Save for rainy days, MPC tells FG

…Retains lending rate for 12th consecutive time
…Wants banks to lend at 9% to real, agric sectors
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has advised the Federal Government to save for the rainy day especially now that the price of crude oil is relatively high, adding that the increased Federation Account Allocation Committee (FAAC) distribution to the three tiers of government portend danger to the economy.

This is even as members of the MPC on Wednesday voted to retain the Monetary Policy Rate (MPR) at 14 percent, Cash Reserve Ratio (CRR) at 22.5 percent and the asymmetric corridor (AC) at +200 and -500 basis points around the MPR.

The Governor of Central Bank of Nigeria (CBN), Mr Godwin Emefiele, who gave the warning while briefing finance correspondents on the outcome of the MPC meeting, said that seven members voted to retain the rate while two voted to reduce and one member voted for increase of the rate.

According to Emefiele, impact of the expected liquidity from the expansionary 2018 Federal Government budget, rising FAAC disbursement in the second half of the year, along with the buildup of 2019 pre-election spending were some of the factors that necessitated the retention of the rates.

With this decision, the MPC has retained the monetary rate for the 12th consecutive time since July 23, 2016, while Tuesday’s meeting was the third for the year 2018.

Emefiele, however, said that the MPC noted with satisfaction the fourth consecutive quarters of growth of real GDP and the positive growth outlook in the domestic economy.

“This is shown by the sustained improvement in the manufacturing and non manufacturing Purchasing Managers Indices in the second quarter of the year,” the CBN governor said.

The MPC, however, said it was concerned about the liquidity impact of the 2018 expansionary fiscal budget and increasing FAAC distributions due to rising prices of crude oil as well as the buildup in election related activities.

“Notwithstanding the positive direction of the output, the MPC reviewed the effects of the sustained policy normalisation in some advanced economies with implications for capital flow reversals, exchange rate and domestic price pressures as well as other challenges to growth in the second half of 2018,” Emefiele said.

The MPC commended the approval of the Federal Government 2018 budget and called for the accelerated implementation to further support the fragile growth recovery.

The committee also called for sustained implementation of the ERGP to further stimulate output growth.

The committee took note of the sustained moderation in inflation pressure, especially the deadline inflation as well as stability in the foreign exchange market.

The MPC expressed concern on the threat posed by incessant herders and farmers’ crises in some key food producing states of the federation, warning that the negative impact on some key food supplies chain, would continue to exact pressures on food prices.

The committee therefore called on the bank to continue to build on the progress already made in arresting the trend to sustain the moderation in food inflation.

According to the apex bank boss, the MPC also observed with satisfaction, the high level of activities in investors and exporters window of the foreign exchange market which continued to supply liquidity in the foreign exchange market, narrowed exchange rate premium and reduced speculation activities in the market.

Emefiele said: “The MPC noted the continued improvement of deposit money banks and expressed optimism that the moderation in the levels of non-performing loans in the industry will continue.

The committee therefore called on the Federal Government to accelerate the settlement of outstanding contractor debts and also encouraged the banks to ensure strict compliance with regulatory provisions.

“In discussing the economic report presented to the committee, it was observed that as the prices of crude oil increased in 2017 and 2018, the monthly allocation to various levels of government also increased, suggesting that Federal Government was not conscious of saving for the rainy day.

The committee therefore advised the fiscal authorities to build the buffers, especially now that the price of crude oil is relatively high.

The committee said it strongly considered the option of tightening; believing that would curtail the threat of a rise in inflation even as the injection from the fiscal authorities would still provide the economy with substantial liquidity.

This, the committee believes, will rein in inflationary pressure and moderate inflation rate to single digit levels, increase real interest rate, build investors confidence and further stabilise the country’s exchange rate.

“Notwithstanding the deceleration in headline inflation, the current double digit inflation remains above the bank’s six to nine per cent target rate.

In addition, the committee is of the view that tightening will help stem the tide of capital flow reversal in the face of sustained monetary policy nominalisation in some advanced economies.

“On the contrary, the committee is of the view that raising interest rate at this time will weaken consumption and raise the cost of borrowing to investors in the domestic economy.

“In addition, the decision the policy will trigger the reprising of financial assets by money deposit banks and further constricting to the real sector that will promote non inclusive growth without development”.

“In considering the option of loosening, the committee accessed the potential effect of stimulating aggregate demand through lower cost of capital. This could stimulate consumption and aggregate demand.

“The committee however considered its potential relevance, taking into account, the expected liquidity injection from the 2018 budget, and increased FAAC disbursements and election related spending ahead of 2019 general election.

“If this crystallizes, it will increase inflationary and exchange rate pressures as well as return interest rates into trajectory. Moreover, lowering policy rate may not translate to an automatic reduction in market rate due to poor transmission mechanisms.

“The committee is also of the view that loosening will reverse the gains already made with reduced importation which has strengthened the current account balance, and lower bank risk appetite and possible rise in NPLs which could negatively impact on the banking industry stability.

“In the discussion for a hold, it was noted that risk to the macroeconomic and financial environment appears fairly balanced with improvement in output growth and inflation.

“Holding policy at the current stand will support growth and further moderate inflation. However, committee noted the appetite of the public for loosening and concern that hold MPR at 14 per cent since July 2016 and considering the dynamic nature of the market, the rates might have lost its signal effect on the market, hence dampen market expectations,” the MPC stated.

Meanwhile, the CBN governor said that the MPC has introduced a policy that will encourage the Deposit Money Banks (DMBs) to lend money to the real sectors and agric sectors of the economy at 9 percent.

Emefiele said: “The incentive that we talked about at the last MPC to encourage banks to give credit to the real sector of the economy, the MPC deliberated extensively on the issue of what can be done to encourage banks to increase credit,

because at the numbers that we looked at during the May meeting, MPC was concerned that credit to the economy was sliding and we look at means to incentify the money deposit banks to increase credit to the real sector.

“At this meeting we found a somewhat improvement which is gratifying but we feel that we must still do what we need to do. Two approaches were considered.

“The first approach, where we said, in order to achieve the objective of lowering interest rate particularly to those priority sectors- manufacturing sectors, agric sector that we will encourage large corporates to issue commercial papers note to the market and there will be a memorandum that will detailed explanations of what they are going to do with that money.

In order to complement the effort of the banks, we will expect that this commercial papers will come at low rate at single digit of 9 per cent or below that.

And for long tenor at a period of 7 years with a specific purpose for that loan, if central bank sees that kind of notes in the market, we will complement the effort of the banks through a mechanism to support that bank that lends to that corporate at single digit rate.”