Nigeria Business & Finance Updates

The monetary policy committee meeting of Monday 25th and Tuesday 26th November , 2019

1CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO.127OF THE MONETARY POLICY COMMITTEE MEETING OF MONDAY25thAND TUESDAY 26th NOVEMBER 2019

The Monetary Policy Committee (MPC) met on the 25th and 26thof November 2019 in an environment of continued global macroeconomic uncertainty,but gradual improvementsin the domestic economy. The Committee appraised the developments in both the global and domestic economies, as well as the outlook for the rest of the year and the first quarter of 2020. All the eleven (11) members of the Committee were in attendance. The Committee reviewedtheeffect of monetary policy on developments in the economy in 2019, particularly, price stability, improvedcredit delivery, low interest rate regime, exchange rate stability, financial system stability, reduction in non-performing loans (NPLs), job creation and output growth. The Committee noted the use of home-grown heterodox policies used by the Bank to successfully achieve substantial macroeconomic stability in 2019. Amongst the policies were the use of the Global Standing Instruction (GSI)to address the predatory impactof serial borrowers in the banking system,a phenomenon thatreducedthe level of NPLs over time, theLoan to Deposit Ratio (LDR) to boost credit delivery by the deposit money banks (DMBs)to the real sector, Discounted Cash Reserve Requirement (DCRR), Development Finance Initiatives in agriculture, micro, small and mediumenterprises (MSMEs) and other real sector activities, including restriction of patronage by local corporate and individual investors inCBN OMO bills.Global Economic Developments Global output growth remained weakdue to the impact of the trade war between the US and China; growing vulnerabilities in the financial markets, downturn in global manufacturing,sustained downward pressure on oi prices, lingering uncertainty around BREXIT, which has continued to dampen 2investment growth in the United Kingdom, subduedgrowth in the European Union and Japan,anddampening output growth in China. These headwinds resulted in slowingglobal trade, weakening aggregate demand and contractionin the aggregate supply chain. Major Emerging Market and Developing Economies (EMDEs) particularlyChinaandIndiaalsoslowed,while South Africa, Russia and Brazil, recorded slower-than-expected growth. Consequently, there was a broad slowdown inglobal output.In the light of these developments, the IMF revised global growthforecastdownwards to 3.0per cent in October2019 from its previous projection of 3.2 per centin July 2019.Inflation in most AdvancedEconomies remained well below their long-run objectives,with price development staying subduedand unemploymenttrending mostly below the Non-Accelerating Inflation Rate of Unemployment (NAIRU). Inthe US,wage growth and aggregate demand continuedto perform below the long run averageeven thoughunemployment remained below the NAIRU.Consequently, the recent trend towards monetary accommodation by key central banksis expected to continueintothe foreseeable future. In key EMDEs, however, prices trended upwards with the output gapswidening and unemployment remaining relatively high.Domestic EconomicDevelopments Data from the National Bureau of Statistics (NBS) showed that real Gross Domestic Product (GDP) grew by 2.28per cent in the thirdquarter of 2019,compared with 2.12and 1.81per cent in the precedingandcorresponding quarters,respectively.Theimproved growth was driven largelybythe performance of the oil sector,which grew by 6.49 per cent,while the non-oil sector grew by 1.85 per cent.The Manufacturing and Non-Manufacturing Purchasing Managers’ Indices (PMI)also expanded for the 31stand 30thconsecutive months at 58.2index points,apiece,inOctober 2019.Staffprojectionsindicate thatreal GDP inQ4 2019is expected to grow by 2.38per cent,driven by the non-oil sector. Headwinds to thisprojection, include:continued high level of unemployment,mild resurgenceof anticipated 3inflationary pressures towards the December festive season,risingpublic debt,high level of insecurity,and slow paceofoil price recovery.Despite these headwinds,growth is expected to pick on the back of recent actions to boostcredit to the private sector through the recent Loan-to-Deposit Ratio (LDR) and Global Standing Instruction (GSI) initiatives, sustained interventions by the Bank in selected employment and growth-enhancingsectors,as well as fiscal policymeasures to support growth. The Committeenotedthe uptick in headline inflation (year-on-year) from 11.24 in September to 11.61per cent in October2019. This was anticipated as part of the seasonalend-of-the year uptick in prices; but was further accentuatedby the border closure, an expected temporary food supply shock which willadjust over the medium-to-long term as the economy increase investments in food production. Consequently, food inflationrose from 13.51to 14.09 per cent in September and October 2019, respectively. Core inflation, the underlying inflation in the economy, however, declined marginally from 8.94 to8.88 per cent in September and October, respectively. The decline observed in core inflation was attributed to the relative stability in the foreign exchange market. The Nigerian land borders were closed to address the incidenceof increased cross-border banditry, smugglingand dumping,insurgencyand the illegal trade practices of neighbouring countries whose economies had become dependent on Nigeria through smuggling through the borders. The Bank’s continued intervention in the agricultural sector is expected to improve medium-term food supply.Indeed, there has been reports of bumper harvest in some staples like rice, maize, etc.The Committee observed that broad money supply (M3) grew by 5.72 per cent (year-to-date) in October 