil price benchmark of US$57 per barrel, to build fiscal buffers.

It also voted to retain Monetary Policy Rate (MPR) at 13.5 percent and to hold all other policy parameters constant. It also retained the asymmetric corridor at +200/-500 basis points around the MPR; retained the CRR at 22.5 percent, and retain the Liquidity Ratio at 30 percent.

Reading the communique of the meeting, CBN Governor, Mr. Godwin Emefiele said “MPC is also of the view that the improvements in the macroeconomic indicators such as the GDP, NPLs, CAR, and the LDR, suggest that current monetary policy stance is yielding results.

“It, therefore, feels that maintaining the current stance would be necessary in order to sustain the improvements.”

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According to him, MPC also feels that holding its current policy position offers pathways for appraising the effect of the heterodox policies to encourage lending by the banking industry without varying the policy rate as the downside risk to growth and caution on inflation looks stable.

MPC projected a positive trajectory for the economy in the near future but warned that headwinds to this projection, include: continued high level of unemployment, the mild resurgence of anticipated inflationary pressures towards the December festive season, rising public debt, high level of insecurity, and slow pace of oil price recovery.

“Despite these headwinds, growth is expected to pick on the back of recent actions to boost credit to the private sector through the recent Loan-to-Deposit Ratio (LDR) and Global Standing Instruction (GSI) initiatives, sustained interventions by the Bank in selected employment and growth-enhancing sectors, as well as fiscal policy measures to support growth.

The Committee noted the uptick in headline inflation (year-on-year) from 11.24 in September to 11.61 percent in October 2019.

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This was anticipated as part of the seasonal end-of-the-year uptick in prices; but was further accentuated by the border closure, an expected temporary food supply shock which will adjust over the medium-to-long term as the economy increase investments in food production. Consequently, food inflation rose from 13.51 to 14.09 percent in September and October 2019, respectively.

Core inflation, the underlying inflation in the economy, however, declined marginally from 8.94 to 8.88 percent in September and October, respectively.

The decline observed in core inflation was attributed to the relative stability in the foreign exchange market.

The Nigerian land borders were closed to address the incidence of increased cross-border banditry, smuggling and dumping, insurgency and the illegal trade practices of neighbouring countries whose economies had become dependent on Nigeria through smuggling through the borders.

The Bank’s continued intervention in the agricultural sector is expected to improve the medium-term food supply.
Indeed, there have been reports of a bumper harvest in some staples like rice, maize, etc.

Growth in credit to the private sector, however, improved to 13.08 percent in October 2019 from 12.49 percent in the previous month, reflecting the impact of the Bank’s recent policy on loan-to-deposit ratio.

An increase in absolute gross credit, amounting to N1,169.70 billion, was recorded between end-May and end-October 2019.

Consequently, the manufacturing sector received N459.69 billion, the highest in two decades.

This was followed by consumer loans of N356.65 billion, General Commerce (N142.98 billion), Information and Communications (N82.07 billion), Construction (N74.52 billion), Agriculture, Forestry and Fishing (N73.20 billion), Mining and Quarrying (N3.64 billion) and Transportation and Storage (N3.09 billion), amongst others.

The Committee, therefore, urged the Management of the Bank to sustain its current efforts to improve lending to the private sector and to explore other initiatives to provide funding to other critical sectors of the Nigerian economy.

Overall, the medium-term outlook for the domestic and global economies continue to be clouded with uncertainties, associated with the persisting trade wars between the US and its major trading partners, financial vulnerabilities, rising levels of public and corporate debts, pockets of geopolitical tensions and weakening global output.

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However, the reforms underway in the domestic economy; aimed at diversification away from oil over the last three years have provided adequate shock absorber to withstand the headwinds.

However, the Committee urged the fiscal authorities to invest massively in public works programme and improve fiscal buffers to complement these efforts.

Forecasts of key macroeconomic variables, however, indicate prospects of improved output growth for the economy.

