clean/cb_requests/00ef8b5795101e70a74c850f3353cffb.json

{"doc_id": "00ef8b5795101e70a74c850f3353cffb", "text": "1 \n \n \nCENTRAL BANK OF NIGERIA COMMUNIQUÉ NO. 123 OF THE MONETARY POLICY \nCOMMITTEE MEETING OF MONDAY 25TH AND TUESDAY 26TH MARCH, 2019 \nBackground \nThe Monetary Policy Committee (MPC) met on the 25th and 26th March, 2019; \nagainst the backdrop of developments in the global and domestic economic \nenvironments in the first quarter of 2019. Eleven (11) members of the \nCommittee were present. \n \nGlobal Economic Developments \nThe Committee noted with concern the weakening performance of global \noutput growth at the end of 2018 and observed that developments in the first \nquarter of 2019 were characterised by legacy headwinds from the second half \nof 2018. These include: the continued trade war between the US and China, \npolicy uncertainty amongst advanced economy central banks; persisting \nuncertainties surrounding BREXIT negotiations; vulnerabilities in major financial \nmarkets and rising public debt in some Emerging Market and Developing \nEconomies (EMDEs). Consequently, global output growth for 2019 was \ndowngraded by the IMF from 3.7 per cent to 3.5 per cent. \nPrice developments across major advanced economies, continued to \nmoderate in the review period alongside signals of weakening output growth. \nIn the light of this development, the US Fed, the Bank of England and the \nEuropean Central Bank retreated from their earlier stance of monetary policy \nnormalisation in favour of a monetary policy accommodation. This led to \n2 \n \nvolatilities in the financial markets of the advanced economies as the \nbalancing of portfolios moved capital from the equities to the bonds market. \nThe MPC noted the moderate appreciation of the US dollar against the \ncurrencies of most advanced and emerging market economies. It further \nnoted the trend of declining long term yields in the US, and the likelihood that \ncapital flows may be redirected to EMDEs in the medium term. \nDomestic Output Developments \nOutput data from the National Bureau of Statistics (NBS) indicate that real \nGross Domestic Product (GDP) grew by 2.38 per cent in Q4 2018 from 1.81 and \n2.11 per cent in the previous quarter and corresponding period of 2017. The \nmajor impetus for growth came from the non-oil sector, which grew by 2.7 per \ncent in Q4 2018, while the oil sector contracted by 1.62 per cent. \nThe Committee welcomed the continued positive sentiments in the \nManufacturing and Non-Manufacturing Purchasing Managers’ Indices (PMIs) \nfor the 24th and 23rd consecutive months in March 2019. The manufacturing PMI \nrose by 57.4 index points compared with 57.1 in the previous month. Similarly, \nthe non-manufacturing PMI increased by 58.5 index points compared with 58.4 \nin February 2019. The increase in both measures of PMI was driven by increases \nin production, employment, raw material inventories and new orders. This \nimproved outlook was attributable to the continued stability in the foreign \nexchange market, various interventions by the Bank in the real sector and the \neffective implementation of the Economic Recovery and Growth Plan (ERGP) \nby the Federal Government. Furthermore, on the current measure of national \noutput, the MPC noted the need to rebase the GDP, an exercise which was \nlast carried out in 2010. \n \n \n \n3 \n \nDevelopments in Money and Prices \nThe Committee noted that broad money supply (M2) contracted by 1.98 per \ncent in February 2019, below its level at end-December 2018. Net Foreign \nAssets (NFA) contracted by 7.47 per cent in February 2019 relative to its level \nat end-December 2018. In contrast, M3 grew by 4.31 per cent in February 2019 \ncompared with its level at end-December 2018. Net Domestic Credit also grew \nby 10.68 per cent in February 2019. The growth in NDC was accounted for by \nthe increase in credit to Government which grew by 17.20 per cent in February \n2019 over its level at end-December 2018. Credit to the private sector also rose \nby 6.41 per cent compared with its growth benchmark of 9.41 per cent. Given \nthe positive trajectory, the Committee urged the Management of the CBN, to \nsustain the various initiatives of the Bank, particularly the partnership between \nthe Bankers Committee and the Nigeria Incentive-Based Risk Sharing System \nfor Agricultural Lending (NIRSAL) aimed at establishing a national microfinance \nbank to cater for the MSMEs of the economy. \nThe Committee noted the continued moderation in inflation as headline \ninflation (year-on-year) declined further to 11.31 per cent in February 2019 from \n11.37 and 11.44 per cent in January 2019 and December 2018, respectively. \nThe decrease in headline inflation was driven mainly by food inflation, which \ndeclined to 13.47 per cent in February 2019 from 13.51 per cent in January \n2019, while core inflation declined marginally to 9.80 per cent from 9.91 per \ncent in the previous month. On a month-on-month basis, headline, food and \ncore inflation declined to 0.73, 0.82 and 0.65 per cent in February 2019, \nrespectively, from 0.74, 0.83 and 0.81 per cent in January 2019. The Committee \nnoted the upside risks to inflation to include; high cost of energy, infrastructure \nconstraints, insecurity in some parts of the country; and anticipated increase in \nliquidity from the late implementation of the 2018 budget, and noted that most \nof these factors were outside the ambit of monetary policy. The MPC, \ntherefore, urged the Federal Government to sustain its current effort in \nstimulating output growth by executing the policies approved in the ERGP. \n4 \n \nThe net liquidity position reflected the impact of OMO auctions, foreign \nexchange interventions, statutory allocations to states and local governments, \nand maturing CBN Bills. Consequently, the average Inter-bank call rate \nincreased to 16.45 per cent in February 2019 from 15.00 per cent in January \n2019. The Open Buy Back (OBB) rate, however, declined marginally to 18.79 \nper cent in February 2019 from 19.71 per cent in January 2019. The interbank \ncall rates, however, closed at 8.0 per cent on March 8, 2019, while the OBB \nclosed at 14.39 on March 22, 2019. \nThe Committee noted that in spite of the recent upsurge in capital inflow into \nthe economy, the All-Share Index (ASI) and Market Capitalization (MC) \ncontinued to decline, reflecting global sentiments in portfolio rebalancing from \nequities to fixed income securities. This generally reflected the perceived risk at \nthe long end of the yield curve. \nThe Committee noted with satisfaction, the continued stability in the foreign \nexchange market at the Investors’ and Exporters’ (I&E) window of the market. \nIn particular, it also observed the moderate improvement in oil prices and \nstable accretion to external reserves, which stood at US$45.2 billion as at March \n21, 2019, a 6.73 per cent increase from US$42.35 billion at end-February 2019. \n \n \nThe Overall Outlook and Risks \nThe medium term outlook for the global economy continues to be uncertain \nwith indications of increasing macroeconomic vulnerabilities and downward \nrevision of the forecast for global output growth. \nOn the domestic economy, available data on key macroeconomic indicators \nfor output growth in the first quarter of 2019, and forecasts for the rest of the \nyear, suggests continued positive outcomes. Based on recent projections, the \neconomy is expected to grow by 2.0 per cent (IMF), 2.2 per cent (World Bank) \nand 2.74 per cent (CBN). The projection is hinged on: the enhanced flow of \ncredit to the real sector; sustenance of a stable exchange rate; moderating \n5 \n \ninflation rate; CBN special interventions in growth-enhancing sectors, \nespecially, agriculture and non-agricultural SMEs; improved growth in the non-\noil sector and the effective implementation of the ERGP by the Federal \nGovernment, amongst others. The Committee expressed optimism that the \nestablishment of the NIRSAL National Microfinance Bank and the enactment \nof the Secured Transactions in Movable Assets Act 2017 will stimulate lending \nto small and medium enterprises. \n \nCommittee’s Considerations \nThe Committee observed the tepid output growth in 2018, but noted with \nsatisfaction that it strengthened in the last quarter of 2018 as well as the positive \nforecast for 2019. It further noted with great satisfaction, the continued \nmoderation in all measures of inflation, sustained stability in the exchange rate \nand the robust level of external reserves. It commended the recent upsurge in \ncapital inflows into the economy, noting this to be a demonstration of \nsustained confidence by the foreign investor community in the Nigerian \neconomy. The Committee was, however, not unmindful of developments in \nthe global economy, noting the recent slowdown in growth in some advanced \neconomies and the dovish stance of some major central banks as an early \nwarning sign of broader macroeconomic vulnerabilities. It, therefore, \nunderscored the need to monitor the trend in capital flows and the continued \ndownturn in the equities market, noting that the recent surge in portfolio inflows \nwere concentrated in the money market. \n \nThe Committee noted the relative volatility in oil prices and its impact on \naccretion to reserves which could easily undermine the stability observed in \nthe foreign exchange market. It, however, noted that current developments \nin the oil futures market indicate that oil prices will remain considerably above \nthe Federal Government’s 2019 budget benchmark. The Committee, \ntherefore, urged the Federal Government to strengthen its current revenue \n6 \n \nmobilization efforts as well as explore additional sources of revenue in order to \nimprove fiscal buffers. It further urged the Federal Government to sustain its \nimplementation of the ERGP, while ensuring that growth is all inclusive. It \nreiterated the need to concentrate effort on addressing the problem of weak \npower infrastructure, as well as support domestic manufacturing. The \nCommittee also called on all relevant institutions of the government to address \nthe menace of smuggling and dumping of goods into Nigeria; and \nencouraged the Bank to continue to explore available scenarios to deal with \nthe activities of economic and policy saboteurs, including those involved in \ndumping and smuggling, in a bid to accelerate domestic production of goods \nin Nigeria. \n \nThe MPC noted the positive moderate outlook for growth and the risks in the \nhorizon. The Committee also noted that having achieved a relatively stable \nexchange rate with price stability, it is imperative that monetary policy should \nexplore the next steps necessary for enhancing growth, reducing \nunemployment and diversifying the base of the economy. It further observed \nthat per capita income growth is very