New Telegraph

Grappling with dilemma of monetary policy

With inflation widely predicted to maintain its uptrend in the near term, at least, the Central Bank of Nigeria (CBN) looks set to keep grappling with the dilemma of monetary policy, especially given that the negative impact of the #EndSARS crisis on output growth, means that the apex bank would likely keep striving to roll out measures to boost the economy writes TONY CHUKWUNYEM

Prior to the meeting of the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) in September this year, analysts had predicted that although inflation was on an upward trajectory, the need to address economic contraction occasioned by the coronavirus (COVID-19) crisis, would make the committee to maintain the status quo rather than hiking rates. For instance, commenting on the likely outcome of the MPC meeting at the time, the Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, said: “In spite of the rising inflation trend, the most likely outcome considering the impact of economic contraction and high unemployment is to leave all monetary parameters unchanged.

The committee will continue to monitor the impact of recent policies such as the reduction in interest rates, on banking system liquidity and deposits.” Also, citing the National Bureau of Statistics (NBS) report, which showed that Nigeria’s inflation rate rose for the 12th consecutive month to hit 13.22 per cent in August 2020, the highest recorded in 29 months, since March 2018 (13.24 per cent), analysts at FBNQuest Research stated: “This latest increase makes further monetary easing less likely. It also pushes the policy rate further into negative territory in real terms.”

Surprise rate cut

However, it is no longer news that at the end of that meeting, MPC voted to reduce the benchmark interest rate – the Monetary Policy Rate (MPR) – by 100 basis points from 12.5 to 11.5 per cent; adjust the asymmetric corridor from +200/-500 basis points to +100/-700 basis points around the MPR; retain the Cash Reserve Ratio (CRR) and Liquidity Ratio at 27.5 per cent and 30 per cent respectively.


Explaining the issues it considered to arrive at its decision, the committee stated in the communiqué it released at the end of the meeting that “the MPC was, at this meeting, confronted by policy dilemma. Whereas MPC believes in the primacy of its price and monetary stability mandate, it nevertheless was confronted with what policy direction to focus on, given the contraction in output growth during the second quarter of 2020, which may lead to a recession, if the third quarter of 2020 output growth numbers further show a contraction.

“It is, therefore, of the view that, if a recession occurs in Q3’20, the committee would be confronted with proposing policy options in a period of stagflation. This is because, with the recent removal of subsidy on fuel price, the increase in energy prices and the adjustment of the exchange rate, inflationary pressure will, no doubt, persist unless MPC consider options that will deal with the pressure aggressively.

“The committee was therefore of the view that, to abate the pressure, it had no choice but to pursue an expansionary monetary policy using development finance policy tools, targeted at raising output and aggregate supply to moderate the rate of inflation.”

Significantly, the committee pointed out that “at present, fiscal policy is constrained and so cannot, on its own lift the economy out of contraction or recession given the paucity of funds arising from weak revenue base, current low crude oil prices, lack of fiscal buffers and high burden of debt services.

“Therefore, monetary policy must continue to provide massive support through its development finance activities to achieve growth in the Nigerian economy. This is the reason MPC will continue to play a dominant role in the achievement of the goals of the Economic Sustainability Program (ESP) through its interventionist role to navigate the country towards a direction that will boost output growth and moderate the level of inflation.”

It further stated: “Given that the currency adjustment was a causal factor in determining the price of petroleum products and energy prices, the MPC believes that the CBN management must take bold actions to stabilize the exchange rate. “Management was further enjoined by the MPC to continue to provide funding to sectors that will resolve the supply constraints in petrol pricing, energy pricing and food availability.

To support household consumption, the MPC enjoined management to aggressively channel its funding to targeted households, SMEs and consumer credit by further increasing its lending activities through its NIRSAL Microfinance Bank (NMFB).

“The management was also directed to ensure that DMBs respond to the reduction in deposit rates by aggressively lowering cost of credit to borrowers. As regards output growth, MPC noted that air and road transportation; entertainment & accommodation; food services; and education subsectors were adversely affected by the lockdown. It therefore suggested that more efforts be put in place to continue to provide relief and funding to these subsectors to catalyze growth and improve the output numbers.”

Need to sustain economic recovery

Noting that members of the MPC were confronted with three choices: To tighten policy in order to curb inflation and attract fresh capital into the economy; ease the stance of policy to provide cheaper credit to improve aggregate demand, stimulate production, thereby boosting economic growth and maintaining status quo to allow the economy to adjust to the stimulus measures put in place by the monetary and fiscal authorities, the communiqué noted that the members believed that the option to loosen would complement the CBN’s commitment to “sustain the trajectory of the economic recovery and reduce the negative impact of COVID-19.” It further explained that MPC members were of the view that liquidity injections would stimulate credit expansion to the critically impacted sectors of the economy and offer impetus for output growth and economic recovery.

Substantial disbursement of intervention funds

In fact, as one of the members of the MPC, Professor Adeola Adenikinju, pointed out in his personal statement at the meeting, “the CBN recorded impressive progress in the disbursement of intervention funds to support the economy during Covid-19. The Healthcare Credit Support of N100billion has been drawn down by N44.47 billion to support 41 Projects in the healthcare sector.

“Also, N73.685 billion has been disbursed under the Targeted Credit Facility (TGF) fund of N100 billion to 120,074 beneficiaries. In addition, over N216.878 billion have been disbursed out of N1 trillion to fund 87 real sector projects in manufacturing, agriculture and services.”

November meeting

Significantly, as industry watchers look forward to the last MPC meeting of the year in the next few weeks, the general feeling is that the policy dilemma, which the committee members faced at their last meeting, has not gone away. Indeed, it seems to have been worsened by the devastating impact of the recent #EndSARS crisis on the economy.

The CEO of FDC, Bismark Rewane, pointed out in a report last Friday that apart from the huge economic losses that the nation incurred due to the crisis, which would push the authorities into investing significant amounts in completing infrastructure and poverty allocations, the disaster will also lead to a spike in inflation.

The #EndSARS crisis broke out on October 20, when security forces in Lagos opened fire on unarmed protesters at the Lekki Toll gate, who had been staging a sit-in for about two weeks, calling for the dissolution of the Special Anti-Robbery Squad (SARS), a notorious Police unit that had long been accused of extortion, torture and extra-judicial killings, resulting in widespread looting of warehouses, massive destruction to the facilities of fast-moving consumer goods (FMCG) companies and the burning of trucks conveying agricultural commodities. According to the FDC boss, “the #EndSARS protest effect on the budget, Economic Sustainability Plan (ESP) and Economic Recovery and Growth Plan (ERGP) would definitely be telling.

Nigerian government will need to invest significant amounts in completing infrastructure & poverty allocations. The forex rate of N379/$ may need an adjustment and huge sales to replenish lost inventory.” He also disclosed that in the aftermath of the crisis, the FDC had revised its estimates for inflation in October 2020 upward to 14.5 per cent from the previous 14.2 per cent projection. Still, like he did prior to the last MPC meeting, the financial expert is also predicting that the committee will leave rates unchanged at its last meeting of the year.


However, the consensus among analysts at the weekend was that while it may be difficult to accurately forecast how the MPC members will vote, one thing that is almost certain is that CBN would likely step up its interventions in critical sectors of the economy in the coming weeks and months.

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