Nigeria economy may relapse to recession if…MPC warns

…Cautions FG over elections spending, insecurity, flooding
…Retains MPR at 14 percent, CRR 22.5%, Liquidity Ratio at 30%
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has warned that the country may slip into recession again if the Federal Government did not take urgent steps to address the imminent danger, noting that the slow growth of 1.95 percent and 1.50 percent recorded in first and second quarters of 2018 indicated that the exit from the recession in 2017 may be under threat.

According to the CBN think tank, the economy is still confronted with growth challenges and inflationary pressure.

The CBN Governor, Godwin Emefiele, confirmed the committee’s position to the media on Tuesday just as the committee left Monetary Policy Rate (MPR) at 14%, Cash Reserves Ratio (CRR) 22.5% ; liquidity at 30% and Asymmetric corridor at +200 and -500 basis points around the MPR.

The CBN Governor, Godwin Emefiele, announced the decision of the committee at the end of a two-day meeting held at the apex bank’s headquarters in Abuja.

He said that seven out of 10 members of the committee agreed to maintain the current monetary policy stance while three voted to increase the rate.

Cautioning the federal government, Emefiele said, “The rise in headline inflation was from food, while core inflation declined, indicating that supply side factors were driving the price increase.

The near-term upside risks to inflation remained the dissipation of the base effect, expected 2019 election-related spending, continued herdsmen attack on farmers and the current episodes of flooding which has destroyed crops and would affect food supply and prices.

In this regard, the Committee urged the fiscal authorities to ensure sustained implementation of the 2018 budget to relieve the supply side growth constraints, as well as address the flooding incidence which has become perennial, on a permanent basis.

Outlining the underpinning developments that informed its decision, Emefiele said: “The committee appraised the macroeconomic environment and noted that at its July meeting, modest stability had been achieved in key indicators including inflation, exchange rate and reserves.

In particular, relative stability has returned to the foreign exchange market, going by a robust level of external reserves with inflation trending downward for the 18th consecutive months”.

But the CBN Governor said these gains so far achieved, appear to be under threat of reversal following the new data which provides evidence of weakening fundamentals.

Emefiele further said that the MPC was of the view that even though growth remained weak, the effective implementation of the 2018 FGN capital budget and policies that would encourage credit delivery to the real sector of the economy would boost aggregate demand, stimulate economic activity and reduce unemployment in the country.

The MPC observed that despite the under-performance of key monetary aggregates, headline inflation (year-on-year) inched up to 11.23 per cent in August 2018, from 11.14 per cent in July 2018.

The MPC also expressed concern at the decline in major capital market indices, saying that the All-Share Index (ASI) decreased by 14.99 per cent to 32,540.17 on September 21, 2018 from 38,278.55 at end-June 2018.

Similarly, Market Capitalisation (MC) decreased by 14.33 per cent to N11.38 trillion on September 21, 2018 from N13.87 trillion at end-June 2018.

The development, according to the apex bank, was due largely to sustained profit-taking by portfolio investors and capital reversals as foreign yields become increasingly more attractive.

The CBN governor noted the decrease in external reserves to US$44 billion on September 20, 2018 from US$45 billion at the end-July 2018.

Total foreign exchange inflow through the economy fell by 38.34 per cent to US$6.00 billion in July from US$9.73 billion in June 2018, the committee stated.

However, Emefiele said that the MPC believes that accretion to external reserves should strengthen in the last quarter of 2018, with crude oil price remaining above the budget benchmark price of US$51.00 per barrel and oil production increasing to 2.3 million barrels per day.

The Committee noted the relative stability in both the Investors’ and Exporters’ (I&E) window of the foreign exchange market, which was sustained by autonomous inflows and measures taken by the Bank to deepen the foreign exchange market and curb speculative practices.

The CBN governor said the MPC listed measures which include implementing capital component of 2018 budget, implementing provisions contained in Economic Recovery and Growth Plan (ERGP) that government could take to sustain economic growth.

“In this regard, the committee urged government to take advantage of the current rising trend in the 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 also called on the fiscal authority to intensify the implementation of the Economic Recovery and Growth Plan (ERGP) to stimulate economic activities bridge the output gap and create employment.

The committee noted the disruption to the food supply chain in major food producing states due to poor infrastructure, flooding and the ongoing security challenges. It noted the rise in food prices contributing to the uptake in the headline inflation.”

Emefiele said the committee expressed concern on rising inflation which he said could rise in the wake of electioneering spending coupled with distribution from Federation Account Allocation Committee (FAAC).

He said: “The MPC expressed concern over the potential impact of liquidity injection from the election related spending, and increase in FAAC distribution which is rising in tandem with increase in oil receipt.

Other areas of committee’s concern include rising level of non-performing loans in the banking system which he said was stressed mainly by exposure to the oil sector and urged the banks to closely monitor and address the situation.

Meanwhile, reacting to the takeover of Skye Bank now Polaris Bank, which the CBN handed over to AMCON recently, the CBN governor said:

“The situation with Skye Bank as you well know is that as at two years ago when the news broke that the bank had slide into negative capital as a result of Non-Performing Loan. At that time, we compelled the entire board and executives to resign and they did.

“After that, before we conducted an internal audit, the hole (financial gap) was about N370 billion. After the forensic audit, it came to the level it was today, which is almost about N800 billion. So what we did was to say that having established a hole at this level, tax payers’ money will be invested in this bank as a loan.

“So we decided that there is a need to let shareholders know, particularly those that have lost their investment, we will try to make sure that small investors remain protected. It is for this reason that the name had to be changed for from Skye Bank to a sexy name.

The name had to be changed for legal reasons, having gotten to the point where the Central Bank of Nigeria has invested close to N800 billion in this bank.

At some point it must be seen to be owned by the CBN until we find investors that can pay a fair price for the bank. That is the reason why the name had to change from Skye Bank to Polaris Bank”, said the governor.

On whether it was registered or not, he said: “The insinuation that the company wasn’t registered, is false. It was first of all registered as a limited liability company about three weeks and was registered as a bank on Friday, which is a day before we took that action”, he added.