negligible, while aggregate demand \nremains weak. Aggregate output also remains below the potential output \nlevel, implying sufficient headroom for non-inflationary growth. This new \ndirection has, therefore, become imperative against the backdrop of the \naftermath of the general national elections and strong inflow of foreign direct \nand portfolio investments into the economy. \n \nThe Committee urged for the speedy passage of the other aspects of the \nPetroleum Industry Bill (PIB) to fast track the development of the value chain in \nthe sector and create employment. It also welcomes the passage of the \nNational Minimum Wage Bill by the National Assembly and call for its speedy \nimplementation in order to boost domestic aggregate demand. \n \n7 \n \nThe Committee further observed that the performance of the monetary \naggregates were below their benchmarks, indicating headroom for monetary \ngrowth. The MPC noted the encumbrances and constraints imposed on fiscal \npolicy and the associated vulnerabilities as it has consistently failed to mobilise \nsufficient revenues to support development as enunciated in the ERGP, \nleaving room for continued debt financing, not previously envisaged. Against \nthis backdrop, it is imperative for monetary policy to provide the much needed \nleverage to support output growth and employment generation in the \ncountry. \n \nOn a more cautious note, the Committee expressed concern and sympathises \nwith the fiscal authorities, over the growing fiscal deficit, external debt and \ndebt service, and urged the need to closely monitor the public procurement \nprocess in order to improve efficiency in public resource management. \n \nOn financial system stability, the MPC noted the improvements in key financial \nsoundness indicators and commended the Federal Government for the \nsettlement of debt owed to oil marketers, which has considerably, helped in \nreducing the non-performing loans (NPLs) portfolio of the banking industry. The \nCommittee, therefore, urged the Government to expedite action in settling all \noutstanding contractor-related arrears so as to improve the NPLs position and \nstabilise the banking system. In addition, the MPC reiterated the Bank’s \ncommitment to improve credit delivery, especially to small and medium scale \nenterprises, while acknowledging efforts by the Central Bank of Nigeria in \ncoordinating the de-risking of lending to the private sector through the \ncollaboration between the Bankers’ Committee and NIRSAL. \n \nIn its consideration of the best monetary policy option, the Committee noted \nthe need for all agencies of Government to work hard, not only in \nconsolidating the growth so far achieved, but also in ensuring that appropriate \npolicies are put in place and implemented to create jobs on a mass scale and \n8 \n \ndiversify the economy in a proper direction. In doing this, the policy options \nfacing the MPC at this meeting is a decision between retention of the current \nstance of monetary policy or a slight loosening of the policy rate, backed by \nthe substantial stability of the major macroeconomic indicators. The \nCommittee felt that given the relative stability in the key macroeconomic \nvariables, there is the need to signal a new direction that is pro-growth. \n \nIn its arguments, the Committee was convinced that doing this would further \nuphold the Bank’s commitment to promoting strong growth by way of \nencouraging credit flow to the productive sectors of the economy. The MPC \nfelt that signalling through loosening by a marginal reduction would serve to \nmanage the sentiments in the capital markets owing to the wider spread in \nyields in the EMDEs, relative to the advanced economies. Moreover, the real \ninterest rate in the country would still remain positive. \n \n \nThe Committee’s Decision \nIn light of the above, the MPC decided by a vote of six out of eleven members \nto reduce the Monetary Policy Rate (MPR) by 50 basis points. Two members \nvoted to reduce the MPR by 25 basis points, while one member voted to \nreduce it by 100 basis points. Two members, however, voted to hold the MPR \nat its current level. Ten members voted to hold all other parameters constant, \nwhile a member voted to reduce the Cash Reserve Ratio (CRR) by 100 basis \npoints from 22.5 to 21.5 per cent. \nIn summary, the MPC voted to: \nI. Adjust the MPR by 50 basis points from 14.00 to 13.50 per cent; \nII. Retain the asymmetric corridor of +200/-500 basis points around the MPR; \nIII. Retain the CRR at 22.5 per cent; and \nIV. Retain the Liquidity Ratio at 30 per cent. \n9 \n \n \nThank you. \nGodwin I. Emefiele \nGovernor, Central Bank of Nigeria \n25th March 2019 \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n10 \n \nPERSONAL STATEMENTS BY THE MONETARY POLICY COMMITTEE MEMBERS \n1. \nADAMU, EDWARD LAMETEK \nThe 266th meeting of the Monetary Policy Committee (MPC) held against the \nbackdrop of sustained threats to global growth prospects arising mainly from \nuncertainties around BREXIT, Iran sanctions, volatile commodity (oil) prices as \nwell as the rather slow progress on trade negotiations between the United \nStates and China. Considering some of these headwinds, the IMF had, in \nJanuary 2019, revised its projection of global growth for 2019 to 3.5 per cent \nfrom 3.7 per cent. On average, growth in the advanced economies is \nexpected to slow in 2019 relative to 2018. Similarly, growth in emerging markets \nand developing economies (EMDEs) is expected to moderate, albeit slightly to \n4.5 per cent in 2019 from 4.6 per cent in 2018. It is reasonable to estimate that \nthe current external conditions would pressure growth in many developing \neconomies especially when their impact on commodity prices is factored. For \nexample, owing largely to some of the global vulnerabilities, oil output and \nprices have remained unsettled for months, and could discount output growth \nin oil producing (developing) economies. \nOn the positive side, however, yields in the advanced economies are \nexpected to moderate on account of the slowdown in policy normalization by \nthe \nUS \nFederal Reserve and the likely \ncontinuation of monetary \naccommodation by the European Central Bank (ECB) and the Bank of \nEngland (BoE). This potentially means that EMDEs could continue to count on \ninflows especially of portfolio investment without having to further constrain \ntheir economies by raising interest rates. For Nigeria, this presents an \nopportunity to support growth which is currently facing important downside \nrisks. Viewed alongside other opportunistic conditions in the domestic \neconomic environment, which I will highlight subsequently, I voted to slightly \nease the stance of monetary policy at the March 2019 MPC meeting. \nMajor indicators of economic growth are not as strong in the first quarter (Q1) \nof 2019 as they were in the fourth quarter (Q4) of 2018. The composite \n11 \n \nmanufacturing purchasing managers’ index (PMI) slowed from 61.1 points in \nDecember 2018 to 57.4 points in March 2019; similarly, the non-manufacturing \nPMI slowed to 58.5 from 62.3. In addition, the CBN-Composite Index of \neconomic Activity (CBN-CIEA), which leads the Nigeria’s gross domestic \nproduct (GDP) growth by about three quarters, indicated softening economic \ngrowth in Q1 2019. Abstracting from these statistics, I figured that economic \ngrowth could slow in 2019, particularly in the first half, unless it receives \nadditional policy push. Most of the current projections of real GDP growth for \n2019 fall between 2.0 - 3.0 per cent. This is significantly below potential, and \nmore importantly, growth needs to be better for the economy to generate the \nmuch needed jobs and achieve poverty reduction. Non-oil output, particularly \nagriculture and services, will need to be supported considerably to drive \ngrowth in 2019 given the weak outlook for the oil sector. \nMeanwhile, consumer price developments in February resulted in a slight \nmoderation in the headline inflation to 11.31 per cent from 11.37 per cent in \nJanuary. On month-on-month basis, the headline index increased by 0.73 per \ncent in February 2019, down from 0.74 per cent recorded in January. The \ndecline in headline inflation reflected the moderation in both food and core \ninflation. All the measures of inflation declined on the month-on-month basis in \nFebruary 2019, suggesting that the prospect of a surge in headline inflation is \nminimal over the short-term horizon. The development interventions by the \nBank especially in the area of food production have remained a major \ninfluence on the softening stance of food inflation. Barring any major shock, \ncore inflation could attain single digit by the end of the third quarter. The \noutlook for inflation up to August 2019 does not indicate a major departure \nfrom current trends. However, key risks to this outlook include the in-coming \n(new) minimum wage and higher energy prices. Both could stoke a transient \nincrease in the general price level. \nThe foreign exchange (FX) market has remained relatively stable on account \nof sustained supply of FX by the CBN and from autonomous sources. \n12 \n \nConsequently, the naira exchange rate continues to be stable and premiums \nhave virtually disappeared across the major segments. Based on the current \nlevel of external reserves and the prospects of sustained autonomous foreign \nexchange inflows, the short- to medium-term outlook for the naira exchange \nrate appears good. It is comforting that the economy continued to attract \ncapital inflows in Q1, 2019 despite elections-related political uncertainties. In \nfact, threats to capital inflow have continued to moderate especially as the \nUS Fed slows policy normalization and most other advanced economies are \nsustaining accommodative monetary policy. \nIn the banking system, major financial soundness indicators (FSIs) continued to \nimprove in Q3 2019 owing principally to the resolution of one of the troubled \nbanks, \nincreased \nsurveillance \nby \nthe \nBank \nas \nwell \nas \nimproved \nmacroeconomic conditions. However, vulnerabilities have persisted including \n(high) FX exposure of banks, particularly to entities that do not earn FX; \nconcentration and high non-performing loans (NPLs). I believe that payment \nof contractor debts by the Federal Government will go a long way in soothing \nthe pressures in the banking system, while improved surveillance and \ndeployment of sanctions against regulatory infractions will engender good \ngovernance and stability. This is important because financial intermediation, \nespecially provision of credit, is highly dependent on the state of health of \nfinancial institutions. At end-February 2019, the stock of deposit money banks’ \ntotal credit declined by about 2.5 per cent, year-on-year. This trend needs to \nbe halted in the face