*Emefiele debunks perceived plans to convert domiciliary accounts to naira, promises improved forex supply
27 March 2016, Lagos — The Monetary Policy Committee (MPC) of the Central Bank of Nigeria, CBN, on Tuesday resolved to raise the Monetary Policy Rate (MPR) otherwise known as the interest rate, to 12 per cent from 11 per cent.
It also increased bank’s Cash Reserve Ratio (CRR) to 22.5 per cent from 20 per cent, in a move aimed at tightening liquidity, which the central bank blamed for the current pressure in the foreign exchange market with a strong pass-through to consumer prices. Inflation in the country rose to 11.4 percent last month, effectively exceeding the CBN’s inflationary ceiling by 240 basis points.
The MPC also kept liquidity ratio unchanged at 30 per cent, and further resolved to narrow the asymmetric corridor around the MPR from +200 and -700 basis points to +200 and -500 basis points respectively.
MPC, however, remained silent on the fate of naira and the currency controls the central bank introduced a year ago due to dollar shortages brought on by low oil prices.
Addressing journalists at the end of the two-day meeting of the committee in Abuja, CBN governor, Mr. Godwin Emefiele, said the decision to resume the tightening regime after a four-month break, followed the evaluation of both internal and external factors, explaining that the “balance of risks is tilted against price stability”.
He said all members voted for a tightening of monetary policy, except one member who voted to retain the CRR at 20 per cent, while another member voted to retain the current width of the asymmetric corridor.
The CBN governor noted that contrary to the notion of a liquidity overhang in the financial system, the wider economy appears to be starved of the needed liquidity to spur growth and employment.
He also said, though conflicting signals from slowing growth and rising inflation present a difficult policy challenge, the committee stressed on the need to urgently address key sources of pressure and resolved to closely monitor the development while working with the relevant authorities to address the structural bottlenecks.
He said though headline inflation shot to 11.38 per cent in February, substantially breaching the policy reference band of 6 – 9 percent, the increase in inflation rate was largely driven by structural factors including fuel scarcity, increased electricity tariffs, persistent insecurity, exchange rate pass-through and seasonality of agricultural produce, and “not so much by liquidity”.
In arriving at its policy decisions, Emefiele said: “The committee noted the weakening macroeconomic environment, reflected particularly on foreign exchange shortages, the slowing GDP growth rate and rising inflation.
“Overall economic growth slowed significantly in 2015, particularly in Q4. Apparently, the conditions responsible for the slowdown – uncertainty around fiscal policies, an adverse external environment, security challenges in some parts of the country affecting production and distribution of agricultural produce, low electricity supply, fuel shortages, and sluggish growth in credit to the private sector – have continued in the first quarter of 2016.”
On the CRR hike, he said: “From the monetary data, the committee noted that the excess liquidity in the banking system was contributing to the current pressure in the foreign exchange market with a strong pass-through to consumer prices.
“The committee further noted that previous efforts to reflate the economy in order to spur growth, did not elicit the required response from DMBs, hence the surfeit of liquidity in the interbank market.
“Obviously, the attendant low rates at that market have not transmitted to the term structure of interest rates. Concerned about the need for low-interest rates to support growth and employment, the committee urged the CBN to explore innovative ways of ensuring the unhindered flow of credit at low cost to key growth sectors, even as monetary policy has to, under the circumstance, address the liquidity surfeit in the banking system as well as the pressure on exchange rate and consumer prices.
“The committee hopes that fiscal and other structural policies would soon be deployed to strengthen the overall response of macroeconomic policy to the shocks.”
According to Emefiele, concerns were also expressed by committee members over headline inflation, noting that the policy rate had become negative in real terms.
He said: “This development has the potential of keeping both foreign and domestic investments on hold. As part of measures to address the supply constraint in the foreign exchange market, yields on domestic instruments have to be competitive to attract the much-needed foreign inflows.
“On the administrative side, this will have to be complemented by a comprehensive reform of the foreign exchange market which is currently being undertaken.
“For the avoidance of doubt, the Bank would continue to allow domiciliary account holders unfettered access to funds in their accounts.”
The committee further enjoined the National Assembly to speed up passage of the 2016 budget in order to halt the depressing effect of the uncertainty that engulfs the waiting period.
It expressed hope that the implementation of the budget would go a long way in boosting business confidence, and reinvigorating the financial markets and urged the CBN to continue to upscale its surveillance of the financial system with the aim of promptly detecting and managing vulnerabilities to ensure sustained stability.