2019, compared with the2019 indicative benchmark of 16.08 per cent. Growth in Net Domestic Credit (NDC) moderated to 26.38 per cent in October 2019 from 30.33 per cent in the previous month. This was attributed to a significant reduction in credit to Government in October 2019 to 85.99 per cent from 114.79 per cent in the previous month. Growth in credit to the private sector, however, improved to 13.08 per cent in October 2019 from 12.49 per cent in the previous month, 4reflecting the impact of the Bank’s recent policy on loan-to-deposit ratio. Anincrease in absolute gross credit,amounting to N1,169.70billion,was recorded between end-May andend-October 2019. Consequently, the manufacturing sector received N459.69 billion, the highest in two decades. This was followed by consumer loans of N356.65 billion, General Commerce (N142.98 billion), Information and Communications(N82.07 billion), Construction (N74.52 billion), Agriculture, Forestry and Fishing (N73.20 billion), Mining and Quarrying (N3.64 billion) and Transportation and Storage (N3.09 billion), amongstothers. The Committee, therefore, urged the Management of the Bank to sustain itscurrent efforts toimprove lending to the private sector and to explore other initiatives to provide funding to othercritical sectors of theNigerian economy.In the reviewperiod, money market interest rates reflected the prevailingliquidity conditions in the banking system. Overall, the monthly weighted average Inter-bank call and Open BuyBack (OBB) ratesfellto7.87and 7.22per cent, respectively, in October 2019,from11.41and 10.73per cent, respectively,in September 2019.The Committee notedthat the persistingbearish trend in the equities market,had started to abatein November 2019,and was pleased by the increased patronage in thesovereign bonds market.TheAll-Share Index (ASI) grewby 2.41per cent to 26,991.42index points on November22, 2019, from 26,355.35 index points at end-October 2019.Market Capitalization (MC)alsogrew by 1.54per cent to N13.03trillion on November 22, 2019, from N12.83trillion at end-October2018, due largely to portfolio shift from short-term Government securities to the equities market.The MPC also notedthe improved resilience of the banking system, as theNon-Performing Loans(NPLs)ratio declined further to 6.56 per cent at end-October 2019 from 6.67per cent at end-September2019and from 14.05 per cent in October 2018. The Committee, however,notedthat thisfigureremainedabove the prudential benchmarkof 5.0 per cent,and urgedthe Bank to sustain itscurrent efforts,which have created this exorable prudential regime.5Outlook Overall, the medium-termoutlook for the domestic and global economies continue to be clouded with uncertainties,associated withthe persisting trade wars between the US and its major trading partners, financial vulnerabilities, rising levels of public and corporate debts, pockets of geopolitical tensions and weakening global output.However, the reforms underway in the domestic economy; aimed at diversificationaway from oilover the last three years have provided adequateshock absorberto withstand the headwinds. However, the Committee urged the fiscal authorities to invest massively in public works programme and improve fiscal buffers to complement these efforts. Forecasts of key macroeconomic variables,however, indicate prospects of improvedoutput growth for the economy. Based on recent revised projections, the economy is expected to grow in 2019 by 2.3 per cent (IMFestimate), 2.1 per centby the World Bank,and 2.20per cent by the CBN. The Committeenoted the tailwinds to these developments,to include:sustained stable exchange rate;enhanced flow of credit from the Deposit Money Banks (DMBs)to the private sector;expected improvements in tax revenueand efficiency in public expenditure;continued improvement in the business environment andactivities; andthe sustainedinterventions by the Bankin the real sector.The Committee’s ConsiderationsThe Committee welcomed the improvementsin output growth in the third quarter of 2019, noting that the current direction of the Purchasing Managers Index suggests stronger growth in the fourth quarter. It however, re-emphasized the need for diversification to strengthen the productive base of the economy and reduce dependence on oil. Diversification has become necessarynow that Nigeria has signed the African Continental Free Trade Agreement (AfCTA). To achieve this, the Committee urged the Federal Government to continue to improve the investment climateand ease of doing businessto attract Foreign Direct Investment. Particularly, Government should,as a 6priority,improve conditions for global auto manufacturers, including for aviation and rail industries to invest in the country.The Committee commended the expansion in manufacturing output, noting that it was a direct fallout of the policy on loan-to-deposit ratio. The Committee,called on Government to urge the Pensions Commissiontoimprove the prudentialrequirements for Pension Funds to refocus their investment portfolio away from their traditional choice of Government securities in favour of other viable long-term investments in real estate, manufacturingand agriculture; and indeed infrastructure. Moreover, the Committee called for strong visibility of fiscal and structural policies to improve infrastructure and investment conditions in the economy. It expressed strong optimism that the current policies of the Bank, in a regime of solid fiscal and structural policy support,would yield strong dividends in closing the current negative output gap in the medium to long term,and place the economy on a sustainable and self-sufficient path of output growth. As a key pillar of economic diversification, the MPC directed the attention of the fiscal authorities to the immense potentialsofthe gas sub-sector and the urgency to encourage horizontal integration through