of the prevailing sluggish performance of economic \nactivity. In this context, the role of other financial institutions (OFIs) in the credit \narena becomes important. These institutions (micro-finance banks, finance \ncompanies, mortgage banks, development finance institutions, etc.,) are \nexpected to play the very important role of closing certain gaps in the financial \nsystem including, crucially, financial inclusion. As such, they need to be \nencouraged to remain mission-focused. \n13 \n \nOverall, the balance of risks continues to be tilted against economic growth. \nIn my January 2019 statement, I emphasized the need to support growth given \nthe weak outlook for economic activity based on indications from the oil sector \n(especially the volatility in crude prices and production cuts) and sluggish \nconsumption demand. Of course, I noted that more clarity over the next two \nmonths (February and March) would be helpful in deciding the direction of \nmonetary policy beyond Q3 2019. Clearly, the indications then have been \njustified by subsequent developments particularly as shown by the CIEA, PMIs, \nand the current outlook for the oil sector. My conviction about the merit of \neasing the policy stance around this time has been further strengthened by \nthe increased opportunity for doing so. First, all the measures of inflation \ncontinued to trend downwards in February with an outlook for achieving \nsingle-digit core inflation by August. This means that the real challenge remains \nfood inflation, which may be more effectively addressed through actions \naimed at boosting production and easing distribution bottlenecks. In this \nregard, the Bank’s interventions in agriculture will continue to be relevant. \nSecond, domestic yields had declined with the 1 year NTB rate at about 13 \nper cent; the monetary policy stance needed to be in sync especially as inflow \nof portfolio investments remained high. Finally, the relatively good level of \nexternal reserves and growing confidence in the economy offer some \nguarantee of adequate supply of foreign exchange to the market from both \nthe CBN and autonomous sources. As such, the naira exchange rate is \nexpected to remain stable in the face of slightly easy monetary conditions. I, \ntherefore, voted to reduce the Monetary Policy Rate (MPR) by 50 basis points \nwhile retaining all other policy parameters at their previous levels. \nAs I have always noted, a growth-supporting monetary policy orientation can \nonly compliment policies in other sectors of the economy to deliver broad \nbased economic prosperity. The structural impediments to growth and job \ncreation, particularly poor infrastructure, low (public) revenue effort and \ninsecurity have to be dealt with while also maintaining a focus on the \ndiversification of the economy. \n14 \n \n2. ADENIKINJU, ADEOLA FESTUS \nMy decision at this Meeting is influenced by a number of factors: developments \nin the global economy and within the domestic economy. \nDevelopments in the Global Economy \nThere is an increasing concern about the weak state of the global economy. \nThere are pressure points and vulnerabilities in many regions of the world, both \nin advanced economies and emerging and developing economies. Fear of \nimpending global recession and slow down of growth in the US to 2.6% in Q4 \n2018 from 3.4% in Q3, 2018, the inversion of the US Yield Curve, as well as weak \ngrowth in Europe, China, Japan; the prevailing uncertainty around the BREXIT, \nthe prolong US and China Trade War, declining growth of global trade, \ngeopolitical tensions in the Middle East and other regions have put enormous \npressures on the global economy. \nHowever, global inflation rates remain moderate. Oil prices continue to benefit \nfrom geopolitical tensions and OPEC and non-OPEC oil supply cut. Hence, \nprice of bonny oil is close to US$70 per barrel in March. The medium outlook for \noil is generally positive. \nNigeria, like other developing and emerging countries will benefit from the \ndovish monetary policy stance of the US Fed, which has put on hold the \nnormalization of rates that led to three rates increase in 2018. President Trump \nis currently pushing for rate cuts by the Fed. \nOther developed countries are also taking deliberate steps to boost their \ndomestic economies by extending monetary accommodation policies. \nHence, interest rates in advanced economies are likely to remain low, giving \nmore elbow rooms for emerging and developing countries to be more flexible \nwith domestic monetary policies. Egypt and Ghana have already reduced \ntheir monetary policy rates in order to support domestic economic growth. \n \n15 \n \nDevelopments in Domestic Economy \nThere are positive developments within the domestic economy since the last \nmeeting of the MPC in January, 2019. The real GDP grew by 2.38% in Q4 2018 \ncompared to 1.81% in Q3 2018. This is still too low to make a major dent on \npoverty and employment. Purchasing Manager’s Index rose in March, 2019 \nfor 23rd consecutive months. \nStaff reports show that there is a slack in aggregate demand and aggregate \noutput is below potential output. This suggests that increase in expenditure \nmay not necessarily translate to inflationary pressures. Monetary aggregates \nM1, M2 and M3 are below their provisional levels in February 2019. The \nexpected increase in aggregate spending from higher minimum wage \nrecently signed into law by the President may help to boost real consumer \nspending and raise aggregate demand which may be good for the \nproductive sector of the economy. \nHeadline Inflation rate declined marginally in February 2019 to 11.31% from \n11.37% in January 2019. Food and core inflation also declined over same \nperiods. There has been a significant drop in inflation from peak of 18.2% in \nNovember 2016 to 11.31% in March 2019. While this is still above the single digit \ntarget for inflation rate, it lies within a growth neutral corridor and below a \ngrowth hindering range estimated by the Bank Staff. The anticipated surge in \nliquidity from the 2019 election spending did not show up in the NBS data. \nMoreover, from available information and projection, barring any fiscal \nsurprises, threat of inflation in the short term seems to be low or moderate. \nThe Financial Soundness Indicators (FSI) showed an improvement since the last \nMPC Meeting. Capital Adequacy Ratio, CAR, NPLs, and Liquidity ratios \ncontinue to trend in the right direction. There is also a fall in total operating \ncosts margins by banks. Improvements in the ROA and ROE among the banks \ncoupled with the falling ratio of operating costs to operating income suggest \nto me that the DMBs have elbow room to pass lower rediscounting rate from \nthe CBN to their customers. \n16 \n \nThe monetary authority should continue its current efforts to reduce NPLs in \nboth DMBs and among the OFIs. Secondary market for trading in NPLs should \nbe facilitated to encourage banks with relatively higher NPLs to clean their \nbalance sheets and be able to create new credits. \nThe falling rate of total bank credit is a concern. The observed shift in bank \nbalance sheet from loans and advances to fixed income assets is not a good \nomen to the real sector. Access to credit and high costs of credit are two of \nthe major constraints to real sector growth. CBN efforts using nonconventional \nmeasures to raise domestic credit should be complemented by DMBs by \nperforming their primary responsibility of credit creation. The huge gap \nbetween average lending and deposit rates is too wide and symptomatic of \nlack of real competition among the banks. \nOn the external sector, the exchange rate markets have continued to be \nrelatively stable. The convergence between the I&E market and the Bureau \nde Change is a reflection of the CBN efforts at enhancing stability in the \nmarket. The Foreign reserve rose to US$44.92 billion in March 20, 2019 from \nUS$42.52 billion in January 2019. Foreign inflow to the economy remains \nimpressive showing strong confidence in the economy. \nThe big elephant in the room in my view is the fiscal authority, whose primary \nresponsibility is to drive economic growth. There is a need for speedy passage \nof the 2019 Appropriation Bill, as well as its effective and timely implementation. \nThe huge petroleum subsidy and the poor state of the local refineries should \nbe addressed. Inefficient and unprofitable state assets should be disposed to \nraise government revenue. Attention must focus on the passage of the PIB \nafter so much delay with huge costs on investments in the value chain in the \npetroleum sector. Government should be committed to establish fiscal buffers \nas it is the practice in many oil exporting countries. I am concern with the \noverall rising debt profiles of the government, at a time when the price of oil is \nabove the government benchmark price. \n \n17 \n \nDecision \nOverall, I think it is time for the MPC to review its monetary policy stance which \nhas been largely effective in delivering price and exchange stability, in order \nto support economic growth to address the unacceptably high rate of \nunemployment and poverty in the economy. The MPR is already losing its role \nas an anchor for interest rates in the economy. I have no illusion that the \nreduction in MPR alone would compel the banks to lower their lending rates. \nHence, there is a need to reduce the CRR to increase banks liquidity. Other \nadministrative steps open to the CBN should also be used to encourage banks \nto lower lending rates. \nHence, I vote: \n1. To lower the MPR by 50 basis points to 13.5% \n2. Reduce CRR by 100 basis point to 21.5% \n3. Keep liquidity ratio at 30% \n4. Maintain asymmetry corridor around the MPR by -500 and +200 basis \npoints \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n18 \n \n3. \nAHMAD, AISHAH N. \nAt the March 2019 monetary policy committee (MPC) meeting, I voted to cut \nthe monetary policy rate by 100 basis points to 13% and retain other policy \nparameters; CRR 22.5%, liquidity ratio 30%; asymmetric corridor at +200 and - \n500 basis points around the MPR. My decision to vote for an accommodative \npolicy stance was predicated on global and domestic macroeconomic \ndevelopments and the urgent need to dramatically improve our weak output \ngrowth. \nAs mentioned in previous statements, GDP growth though positive, has been \nfragile since the country exited recession in 2017, whilst unemployment is high \nat 23.1% in Q3 2018, up from 22.73% in Q2 2018. With output growth at current \nlevels of 2.38% in Q4 2018, the recovery is yet structurally delicate and grossly \ninsufficient to improve GDP per capita or deliver sustainable and inclusive \ngrowth. To strengthen the recovery and reverse the rising tide of \nunemployment, we must ramp up domestic productivity and dramatically \nincrease investment in employment elastic sectors; a rate cut is a first step to \nstimulating the economy in this regard. \nLatitude for monetary easing at this time is justifiable, given the MPC’s relative \nsuccess in maintaining price and monetary stability over the past few months \nand continued improvement in key macroeconomic indicators. Latest reports \nfrom the National Bureau of Statistics, (NBS), indicate that headline inflation \n(year-on-year) declined progressively to 11.31% in February 2019 from 11.37% \nand 11.44% in January 2019 and December 2018 respectively. This pattern of \ndisinflation is also seen in the food sub-index which fell from 13.56% in \nDecember 2018 to 13.51% and 13.47% in January and February 2019, \nrespectively. \nModerating inflation pressure reflects declining food prices, weak consumer \ndemand, tight monetary policy stance and a relatively stable exchange rate. \nThe naira exchange rate recorded an average of N363.65/US$ between \n19 \n \nDecember 2018 and February 2019 at the Investors’ and Exporters’ (I&E) \nwindow and N360.98/US$ at the Bureau De Change (BDC) segment over the \nsame period, indicating improving convergence across the segments. External \nreserves remained relatively robust at US$44.92 billion (March 20, 2019), \nmirroring strong crude oil prices and continued net positive investment flows \ninto the economy. This reflects growing investor confidence, despite the \nemerging market currency challenges of Q2/Q3 2018 and anticipated investor \ncaution ahead of the 2019 general elections. \nStrengthening financial soundness indicators provides the perfect springboard \nfor private sector credit growth. The financial system stability profile continues \nto improve as reflected in key industry prudential ratios. Industry capital \nadequacy is healthy at 15.14% (February 2019), while liquidity and profitability \nindicators also stayed robust. The recent settlement of contractual obligations \nby the Federal government, supported by some CBN initiatives have helped \nimprove industry non-performing loan ratios and this is expected to impact \npositively on credit to the economy which has grown slightly over the last two \nmonths. Financial institutions are increasingly leveraging technology to \nenhance retail credit origination processes and build scale; this is \ncommendable. However, lending rates remain higher than desirable. The CBN \nis encouraged to continue its interventions in critical sectors to finance \ncapacity expansion and its de-risking initiatives to make real sector lending \nsafer and more attractive. \nIt is prudent to consider the probable impact of a monetary policy rate cut on \nNigeria’s competitiveness as a foreign investment destination relative to other \nemerging markets. There is the potential that it could trigger a market sell-off, \nexert pressure on the external reserves and exchange rate with negative \nimplications for inflation and growth. Portfolio flows have however, remained \nstrong through most of Q1 2019 especially since the Fed (and later the ECB and \nBOE) halted its earlier signaled policy normalization program. This, coupled with \na relatively firm international oil price has led to net FX purchases by the CBN \n20 \n \nat the I&E window for several weeks and continued accretion to reserves. This \nmarginal rate cut also keeps real interest rates positive; thus, retaining a healthy \nyield for investors, but most importantly signals a focus on growth and \ninvestment to support sustainable economic expansion. The chances that \nlowering rates could reverse the disinflation gains also appear slim. Private \nconsumption patterns remain constricted and the threats to price stability in \nthe short term appear largely benign. \nNotwithstanding, a rate cut alone is simply not sufficient. Age-old structural \nchallenges need to be tackled decisively to improve the fiscal revenue profile, \nreduce vulnerabilities and improve per capita income in support of a more \nresilient recovery. Implementation of the ERGP must continue, whilst the \nsuccesses recorded in developing agricultural value chains and reducing the \nimport bill must be replicated in other non-oil sectors such as services and \nmanufacturing to enhance export earnings potential. \nRenewed focus on improving domestic economic productivity must be \nmatched with vigilance on potential external sector shocks. As anticipated, \nthe headwinds and uncertainties which confronted the global economy in the \nsecond half of 2018, (protracted trade dispute between the U.S.A. and China, \ngeo-political tensions and uncertainty around the “BREXIT” deal), continue to \nburden global economic activity. These developments have prompted \ndownward revisions of global growth forecasts, sent yields soaring and upset \nstock markets across many countries. In fact, the IMF’s downward projections \nfor global growth from 3.7% to 3.5% in 2019 could deteriorate further as risks tilt \nmore to the downside. \nWhilst the delay in rate hikes by major central banks may temporarily trigger \nincreased capital flows into emerging and Africa’s frontier markets, slowing \nglobal growth prospects portends lower global demand and as a direct \nconsequence, lower demand for Nigeria’s crude oil exports with adverse \nimplications for fiscal revenue and domestic output. \n21 \n \nTherefore, monetary policy must consolidate on price stability gains even as it \nsupports growth in an era of persistent global and domestic economic \nuncertainties. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n22 \n \n4. \nASOGWA, ROBERT CHIKWENDU \nBackground: \nThe second MPC meeting held in March 2019 took place at a delicate \nmoment for the global economy. Several advanced, emerging and \ndeveloping countries are currently losing the momentum of growth with rising \npolicy uncertainties. As the drumbeat of warnings about a looming worldwide \neconomic recession is rising, it is imperative that costly policy mistakes are \ngenerally avoided. For monetary policy, it is important for decisions at this time \nto be data dependent ensuring that inflationary expectations remain the main \nanchor, while such policy choices are effectively communicated. Interestingly, \nmany central banks of advanced economies which had hitherto embarked \non aggressive monetary policy normalization have shifted the mode towards \na ‘pause in interest rate hikes’. \nFor Nigeria, one source of comfort is that the 2019 elections which apparently \nwas a major drag on foreign capital flows have been successfully concluded. \nAs such, the Nigerian Monetary Policy Committee meeting of March 2019 was \nguided by the international monetary policy developments as well as local \neconomic conditions and pressures. The committee’s choices at this meeting \nshould generally reflect the need to contain any pending inflationary \npressures, ramp up foreign capital flows whilst stimulating the domestic growth \nmomentum with well synchronized complementary policies. \nLoss of International Growth Momentum: \nThere has been a weak start to 2019 growth for several major economies with \nclear signs and expectations of poor growth results in quarter 1. In February \n2019, there was a downward revision in global growth projections by 0.2 \npercentage points lower for 2019 and by 0.1 percentage points for 2020 from \nthe earlier projections in January. These new forecasts are arising from \ncorresponding negative revisions in major economies including US, the Euro \nArea and the United Kingdom. \n23 \n \nIn the United States for instance, the recent sharp drop in the yield curve in the \nmidst of a big rise in the government budget deficit is reflecting clearly investors \ndampening expectations, thus suggesting even further weakening ahead. In \naddition, the United States data in January and February 2019 showed that \npersonal income and household expenditures had fallen considerably more \nthan in the last five years. \nIn Europe, growth in 2019 is also noticeably slowing in major economies \nincluding Germany, France, Italy and the United Kingdom. For instance, the \nGDP growth forecast for 2019 in Germany has been recently downgraded to \n0.7 percent from the level of 1.6 percent previously forecasted and mainly \ncaused by the continued drop in the purchasing managers index for German \nmanufacturing, which reflects the rapid loosening of business and consumer \nsentiments and demand. In Italy, there are early signs of recession as the \ndeclining weak domestic demand and the recently raised higher borrowing \ncosts remain key impediments to growth, while in the UK, the declining business \nenvironment amidst the prolonged uncertainties about the BREXIT outcome \ncontinue to dampen growth prospects. This has recently weakened the equity \nmarket in the UK, while credit growth also appears to be stagnating. \nSimilarly, in key Asian Economics, the momentum of growth has also loosened \nin the early months of 2019 thus lowering growth projections. In China, growth \nappears to be at its lowest level in several decades also due to weakening \ndemand and the unsettled trade war with the United States. Despite recent \ngovernment fiscal stimulus (including billions of dollars in tax cuts and \ninfrastructure spending) aimed at offsetting some of the impact of the rising US \ntrade tariffs, the Chinese economy still faces signs of stuttering growth. In \nJapan, there were earlier forecasts of considerable growth in 2019, but now, \nthe perceptions of growth moderation seem to be rising especially as the \nfinancial conditions remain weak since January 2019 and the global trade \ntensions still pose significant problems for the country’s exports. \n24 \n \nIn sum, there are persisting threats to the global economy which currently \ngenerate fears for a possible global recession. Such threats include, tensions in \ntrade policy that could possibly flare up again, sparking retaliations and \ncounter-retaliations, thus further disrupting global supply chains and possibly \naggravating financial fragilities in many emerging economies. In addition, \nuncertainties and risks surrounding BREXIT at the moment remain very \nheightened as a disorderly exit would raise costs for several Euro economies \nwhich may further weaken market sentiments. \nAs a short term response, central banks in some key economies are adopting \na de-facto monetary policy tightening in the form of delays to rate hikes and \nhalts to unconventional monetary policy actions in the midst of the weakening \nglobal economy. Specifically, the US Fed, the European Central Bank, Bank of \nEngland and Bank of Japan have communicated officially a temporary halt \nto considerations on monetary policy adjustments. \n \nImproving Domestic Macroeconomic Fortunes with Persisting Downside Risks: \nMacroeconomic indicators for Nigeria before this MPC meeting have