Emefiele also refuted suggestions that the central bank was planning to convert the over $20 billion held in domiciliary accounts in the country to naira.
He said the CBN had no intention of doing so and would never convert people’s domiciliary accounts to the naira.
Also, the CBN governor said it was working to improve the supply of foreign exchange for legitimate businesses, but appealed to Nigerians to look inwards to things which could be produced locally in order to reduce the pressure on foreign exchange.
He added that the refusal by banks to lend to the real sector was largely caused by the magnitude of non-performing loans (NPLs) which have almost reached the five percent sector threshold, adding that credit advances to oil companies were largely responsible for the NPLs.
He said measures were being taken to address the huge indebtedness of the oil sector to the banking system.
Speaking to THISDAY yesterday on the decisions of the MPC, the Deputy Managing Director, Aquila Asset Management Limited, Oyelami Adekola, said despite the hike of the MPR and CRR, inflation would continue to climb.
Adekola said the inflationary pressure was as a result of imported inflation because a lot of importers now purchase forex from the parallel market at a higher cost.
“So I reckon that the hands of the MPC members are tied. They have no choice other than to continue with the tightening measures. But for me, a reasonable thing to now do after these tightening measures are to ensure adequate quantitative easing to specific sectors.
“Sectors should be targeted for growth and they must be able to get single digit funds to be able to grow.
“They should ensure that the funds are properly monitored. And it is likely that the key monetary policy tools would be raised further because I don’t see inflation backing down soon and the pressure would continue.
“Today, because of the CBN’s policy, there is a lot of money not in the banking system and I think that should encourage bankers to go out there to mobilise deposits, especially with the CRR hike,” he said.
In his reaction, Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, who welcomed the decision by the MPC, however, said that “it won’t go far” in addressing some of the challenges being faced in the economy.
According to him, there was credibility, clarity and some inconsistency in the MPC decision, just as he maintained that Nigeria requires an exchange rate policy
“Let me tell you, nobody is going to bring foreign exchange into Nigeria because of a one per cent increase in interest rate, when they know that it is inevitable that there would be an exchange rate depreciation.
“Therefore, yes, Nigeria has tightened like three out of nine other African countries, but something else has to be done,” Rewane said.
According to him, faced between stimulating growth and controlling inflation, the MPC members made a choice to contain inflation against growth.
“This is because if you are going to make a choice for growth, you will not push up the interest rate. Once the budget is approved, we are going to go into a higher rate of spending and the level of activity and the demand for foreign exchange is going to increase because of government expenditure. That is why an exchange rate policy is inevitable.
“An exchange rate policy allows for flexibility of exchange rate rather than a rigid exchange rate policy. With that, the central bank can always intervene in the forex market with the resources available.
“This is because right now, tongues are wagging with the rationing of forex exchange and to avoid that, there should be further clarity,” the FDC boss said.
But the Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, faulted the premise on which the MPC raised the two monetary policy tools, saying it was at variance with the factors that drove inflation to double-digit.
The MPC decision, Chukwu argued, would not necessarily lead to a moderation in inflationary pressure.
He explained that: “Inflation was not driven by expansion from the banks and we are in a situation where the banks are not lending. Therefore, you cannot moderate inflationary pressure, if it was not driven by credit, by increasing the MPR and CRR.
“The rise in inflation was driven by the pass-through effects of the devaluation that we have seen in the parallel market rates, the increase in energy charge and an increase in petrol price as a result of inadequate supply.
“So those factors have nothing to do with the availability of credit. Therefore increasing the MPR would not in any way benefit the country and would not bring about a reduction in inflationary pressure. I don’t think the premise on which they decided to raise the MPR and CRR was based on the factors that are driving up inflation rate.
“They also said they want to encourage investments in financial assets. I don’t think that would happen unless we address the challenges we have with the exchange rate. Foreign portfolio investors are running away from the Nigerian market not because yields are so low, but because our exchange rate is not market-reflective.”
In a note, the Global Chief Economist, Renaissance Capital, Charlie Robertson, described the decision by the MPC an “interestingly orthodox” move from the CBN.
“The 200 basis points rate cut in November 2015 probably contributed to naira weakness in the unofficial market so partly reversing that cut now … is helpful for the currency.
The full cut has not been reversed – I am not saying this will strengthen the unofficial naira appreciably but it should slow further depreciation. And there’s still talk of more liquidity being injected into that parallel rate,.. which could see the unofficial rate strengthen.
“The rate cut last year was about cutting government borrowing rates – and this is evidently less of a priority today,” Robertson said.
*Obinna Chima & James Emejo – Thisday