Based on recent revised projections, the economy is expected to grow in 2019 by 2.3 percent (IMF estimate), 2.1 percent by the World Bank, and 2.20 percent by the CBN.

The Committee noted the tailwinds to these developments, to include: sustained stable exchange rate; enhanced flow of credit from the Deposit Money Banks (DMBs) to the private sector; expected improvements in tax revenue and efficiency in public expenditure; continued improvement in the business environment and activities; and the sustained interventions by the Bank in the real sector.

The Committee welcomed the improvements in output growth in the third quarter of 2019, noting that the current direction of the Purchasing Managers Index suggests stronger growth in the fourth quarter.

It, however, re-emphasized the need for diversification to strengthen the productive base of the economy and reduce dependence on oil.

Diversification has become necessary now that Nigeria has signed the African Continental Free Trade Agreement (AfCTA).

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To achieve this, the Committee urged the Federal Government to continue to improve the investment climate and ease of doing business to attract Foreign Direct Investment.

Particularly, the Government should, as a priority, improve conditions for global auto manufacturers, including for aviation and rail industries to invest in the country.

The Committee called on Government to urge the Pensions Commission to improve the prudential requirements for Pension Funds to refocus their investment portfolio away from their traditional choice of Government securities in favour of other viable long-term investments in real estate, manufacturing, and agriculture; and indeed infrastructure.

Moreover, the Committee called for strong visibility of fiscal and structural policies to improve infrastructure and investment conditions in the economy. It expressed strong optimism that the current policies of the Bank, in a regime of solid fiscal and structural policy support, would yield strong dividends in closing the current negative output gap in the medium to long term, and place the economy on a sustainable and self-sufficient path of output growth.

On price developments, the Committee considered the moderate uptick in headline inflation in October 2019, attributing it partly to an expected temporary shortfall in food supply because of the recent land border closure and rise in demand as the festive season approaches.

Although it noted that the price increase was not unexpected, the Committee believed that the medium to long-term benefits far outweighs the short-term cost.

Consequently, it noted the need to drive down food prices through increased support for local production of staples foods, including rice, fish, poultry, palm oil, tomatoes, etc. It also urged the Government to follow through with a sustainable policy on backward integration in the milk industry and other priority sectors of the economy.

In the fiscal sector, the Committee identified the need for institutional reforms through policies that would automate day to day processes of key revenue generating and security agencies such as the Nigerian Customs. This would provide the additional advantage of stemming smuggling, kidnapping and the migration of terrorists into the country. The MPC reiterated the need for increased efficiency in public expenditure and the building of fiscal buffers.

On the impact of the recent closure of Nigerian land borders on domestic food prices, the Committee noted that any upward price movement arising from the closure was reactionary and therefore temporary. Moreover, significant investment has been made over the last three years to sustainably increase domestic food supply.

It noted some of the key initiatives in this direction to include: the Commodity Development Initiatives, designed to finance the agricultural value chain of ten ((10) commodities namely; Cassava, Cocoa, Cotton, Rice, Tomato, Poultry, Livestock and Dairy, Fish, Oil Palm and Maize, which has received N171.66 billion in funding. Four of these crops received over 140.12 billion naira or 81.6 percent of total disbursements (Cassava, 11.44 billion naira; Cotton, 40.47 billion naira; Rice, 53.40 billion naira; Oil palm, 34.81 billion naira).

It is, therefore, expected that the outcome of these interventions will close the supply gaps already envisaged in the medium to long term, including dampening domestic prices.

It thus, expressed support for the temporal closure of Nigeria’s land borders, noting that securing the country’s land borders should be further enhanced.

On crude oil price, the Committee noted the lull in the futures market, suggesting that prices would remain relatively weak into the foreseeable future.

The Committee was confident that despite the weaknesses from the external sector, efforts to ramp-up domestic production, through several measures by both the monetary and fiscal authorities, would douse the adverse effects on the domestic economy in the medium term, through the reduction of importation of food and other commodities.

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