shown \nencouraging positive trends, but some potential downside risks remain. The \nlatest data on the manufacturing purchasing managers’ index, inflation, \nexternal reserves, foreign exchange rates and current account balance have \nshown good prospects. Similar to the position in the last January MPC meeting, \nmacro indicators which remain on the downside trend are; the unemployment \nrates and the increasing public debt especially the external bond issuances. \nCBN staff report showed that the manufacturing performance manager index \n(PMI) in the month of March 2019 stood at 57.4 index points, which is higher \nthan the 57.1 index point recorded in February 2019, but lower than the \nDecember 2018 rate of 61.1 points. Similarly, the non-manufacturing PMI \nincreased marginally from 58.4 index points in February to 58.5 index points in \nMarch, but still lower than the December 2018 level of 62.2 index points. This \nfurther reinforces the projection of an expected marginal GDP growth from \n1.81 percent in 2018 to 2.21 percent in 2019. Also year-on-year headline \n25 \n \ninflation declined from 11.37 per cent in January to 11.31 per cent in February \n2019 and mainly because of the declines in food inflation from 13.51 per cent \nin January to 13.47 per cent in February. On a month-on-month basis, both \nheadline, core and food inflation all declined marginally in February when \ncompared to the levels in January 2019. Similarly, CBN staff report showed that \nthe external reserves which declined consistently (eventhough marginally) \nbetween December 2018 and February 2019, had risen very considerably by \nmid-March 2019, while the monthly average exchange rates also declined \nmarginally between December 2018 and mid-March 2019. The recent increase \nin external reserves is attributed partly to the resumption of portfolio flows to \nNigeria which has also helped in strengthening of the local currency relative to \nthe dollar. \n \nThe elevated public debt levels especially those arising from the external bond \nissuances are likely to limit the country’s ability to aggressively pursue growth, \nwhilst containing any inflationary pressures. As at 31st December 2018, there \nwas a 12.25 per cent year-on-year growth for total public debt. While the share \nof domestic debt has dropped in favour of external debt as part of \ngovernment’s strategy, the preference for external bond issuances (which is \npopular amongst international investors who permanently maintain a search \nfor yield behaviour) rather than concessional external borrowing from bilateral \nand multilateral windows raises key sustainability concerns. It is imperative that \nfiscal policy in Nigeria should continually ensure that debt levels remain less \nelevated, \nhighly \nconcessional, \nand \nsustainable \nand \nthat \nrecurrent \nexpenditures are constantly rationalized. \n \nChanging Domestic Financial Market Indicators: \nThe developments in both the international and national macro economy \nhave helped to fuel multiple changes in both the banking and stock exchange \n26 \n \nmarkets in Nigeria. These changes have implications for the future path of \nmonetary policy. \nIn the banking market, CBN staff report showed mixed performance trend for \nthe risk measures (capital adequacy ratio and non-performing loans ratio) but \nthere are overall improvements in the profitability measures (return on equity \nand return on assets) when compared to the position at the January 2019 MPC \nmeeting. Specifically, while the non-performing loans ratio of banks decreased \nmarginally between December 2018 and February 2019, the capital \nadequacy ratio surprisingly decreased, but marginally within the same periods. \nInterestingly, the liquidity ratio which had increased between October and \nDecember 2019, dropped by February 2019 probably suggesting that banks \nmay currently be foregoing the holding of more liquid assets in favour of the \ntraditional lending activities. A key concern however is the month-on-month \nreduction in total deposits by February 2019 compared to the January 2019 \nlevels, but which hopefully can be reversed soon with the ongoing reforms \nincluding financial inclusion strategies. In addition, the continued dominance \nof the oil and gas sector in banks’ credit allocation to the dis-advantage of the \nagriculture and manufacturing sectors is a source of concern. This credit \nconcentration will not only frustrate government’s economic diversification \ntrend, but will neutralize the intended effects of any monetary policy rates \nreduction. \nIn the domestic capital market, CBN staff report showed that the negative \ntrend which persisted in December 2018 worsened up to the mid of March \n2109, with the All-Share Index, the Market Capitalization, decreasing. Also, the \nnumber of deals, volume and value of shares decreased between December \n2018 and March 15, 2019. There are however hopes that with foreign investor \nsentiments shifting following the halt of Monetary policy normalization in \nadvanced economies and the diminished 2019 election risk fears, some \nresumption in capital market activities are expected soon in Nigeria. \n \n27 \n \nMy Policy Decision: \nThe considerable uncertainty surrounding the monetary policy adjustment \ndirection of several developed central banks shows that a turn is imminent \nespecially with the continued weakening global growth which may persist in \nthe near future. As such, a window of opportunity exists for Nigeria and indeed \nother developing markets to boost their domestic financial markets whilst \nintroducing other liquidity measures to ease domestic funding/credit \nconditions and consequently boost local private investment. With the \nsuccessful 2019 elections, quick financial market recovery is apparent in \nNigeria, but will require supportive monetary policy actions that are data \ndependent and well communicated. \nMy strong opinion is for policy parameters to remain largely unchanged in this \nMarch 2019 MPC meeting. \nI will thus vote to: \n Retain the MPR at 14.0 % \n Retain the CRR at 22.5% \n Retain the Asymmetric Corridor at +200/-500 basis points \n Retain the Liquidity Ratio at 30.0%. \n \n \n \n \n \n \n \n \n28 \n \n5. \nBALAMI, DAHIRU HASSAN \nIntroduction \nThe weakening of global growth led to a downgrade to 3.5% in 2019 against \nthe projection of 3.7%. Inflation at the global level remained below the \nbenchmark 2% in most advanced economies. The price of crude oil remains \nsticky below US$70 per barrel due partly to the glut in the oil market and United \nStates (US) President Donald Trump’s policy preference for lower oil price. \nGrowth in the advanced economies’ had also been downgraded to 2% in \n2019 as against the projection of 2.3%. The slowing down of growth in the \nChinese economy (6.6%) is also a contributory factor to the weakening global \ngrowth. \nThe slowdown in policy normalisation by the Federal Reserve Bank and the \ncontinuation of asset purchase in the Euro area, as well as the uncertainties \naround BREXIT negotiations, has implications for the domestic economy. At the \ndomestic level, output growth for 2019 is estimated by the Central Bank of \nNigeria (CBN) at 2.7%, was slightly higher than the World Bank’s estimate of \n2.2%. \nIn spite of the weak outlook for growth, the price level and exchange rate had \nremained stable, while growth rate, eventhough fragile remained positive. The \nthrust therefore is to ensure that real output growth is promoted, to sustain the \ngrowth momentum in the economy. Low level of government’s capacity to \ncollect adequate revenue could impair execution of the budget, and also the \nlate approval of the budget. These must be addressed due to the implications \non the economy. \n \nTrend of Financial Soundness Indicator of the Banking Sector \nOn a month-on-month basis, the capital adequacy ratio (CAR) fell slightly from \n15.26% in December 2018 to 15.14% in February 2019. Non-Performing Loans \n29 \n \n(NPLs), somewhat improved from 11.68% in December 2018 to 11.28% in \nFebruary 2019. The downward trend is a good indicator of the effectiveness of \nthe recovery efforts of the banks and the regulatory support of the CBN \ntowards achieving lower NPLs, eventhough the ratio remains above the \nprudential requirement of 5%. \nThe liquidity ratio at 52.96% in February 2019 over the previous month remains \nabove the 30% minimum prudential requirement for commercial banks and \n20% for merchant banks, which is 3.4% above the December 2018 figure. \nThe Return on Equity (ROE) and Return on Asset (ROE) for the banking industry \nwere 26.12% and 2.59%, respectively in February 2019, compared with 20.54% \nand 2.43% in December 2018. The banking industry’s performance is highly \npositive with 65.03% total operating cost to total operating income in February \n2019 as against 67.06% in December 2018. This further shows that the CBN \nmonetary policy is working positively. \n \nCredit and Growth \nCredit growth remains dismal, as total credit remained around the N15 billion \ncorridor having grown from N15.63 billion in March 2018 to a high of N15.99 \nbillion in October 2018, but contracted to N15.69 billion in February 2019. On \nannual basis, aggregate credit equally recorded a decline of 2.53% from \nFebruary 2018 to February 2019. The trend into 2019 was attributed to disposals \nand write-offs. \nWith the continued monetary policy support for fiscal policy to grow the \neconomy, the Bank would continue to monitor its interventions (such as the \nAnchor Borrower Programme (ABP’s) and the revitalisation of the Textile value \nchain sub-sector) to ensure successful implementation. Proper advice should \nbe given to the government, particularly on the quality of public expenditure; \nin addition to proper cooperation and coordination of fiscal and monetary \npolicies. It should be noted that concerns about growth remains a major \n30 \n \nconsideration because of the weakening of global growth rate, which could \nfurther retard domestic growth. For growth to be robust to create adequate \njobs and to reduce poverty and inequality there should be aggressive policies \nto stimulate aggregate production. \nConsequently, there should be improvement in the supply of energy, access \nto credit at lower interest rates to promote economic growth, and increase the \ncreation of jobs. As part of the multifaceted approach to grow the economy, \nthe monetary authorities should target specific sectors such as agriculture and \nmanufacturing, with high employment elasticity’s. \nThe CBN should continue to sustain the list of 41 items banned from accessing \nthe official foreign exchange market, and expand it to include more items that \ncan be produced locally. Attention also should be paid to the inflows and \noutflows of Foreign Direct Investments (FDI’s) and Foreign Portfolio Investments \n(FPI’s) which are critical in supporting the foreign exchange market stability, as \nwell as inflation and growth. \nFurthermore, the external debt should not be allowed to reach unsustainable \nlevels, while potential interest and exchange rates shocks should be managed \nproperly. \n \nPolicy Choice \nThere is an observed deceleration in interest rate, particularly on government \nbonds and treasury bills. The weighted lending rate across sectors had been \non the decline, yet the MPR has been kept at 14%. The rates of Anchor \nBorrower’s \nProgramme, \nDifferentiated \nCash \nReserve \nRatio \n(DCRR), \nDevelopment Bank of Nigeria (DBN) rates, Bank of Industry (BOI) loans etc. are \nall in the lower double digits and below. As growth, price, and exchange rate \nremain relatively stable, there is need to further promote growth in the \neconomy by signalling the lowering of the anchor rate to encourage the \n31 \n \nDeposit Money Banks (DMB’s) to lower their lending rate so as to encourage \ncredit in the economy. \n \nI therefore, vote to: \ni. Vary MPR by 50 basis point to 13.50 percent; \nii. Retain the CRR at 22.5 percent; \niii. Retain the liquidity ratio at 30 percent; and \niv. Retain the Asymmetric Corridor at +200 and -500 basis points \naround the MPR. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n32 \n \n6. \nISA-DUTSE, MAHMOUD \nA. EXTERNAL ECONOMIC CONDITIONS \nThe IMF global growth forecast for 2019 was downgraded to 3.5% against the \nearlier projection of 3.7% as the global slowdown which commenced in 2018 \nhas persisted and may even worsen. The weakening output growth in major \nadvanced economies is increasingly giving way to accommodative monetary \npolicies in a bid to ward-off economic recession. The US suspended its initial \nplan of at least two policy rate hikes in 2019 following growth decline to 2.6% \nin Q4 2018 from 3.4% in Q3 2018. The Bank of England placed its normalization \nagenda on hold since mid-2018, while the European Central Bank recently \nreturned to monetary accommodation as the Euro Area is projected to see \ngrowth slowed to 1.6% in 2019 as against 1.8% in 2018. Developing Economies \nsuch as Nigeria that are dependent on commodities exported to these regions \nmay therefore need to re-strategize. \nInflation in advanced economies is expected to decline to 1.7% in 2019 from \n2.0% in 2018, but in developing economies, inflation is projected to rise to 5.1% \nin 2019 from 4.9% in 2018 partly due to the pass-through effect of currency \ndepreciations to domestic prices as the US dollar appreciated against most \ncurrencies. Nigeria has however enjoyed a stable exchange rate regime with \nthe naira recently appreciating against the dollar in the Bureau de Change \n(BDC) segment and the Investors’ & Exporters’ (I & E) window. Thus, \ndepreciation-induced inflationary pressure may pose no serious challenge. \nMoreover, with the price of crude oil hovering above US$67 per barrel, \naccretion to foreign reserves to support the foreign exchange market is \nexpected to continue. \nB. DOMESTIC ECONOMIC CONDITIONS \nThe uptrend in real GDP growth in Nigeria has progressed over several quarters \n– growing at 1.5%, 1.81% and 2.38% in Q2 2018, Q3 2018 and Q4 2018, \nrespectively. The oil sector, however, contracted by 1.62% between Q3 2018 \n33 \n \nand Q4 2018, while the non-oil sector grew by 2.70% with the major growth \ndrivers being the services and agricultural sectors. On yearly basis, real GDP \ngrowth stood at 1.93% in 2018 compared to 0.82% achieved in 2017. The need \nto promote growth in the real economy is supremely important for economic \ndiversification, poverty reduction and employment generation. Regrettably, it \nseems unlikely with less than two years before the end of 2020 that the target \nof 7% real GDP growth set out in the Economic Recovery and Growth Plan \n(ERGP) will be achieved. The national unemployment rate at 23.1% in Q3 2018 \ncalls for serious concern, especially when compared with the 11.23% in the \nEconomic Recovery and Growth Plan document. Whilst recognizing that the \nprimary mandate of the monetary authority is to promote price stability, in a \ndeveloping economy context, it should give more than normal weight to the \nneed to stimulate job-oriented growth and poverty reduction. \nInflationary pressures in the economy continued to moderate in the review \nperiod as all indicators (headline, food and core) declined both on year-on-\nyear and month-on-month basis. Food inflation (year-on-year) decelerated to \n13.47% in February 2019 from 13.51% in the previous month, while core inflation \ndeclined to 9.80% in February from 9.91% in the preceding month. For the year-\non-year headline inflation, the decrease has been sustained for three \nconsecutive months with inflation ticking down from 11.44% in December 2018 \nto 11.37% and 11.31% in January and February 2019, respectively. The inflation \noutlook or forecast in the short term shows that inflationary pressures will \ncontinue to moderate. There is a high probability that the ERGP inflation target \nof 9.90% p.a. by 2020 is achievable as the inflation outlook for August 2019 \nstands at 10.48%. Consequently, with inflation well anchored, it is rational to re-\nfocus on attaining the ERGP growth target. \nIt is noteworthy that most of the key monetary aggregates underperformed \nrelative to the provisional benchmarks. In February 2019, M3 grew by 4.31% - \nwell below the benchmark of 14.47%, while M2 and Net Foreign Assets (NFA) \ncontracted by 1.98% and 7.47% relative to benchmark figures of 12.99% and \n34 \n \n18.66%, respectively. These statistics indicate that monetary policy has been \nquite restrictive and that money supply may be constraining the growth \nmomentum in the economy. Thus, there is a need to review the current \nmonetary policy stance to promote growth. \nFinancial market conditions indicate that maximum lending rate remains high \nat 30.56% in February 2019, whereas the yawning gap between maximum \nlending rate and consolidated deposit rate is as wide as ever at 26.23%. This \npicture is not growth-friendly. Reviewing the policy rate in a downward \ndirection seems to be the right way to go in the absence of direct controls. \n \nC. VOTING DECISION \nIn view of the foregoing observations – an external environment tilting towards \nsofter monetary policy to avert global recession; a fragile domestic growth \nrecord with real GDP much below ERGP target; moderating inflation; and \npaucity of credit to optimally promote private-sector led growth, I voted to cut \nthe policy rate by 50 basis points and to hold other parameters constant: \n MPR at 13.50% per cent \n The asymmetric corridor at +200/-500 basis points around the MPR \n Liquidity ratio at 30.0% per cent \n CRR at 22.5% per cent \n \n \n \n \n \n \n \n \n \n35 \n \n7. \nNNANNA, OKWU JOSEPH \nThe economy achieved tepid growth, but showed signs of an uptick and \nresilience. Available data from the National Bureau of Statistics (NBS) reveal \nthat the economy grew by 2.38 per cent in 2018 Q4, as against 1.81 per cent \nin 2018 Q3. In particular, services recorded the highest share of total output \ngrowth in 2018 Q4, followed by agriculture, construction, trade, and industry \nsub-sectors. Oil sector contracted by 1.62 per cent, but less than 2.91 \ncontraction in 2018 Q3. Longstanding structural constraints of high \nunemployment, huge infrastructural gap, weak revenue mobilisation and \nnarrow structural diversification remain the binding constraints to growth. \nInflationary pressure in the economy is moderating, supported by improved \nfood supplies and exchange rate stability. Latest data revealed that headline \ninflation (year-on-year) fell marginally to 11.31 per cent at end-February 2019, \ncompared with 11.37 and 11.44 per cent in the preceding month and end-\nDecember 2018, respectively. Food inflation also declined to 13.47 per cent in \nFebruary 2019 compared with 13.51 per cent in the preceding month. Similarly, \ncore inflation fell to 9.80 per cent from 9.91 per cent at end-January 2019. \nOverall, headwinds to the inflation outlook include high transportation cost, \nenergy cost and incipient demand-pull inflation from the expected \nimplementation of the national new minimum wage. \nRelative expansion in broad money supply during the period is clearly, \ninadequate to sufficiently drive economic growth amidst weak credit \ntransmission to the growth enhancing sectors. While financial conditions are \nsoftening \ncoupled \nwith \ndeclining \nnon-performing \nloans \n(NPLs), \nthe \nphenomena of crowding out and banks risk-aversion continue to be the \nbinding constraints to credit growth. Credit to the core private sector grew by \n5.93 per cent in February 2019 relative to end-December 2018. Net credit to \nthe government increased by 17.20 per cent in February 2019 over the end-\nDecember 2018. In tandem with the liquidity conditions, money market rates \n36 \n \ngenerally trended downwards in the review period; and remained largely \nwithin the monetary policy rate corridor. \n \nSubsisting inadequate fiscal buffers clearly weakens the potential for \nimplementing an inclusive growth strategy. Given the track record of weak \nrevenue mobilisation and absence of strong fiscal buffers, further monetary \ntightening will further elevate yields on fixed-income securities and worsen the \nalready precarious debt service obligations. The expectation in the near-term \nis for an urgent step towards a reduction in consumption subsidies and reform \nin tax administration. These should create the fiscal space to undertake \nefficient public investments \nNigeria’s external sector has shown impressive resilience as all the key metrics \nshowed relative stability. The overall balance of payments position recorded \na surplus in Q4 2018 driven largely by lower import bills, (arising from enhanced \nimport substitution), narrowed deficits in the income account and higher \nsurplus in the current account. Gross external reserves, as at March 14, 2019, \nstood at US$$44.64 billion, boosted by positive foreign exchange earnings from \ncrude oil receipts and swap transactions. Overall, continuous improvement in \nthe ease of doing business should keep FPI and FDI in the positive trajectory. \nLet me note the substantial moderation in inflation, the relative positive yield \ncurve which has sustained investors’ confidence in the economy and \nconcomitantly, the exchange rate stability that has been achieved. Against \nthis backdrop I consider it expedient to signal the need to pursue inclusive \ngrowth and address the dual challenge of poverty and unemployment. On \nthe balance of risks, I am convinced that monetary easing at this time is \nconsistent and pareto optimum. Thus, I vote to reduce the MPR by 50 basis \npoints and keep all the other policy metrics at