private sector participation. This, the Committee argued will improve domestic power supply and export earnings. On price developments, the Committee considered the moderate uptick in headline inflation in October 2019, attributing it partly to an expected temporary shortfall in food supply becauseof the recent land border closure and rise in demand as the festive season approaches. Although it noted that the price increase was not unexpected, the Committee believed that the mediumtolong-term benefits far outweigh the short-term cost. Consequently, it noted the need to drive down food prices through increased support for local production of staples foods, including rice, fish, poultry, palm oil, tomatoes etc. It also urged the Government to follow through with a sustainable policy on backward integration in the milk industryand other priority sectors of the economy.7On the fiscal sector, the Committee identified the need for institutional reforms through policies that would automate day to day processesof key revenue generating and security agenciessuch as the Nigerian Customs. This would provide additional advantage of stemming smuggling, kidnapping and the migration of terrorists into the country. The MPC reiterated the need for increased efficiency in public expenditure and the building of fiscalbuffers.On the impact of the recent closure of Nigerian land borderson domestic food prices, the Committee noted that any upward price movement arising from the closure was reactionary and therefore temporary. Moreover, significant investment has been made over the last three years to sustainably increase domestic food supply. It noted some of the key initiatives in this direction to include: the Commodity Development Initiatives,designed to finance the agricultural value chain of ten ((10) commoditiesnamely; Cassava, Cocoa, Cotton, Rice, Tomato, Poultry, Livestockand Dairy, Fish, Oil PalmandMaize,which hasreceived N171.66 billion in funding. Four of these crops received over 140.12 billion naira or 81.6 per cent of total disbursements (Cassava, 11.44 billion naira; Cotton, 40.47 billion naira; Rice, 53.40 billion naira; Oil palm, 34.81 billion naira). It is, therefore,expected that the outcome of these interventions will close the supply gaps already envisaged in the medium to long term,including dampening domestic prices. It thus, expressed support for the temporal closure of Nigeria’s land borders,notingthat securing the country’s land borders should be further enhanced.On crude oil price, the Committee noted the lull in the futures market,suggesting that prices would remain relatively weak into the foreseeable future. The Committee, therefore, urged the Federal Government to reconsider its 2020 budget oil price benchmark of US$57per barrel,to buildfiscalbuffers.The Committee was confident that despite the weaknesses from the external sector, efforts to ramp-up domestic production,through several measures by both the monetary and fiscal authorities,would douse the adverse effectson the domestic economy in the medium term,through the reduction of importation of food and other commodities.8The Committee’s DecisionThe MPC reviewed the upsides and the downsides of the options to tighten, hold or loosen. It was conscious that,while tighteningmay encourage capital inflows, it alsohasthe downside consequence of constrainingthe already nascentrecovery in output growth. The Committee also noted that a reductionin the policy rate will improve growth prospects,but in view of the uptick in inflationary pressures, it decided that the balance of risks was in favour of protecting price stability. Considering the recovery, decline in market interest rates, growth in domestic credit amongst other positive developments, the Committee felt that there wouldbe more gains in the short to medium term in holding policy at its current position. In its consideration to hold, the MPC noted with pleasure, the positive outcome of actions already taken by the Bank. These actions include: current policy on loan-to-deposit ratio, which has resulted in loans and advances rising by over N1.1trillion between June to October 2019. It further noted that these actions have assisted in boosting credit to the agricultural and manufacturing sectors, hence,the positive outcome on the GDP. The MPC is hopeful that the LDR initiative must be sustained as interest ratesbeing paid by borrowers have so far dropped by up to 400 basis pointsbetween June and October 2019. These have happened with corresponding decline in NPLs to 6.5 percent at end-October 2019. The MPCis, therefore, of the view that sustaining the MPR at its current level is crucial for better understanding of the unfolding impetus of growth before deciding on any probable variations. The MPC also feels that holding its current policy position offers pathways for appraising the effect of the heterodox policies to encourage lending by the banking industry withoutvarying the policy rate as the downside risk to growth and caution oninflationlooks stable.The MPC is also of the view that the improvements in the macroeconomic indicators such as the GDP, NPLs, CAR, and the LDR, suggest that current monetary policy stance is yielding results.It therefore, feels that maintaining the current stance would be necessary in order to sustain the improvements.9In view of the foregoing, the Committee decided by a unanimous vote to retain the Monetary Policy Rate (MPR) at 13.5 per cent and to hold all other policy parameters constant. In summary, the MPC voted to: I. Retain the MPR at 13.5per cent; II. Retain the asymmetric corridor at+200/-500 basis points around the MPR; III. Retain the CRR at 22.5 per cent; and IV. Retain the Liquidity Ratio at 30 per cent. Thank you. GodwinI. Emefiele Governor, Central Bank of Nigeria 26thNovember2019

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