Slowing economy, rising inflation: MPC in dilemma

With an economy in deep recession but inflation spiraling out of control, the Monetary Policy Committee (MPC) of Central Bank of Nigeria (CBN) meeting in Abuja between today and tomorrow ordinarily, appears in a dilemma as to how to deal with the situation without hurting the polity.

Normally, inflation is down during recession but because Nigeria is an importing country and there is a serious dwindle in foreign exchange inflow due mainly to sharp drop in oil prices, this unlikely twin evil currently bedevils the country.

Also, as a result of the inability of agencies of government responsible for generating jobs, building necessary infrastructure and generally getting the economy moving to do this, CBN has become heavily involved in wetting the economy with cash, which it has the primary responsibility to control and mop up.

As inflation began to skyrocket in July this year, MPC hiked baseline interest rate by 200 basis points to the current 14 per cent.

Some economists have expressed opinion that MPC will have to ease lending rates especially with businesses complaining of being priced out of the market even as purchasing power of the average Nigerian continues to dwindle and inventories rise in manufacturing stores.

At the same time, Committee members will have to consider rising inflation and the need to attract foreign investors who would feel discouraged if interest rate is much lower than inflation rate.

Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said, “Economic recovery should be the focus of the MPC now. They should focus on pumping more liquidity into the system rather than taking it out. Inflation is currently at 18.3 per cent but it is not caused by excess liquidity in the system, it is cost push.

“It is time for us to address economic recovery. We need to learn from what the Bank of England did last month to address inflation”.

An FSDH Merchant Bank Research report noted that “while the choice between stimulating economic growth and curtailing inflationary pressure would dominate the MPC meeting as the stability in the value of the Naira would also be a concern for the MPC members in deciding the appropriate policy measures, we expect the MPC to continue to use the Open Market Operations (OMO) to manage the liquidity in the financial system and to influence yields on fixed income securities.”

The researchers took into consideration an IMF recent report on the current global economic outlook, which is shaped by a complex confluence of ongoing realignments, long-term trends, and new shocks. IMF World Economic Outlook (WEO) released last month projected global economy to slow to 3.1 per cent in 2016 before recovering to 3.4 per cent in 2017.

“The IMF expects the Nigerian economy to contract by 1.7 per cent in 2016, but to grow by 0.6 per cent in 2017. The economy has been impacted by negative shocks. Some of the shocks are: crash in oil price and production; scarcity of foreign exchange; low electricity generation and distribution; and depressed consumer demand.

“The appropriate monetary policy response should be to cut rates and boost credit creation to stimulate growth. This is not practicable under the current rising inflation rate and weak currency. A bold decision is appropriate, while the Federal Government of Nigeria (FGN) should increase her capital expenditure aimed at improving the business environment and stimulate growth.

“The FGN should also intensify efforts to borrow long tenored funds from multilateral organizations at low interest rates to increase the stock of foreign exchange.”

FSDH then projected a hold decision by the MPC and urged fiscal authorities to increase capital expenditure aimed at improving the business environment and stimulate growth.

“We expect the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to hold rates when it meets on November 21-22, 2016.

“The inflation rate increased higher in October 2016 to 18.33 per cent, from 17.85 per cent in September 2016, and we expect it to increase further in the next three months. This will be driven by structural factors, such as: high costs of electricity, transport, production inputs and higher prices of both domestic and imported food products. A rate cut is not consistent with the short-term inflation rate outlook, while a rate increase will not be good for economic growth. Thus, we expect the MPC to maintain rates at the current levels.

Speaking in the same vein, an analyst at EY, Mr. Bisi Sanda, said the MPC needed to address the challenge of exchange rate volatility.

“The committee must address the problem of exchange rate. The CBN Governor, Mr. Godwin Emefiele, said the CBN had been giving $11bn annually to BDC operators since 2011. That is $55bn in five years. We need to ask ourselves whether the BDC operators are critical stakeholders in our exchange rate management. It is not like that in other climes.

“They need to look at how banks are committing infractions in the forex market and see how to impose sanctions. Steps must be taken to address the problems causing volatility in the exchange rate. In the past, some people were banned for life from the forex market. What are we doing now?” he noted.