their current levels. \n \n \n \n37 \n \n8. \nOBADAN, MIKE IDIAH \nIn recent times, monetary policy direction in various countries has been \ninformed by global economic and financial developments, and even political \ndevelopments, against the backdrop of the inter-connectedness of \neconomies through globalization. Also, domestic developments, especially \neconomic and policy shocks are critical influencers of monetary policy \ndirection. It is therefore important to review aspects of these developments as \nbasis for decisions on monetary policy direction in Nigeria in the next few \nmonths. \nGlobal Growth and Monetary Policy Stance \nIn the global economy in which Nigeria is active, there have been strong \nconcerns about growth prospects for 2019. Indications from various credible \ninternational organisations suggest the likelihood of growth slowing in 2019 in \nboth advanced and Emerging Markets and Developing Economies (EMDEs). \nAccordingly, global growth in 2019 has been downgraded to 3.5 per cent \ncompared to 3.7 percent in 2018 and is expected to weaken further on the \nbasis of developments in some major economies. These developments include \nthe lingering likelihood of the US economy going into recession in 2020, \nincreasing uncertainty around BREXIT, weakening growth in Europe as major \neconomies like Germany, Italy and France are confronted with internal \nweaknesses, slowing growth in China due to the impact of its trade war with \nthe US and tighter financial regulations, amongst others. \n \nWith significant uncertainties brewing around the major economies that are \nexpected to lead growth, output in the advanced economies was \ndowngraded from 2.3 per cent in 2018 to 2.0 per cent in 2019. While the US is \nprojected to lead this group of economies, the country’s 2019 growth is also \nexpected to trail its performance in 2018 as it continues to grapple with issues \nsuch as trade tensions with major allies, political uncertainties at home and \nconflicts between monetary and fiscal policies. In Europe, the European \n38 \n \nCentral Bank (ECB) formally downgraded its growth forecast for 2019 and gave \nindications of returning monetary accommodation to address emerging \nweaknesses in the Euro area economy. In the Emerging market and \nDeveloping Economies, growth is projected to slow moderately to 4.5 percent \nin 2019 from 4.6 percent in 2018. \nThe concerns about global growth in 2019 are such that: \n In a recent interview by the Chairman of the US Federal Reserve Bank \n(Fed), the initial guidance of at least two rate hikes in 2019 was \nwithdrawn. He stated that the Fed had renewed evidence of a \nweakening \nglobal \neconomy \nvis-à-vis \na \nstrong \nUS \neconomy. \nConsequently, in support of its mandate of fostering maximum \nemployment and price stability, the US Federal Open market \nCommittee, in a Federal press Release of January 30, 2019 conveyed \nthe decision to maintain the target range for the federal funds rate at \n2.25 – 2.5 percent. This halt to its monetary policy normalization is in view \nof a slowing global economy and threats to the US economy. \n \n Out of a total of fourteen (14) central banks surveyed by the Monetary \nPolicy Department of the Central Bank of Nigeria (CBN) between \nJanuary and March 2019, three of the central banks in the survey \nreduced their policy rates while all others left the rates unchanged. \no After its August 2018 rate hike, the Bank of England continued to \nrefrain from further rate hikes to avert a recession as the uncertainty \naround BREXIT threatens to dampen growth as the parliament \nentered into a deadlock in the weeks and days leading up to Britain’s \nfinal exit from the European Union. \n \no After providing guidance of its intention to progress with policy \nnormalization in December 2018, the European Central Bank (ECB) \nhas reversed its stance by returning to monetary accommodation \n39 \n \nthrough the provision of low cost loans to commercial banks. The ECB \nhas also confirmed that there is no likelihood of a rate hike till the end \nof 2020 as inflation continues to linger well below its long-run \nobjective. \n \no With unemployment on the rise in South Africa, the Reserve Bank of \nSouth Africa retained its policy rate in March 2019 to support the \neconomy’s recovery from recession. The Central Bank of Brazil, a \nmajor oil producing country, also held its rate constant in March 2019 \nto support its slow post-recession recovery as output growth nudged \nup moderately to 1.1 per cent in 2018. \n \no Other central banks such as those of Egypt, Ghana and India eased \ntheir policy rates to accommodate growth concerns as global \nindicators show a broad slowdown in economic activities. The Bank \nof Ghana, and the Central Bank of Egypt lowered their policy rates \nby 100 basis points each, as inflation receded quite comfortably, thus \nproviding the policy space to boost growth. All other central banks in \nthe survey such as the Bank of Japan and the Peoples Bank of China \nretained their policy rates in response to prevailing uncertainties in \nthe global economy. \n \nThus, MPR decisions have tended to be shaped by global growth trends, \ncountry growth concerns, recovery prospects, unemployment, and global \nuncertainties, among others. Although in most developed and developing \ncountries, the pre-eminent mandate of the central banks / primary objective \nof monetary policy is price stability, this is being pursued without losing sight of \nthe objectives of sustained economic growth and higher employment. Price \nstability (low inflation) remains a most important condition for economic \ngrowth. But in view of a slowing global economy in perspective, most central \n40 \n \nbanks are now confronted with the need to ensure that their policies support \nrather than choke off growth. \n \nFor an emerging market economy like Nigeria, with the signals of ECB’s return \nto monetary accommodation and the US and UK refraining from monetary \npolicy normalization in the short term, capital flows to the country may likely \nincrease, particularly as the post-election security situation in the country \nimproves contrary to earlier fears. Tinkering with the Monetary Policy Rate in a \ndownward direction is not likely to deter capital inflows, especially as yields in \nthe fixed income segment of the financial market are already in the range of \n12 – 13 percent, below the MPR. This suggests that factors other than monetary \npolicy rate (MPR) actually propelled the recent upsurge in capital inflows to \nthat market. \n \nDevelopments in the Nigerian Economy \nMy opinion on the monetary policy direction in the next few months is informed \nby both global economic and financial trends and developments in the \nNigerian economy. The Monetary Policy Committee meeting was held against \nthe backdrop of generally improved macroeconomic fundamentals including \nthe economic growth rate, foreign exchange market stability as reflected in \nthe exchange rate, external reserves which grew to nearly US$ 45.0 billion or \nabout 13 months imports cover, moderated inflation rate, capital inflows, \nfinancial system soundness indicators, among others. With respect to the latter, \nbesides the improvement in the Non-Performing Loans (NPLs) ratio, there is also \nimprovement in the provisions made for NPLs which stood at 98.59 percent \ncoverage at end-February, 2019 compared to 78.27 percent at end-February, \n2018. This should inspire greater confidence in the financial system. However, \nthere are concerns relating to weak and fragile growth, high unemployment, \nlimited economic diversification, and weak money supply growth in relation to \nprivate sector credit needs. Three of the developments are elaborated upon \nas follows. \n41 \n \nGDP Growth and Unemployment \nSince the Nigerian economy exited recession in the second quarter of 2017, \nthe economic growth rate has remained positive, but low and fragile, \naveraging 0.83 percent in 2017 and 1.93 percent in 2018, indicating a 1.11 \npercentage increase. There was an uptick in real GDP growth in quarter 4 (Q4) \n2018 as it grew by 2.38 per cent compared with 1.81, 1.50 and 1.95 percent in \nquarter 3 (Q3), quarter 2 (Q2) and quarter 1 (Q1), respectively. The real growth \nwas driven by the non-oil sector, which remained the main driver of growth \nsince Q4 2017. Thus, generally, the Nigerian economy continued on a slow \nrecovery path in 2018 from its last recession. However, the economy could \nrecover appreciably from the weak growth experienced in 2018 as oil price \ndevelopment is expected to remain above the budget benchmark. The price \nof Bonny light on March 13, 2019, stood at US$ 67.48 per barrel, haven \nrecovered from much lower prices. The reduction in production by OPEC and \nnon-OPEC by 1.2 million barrels per day contributed to the recent uptick in oil \nprice. However, oil price continued to witness volatility as uncertainties about \nthe direction of global trade and broadly weakening global economy pose \nsignificant challenges to global aggregate demand. \nUnder the circumstance, Nigeria’s output is projected to grow in 2019 as \nfollows: \no 2.0% (IMF) \no 2.2% (World Bank) \no 3.01% (Federal Government) \no 2.74% (Central bank of Nigeria) \nAlthough the macroeconomic fundamentals portray a favourable outlook, \nthe prospects of growth in output remains constrained by external \nuncertainties, reflected by weak global growth trends, volatilities in oil market \nprices, trade tensions between the US and major trading partners. Under the \ncircumstance, domestic initiatives aimed at stepping up growth through \nmonetary policy support to fiscal actions are inevitable. No doubt, the Central \n42 \n \nBank of Nigeria has so far, through its unconventional monetary policy \ninterventions in development through cheap financing, has played a highly \nacknowledged role in stimulating production of goods and services in critical \nsectors of the economy, such as agriculture, manufacturing, small and \nmedium enterprises, etc. The atmosphere seems right at this time to provide \nfurther support to economic growth activities through a downward adjustment \nof the Policy Rate in the expectation that it will be reflected in lower lending \nrates and greater credit availability to real sector operators. \n \nArising from the phenomenon of low and non-inclusive and job-creating \ngrowth is the challenge of unemployment in the country which remains \nconsiderably high. The national unemployment rate stood at 23.1 percent in \nQ3 of 2018. The total combined unemployment and underemployment rates \nincreased from 40.0 percent in Quarter 3, 2017 to 43.3 percent in Quarter 3, \n2018. As at Q3 2018, 55.4 per cent of the youth population (15 – 34 years) of \nthe labour force were either underemployed or unemployed compared to \n52.6 per cent in the