The Monetary Policy Committee (MPC) on Tuesday ended its two-day meeting with a strong warning that Nigeria’s economy risks slipping into another recession if there is no synergy between monetary and fiscal policies to ensure macroeconomic stability.
Noting immediate challenges to growth to include rising inflation and pressure on external reserves as a result of capital flow reversals, the committee opted to continue tightening monetary policy by retaining all fundamentals.
Consequently, the controlling monetary policy rate (MPR) was maintained at 14 per cent; Cash Reserve Requirement (CRR) left at 22.5 per cent and liquidity ratio retained at 30 per cent. The asymmetric corridor was retained at +200/-500 basis points around the MPR.
The MPR is the controlling lending rate by banks, while CRR is the cash reserve allowable by commercial banks to drive their lending operations.
The committee said the decision to continue to tighten monetary policy would tame inflationary pressures, stem the reversal in portfolio capital, improve the external reserves position and maintain stability in the foreign exchange market.
The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, who briefed journalists at the end of the meeting, said the committee noted inflationary pressures rebuilding, while capital flow reversals have intensified, resulting in the bearish trend in the equities market despite the stability in Naira exchange rate.
The CBN governor said following its meeting in July to review the macroeconomic environment, the committee noted the gains of a robust external reserve, with inflation trending downwards for the 18th consecutive month, appearing to be under threat of reversal.
He said new data from the National Bureau of Statistics (NBS) showed weakening fundamentals traced to the contraction in the oil sector in the second quarter of 2018, compared with the previous quarter.
This was worsened by strong linkages to employment and growth in other key sectors of the economy.
The committee said the external reserves dropped from $45 billion at the end of July 2018 to about $44 billion on September 20, 2018 with total foreign exchange inflow through the economy down by 38.34 per cent to $6 billion in July, from $9.73 billion in June 2018.
With crude prices averaging $80 per barrels, about $29 above the budget benchmark price of $51per barrel, and oil production rising to about 2.3 million barrels per day, the committee was optimistic external reserves would strengthen in the last quarter of 2018.
Also, the committee noted the impact of the disruptions to the food supply chain in major food producing states due to the combined effects of poor infrastructure, flooding and the on-going security challenges.
The committee said these situations resulted in a rise in food prices, contributing to the uptick in headline inflation.
Latest data by the National Bureau of Statistics (NBS) said inflation figures showed a marginal increase from 11.14 percent in July to 11.23 per cent last August, the first rise since a declining trend in January 2017.
“The Committee was concerned that the exit from recession may be under threat as the economy slowed to 1.95 and 1.50 per cent in Q1 and Q2 2018, respectively,” Mr Emefiele said.
In this regard, the committee urged government to take advantage of the current rising oil prices to rebuild fiscal buffers, strengthen government finances in the medium term and reverse the current trend of decline in output growth.
The committee expressed serious concerns over the potential impact of huge liquidity flow as a result of election related expenses by politicians as well as increase in Federation Accounts Allocation Committee (FAAC) distributions to the tiers of government from increased oil receipts.
Also, the committee said it was concerned with the rising level of non-performing loans (NPLs) in the banking system as a result the oil sector decline. It called for sustained effort towards the implementation of the Economic Recovery and Growth Plan (ERGP) to stimulate economic activity, bridge the output gap and create employment.
Amid weakening growth, the CBN governor stressed the need to sustain the faithful implementation of the 2018 federal capital budget and policies to encourage credit delivery to the real sector of the economy. He said this would help in boosting aggregate demand, stimulate economic activity and reduce unemployment in the country.
Forecasting a positive macroeconomic outlook, the committee said sustained implementation of the 2018 budget, improvements in the security situation and increased stability in the foreign exchange market would stabilise prices and strengthen economic growth.
Again, growth in the non-oil sector, especially agriculture, manufacturing, services and light industries were expected to drive output growth over the medium term.
However, developments to underline the downside risks include the impact of increased monetary policy normalisation in the advanced economies and the strengthening US dollar.
Others include the late implementation of the 2018 budget, weakening demand and consumer spending, build-up in contractor debt, low minimum wage, impact of flooding on agricultural output and other economic activities, continuing security challenges across the North-east and North-central zones, and growing level of sovereign debt.
Inflation outlook suggests a mild resurgence of inflationary pressure in the economy, traceable largely to cost-push factors, election related spending, among other domestic factors.To check the drift, he called for improved power supply, increased expenditure on capital projects and improved security conditions, to bring down pressure on consumer prices in the near-term.