corresponding quarter of 2017. Thus, unemployment in the \ncountry which has remained a very worrisome problem could be abated by \nmonetary policy that supports job-creating production. \n \nInflation \nAll measures of inflation, headline and core, moderated in February 2019. \nHeadline inflation moderated from 11.44 per cent in December 2018 and 11.37 \nper cent in January 2019 to 11.31 per cent in February 2019 driven largely by \nthe food component. Food inflation decreased to 13.47 per cent in February \n2019 from 13.51 per cent in January 2019. Core inflation also decreased to 9.80 \nper cent from 9.91per cent in January 2019. The downward trend in domestic \nprices partly reflects the Bank’s tight monetary policy stance coupled with \nstable exchange rate and its pass-through to domestic prices and moderation \nin food prices due to irrigation farming. However, inflation at 11.31 per cent in \n43 \n \nFebruary 2019 is outside the Bank’s benchmark corridor of 6-9 per cent. \nNevertheless, inflation has remained below the monetary policy rate. \n \nStructural factors, including poor transport infrastructure, high cost of energy, \ninsurgency and insecurity in the North East; and the announcement effect of \nthe upward review in salaries and wages could constitute an upside risk to \ninflation in the short to near-term. However, experts have indicated that \ninflation could maintain a downward trend considering that the feared \nheadwinds to inflation have not materialized. Importantly, consumption \nexpenditure is still low, the effect of increased investment spending on inflation \nmay be minimal, especially if it stimulates increased output/productivity, and \nwith the existence of output gap, supply can easily be generated to meet \nincreased demand. \n \nThus, the year-on-year inflation rate is moderating, while the month-on-month \nannualized is moderating towards the Bank’s single digit inflation target range \nof 6-9 per cent, reflecting partly the effectiveness of Bank’s tight monetary \npolicy stance. This development provides space to ease the current tight \nmonetary policy stance. \nMonetary Developments \nDevelopments in monetary aggregates suggest scope to expand money \nsupply to drive economic growth. Broad money supply (M2) declined by 1.98 \npercent in February 2019 below the level at end-December, 2018. The \nannualized growth of M2 stood at -11.91 percent compared to the 2019 \nprovisional benchmark of 12.99 percent. On the other hand, annualized \ngrowth of broad money aggregate (M3) at 25.88 percent was, however, \nabove the 2019 provisional benchmark of 14.47 percent. \nAlthough M3 grew largely because of increase in CBN bills, the M2 component \ncontracted in January and February 2019, respectively, reflecting tight \n44 \n \nmonetary policy stance of the Bank. Overall, money supply still remains weak \nto drive the growth momentum in the economy. \n \nTwo Pertinent Issues \nThere are other pertinent issues, some of which impinge on the effectiveness \nof monetary policy. Among these are the following: \ni. \nBourgeoning fiscal deficit, rising debt and debt servicing levels. \nAnalysis of fiscal operations of the Federal Government between \nJanuary \nand December 2018 showed \nthe \nactual \nFederal \nGovernment revenue as N3,909.94 billion, while the total expenditure \nfor the period January – December, 2018 amounted to N7, 538.03 \nbillion, resulting in a fiscal deficit of N3,628 billion. The Federal \nGovernment borrowed N669 billion from the domestic markets \nthrough the issuance of FGN bonds, to partly finance the budget \ndeficit. The larger portion was financed from external borrowings, \nwhile the net deficit was accommodated by the CBN. The public \ndebt level stood at US$73.213 billion out of which US$21.592 billion or \n29.5 percent represents external debt. In the last few years, external \ndebt has built up in a very uncomfortable manner. \n \nThe Federal Government’s actual fiscal deficit has continued to \nwiden and concurrently, the debt level and debt service have \ncontinued to rise. A major driver of the deepening fiscal deficit and \ndebt levels is the under-performance in revenue generation largely \ndue to non-diversification of revenue and continuing weakness in \ndomestic economic performance in spite of slight recovery in the \ninternational price of crude oil. Another major concern is the rapidly \ngrowing cost of debt servicing, fuelled by increasing public debts with \nthe potential for crowding out the private sector. Therefore, the \ngovernment needs to step up domestic revenue mobilisation and \n45 \n \nsignificantly reduce the pace of external debt accumulation \nbecause of the challenges of rising external debt servicing, as well as \ninterest rate and exchange rate shocks. The proposed increase in \nVAT is in the right direction. \nii. \nApparent inefficiency in the financial sector. While stability issues in \nthis sector are gradually being addressed by the CBN, contradictions \nabound. A good number of the operators, especially the deposit \nmoney banks, appear to be doing well as reflected by profitability \nindicators, rates of return, among others. However, inefficiency and \nmonopoly practices seem to abound. Unacceptable interest rate \nspread persists. The maximum lending rate stood at 30.56 percent in \nFebruary, while the Prime lending Rate stood at 16.08 percent in the \nsame month. On the other hand, consolidated demand, savings and \nterm deposit rates declined by 0.02 percentage points to 4.33 \npercent in February 2019 from 4.35 percent in January 2019. The \nspread between the maximum and consolidated deposit rates stood \nat 26.23 per cent in February 2019. This spread suggests exploitation \nand remains unacceptable in view of the adverse implications for \nsavings, investment and welfare. It is important that regulatory \nactions are introduced to redress the situation. \nAlso, there is the phenomenon of high returns on Equities (ROEs) and \nAssets (ROAs). Nigeria’s financial industry operators have higher ROEs \nand ROAs than comparator countries like Turkey, South Africa and \nMalaysia. Yet, these countries have better financial soundness \nindicators and asset quality indicators. The contradictions would \nneed to be looked into with a view to reducing the interest rate \nspread and enhancing competitiveness and efficiency in the sector. \n \n \n \n46 \n \nOpinion \nFor quite some time now, the Central Bank through the Monetary Policy \nCommittee, has refrained from raising its policy rate. The policy rate has \nremained constant at 14.0 per cent since July 2016 because of considerations \nto move the economy out of recession. The 14.0 percent policy rate itself \nreflects tight monetary policy stance. Even in the face of this, interest rates \nhave been trending downwards in the various markets in recent times with \nimplications for the relevance of the monetary policy rate. However, this \nmomentum provides an additional opportunity to adjust the MPR downwards \nin the hope that the deposit money banks would behave and make more \ncredit available to the real sectors of the economy at lower interest rates. This \nwill complement the extant unconventional monetary policy strategy of the \nCBN which makes credit available to priority sectors, for example, agriculture \nand manufacturing, at single digit interest rates. It must be understood that by \nimplementing unconventional monetary strategies to complement fiscal \npolicy initiatives aimed at promoting growth, employment and diversification, \nthe CBN has not abdicated its primary responsibilities. Under the highly \nincapacitated fiscal policy environment of the last few years, the monetary \npolicy interventions have provided succor which needs to be appreciated. \nEven some advanced economies tailor monetary policy to promoting growth \nand employment in addition to maintaining monetary and price stability. \nUnder the circumstances of poor economic governance and conspicuous \nmarket failures in the country, monetary policy intervention becomes \ninevitable. \n \nNow, the inflation rate has moderated and is lower than the Monetary Policy \nRate although it is still above the desired inflation benchmark. Because of weak \ndomestic revenue mobilization, fiscal policy is limited in its efforts to drive \ngrowth and the need has become stronger for further monetary policy support \nto the attainment of the growth, employment and economic diversification \n47 \n \nobjective. Finally, monetary growth and credit have yet to achieve the levels \nthat can effectively drive the economic growth momentum of the country. \n \nIn light of the foregoing, I have the conviction that the current tight monetary \npolicy stance should be eased by reducing the Monetary Policy Rate by 100 \nbasis points, that is, reduce the rate to 13.0 percent. The other indicators will \nmaintain the extant levels. \nCRR - \n22.5% \nLiquidity Ratio - 30% \nAsymmetric Corridor - +200/ -500 basis points \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n48 \n \n9. \nSANUSI, ALIYU RAFINDADI \n1. Decision: \nIn today’s meeting, my decision to vote for a hold reflects my conviction that \nthe current level of real interest rate is appropriate for balancing the monetary \npolicy objectives of price stability and output recovery. The current policy \nstance, which has brought inflation down close to the upper band its target \nrange, supported sustained output recovery, maintained positive net capital \ninflows amidst monetary policy normalization in advanced economies, and \ndelivered the much-desired exchange rate stability, is still optimal for sustaining \nthe disinflation process amidst output recovery. Although available data shows \nthat headline inflation (year-on-year) continued to moderate further in \nFebruary 2019, Staff forecasts indicate that there are threats to inflation, which \nwould remain sticky, while output recovery would continue at a slightly faster \nrate in the near term compared with that achieved in the fourth quarter of \n2018. Despite the temptation to loosen to support speedier output recovery, \nholding all the key parameters constant is, in my opinion, the time-consistent \noptimal policy position needed for now to keep inflation low without \nthreatening the output recovery. \n \n2. Background and Justification \n2.1. Global Economic Developments \nGlobal economic developments show that weak output growth and price \ndevelopments across the major advanced economies could have positive \nimplications for capital flows to emerging markets and developing economies. \n \nGlobal output, which the IMF’s World Economic Outlook projected to grow at \n3.7 percent in 2019, is now forecasted to grow at a slower rate of 3.5 percent. \nThis downgrade is due to the slower growth projections in advanced \neconomies (of 2.0 percent in 2019, compared with 2.3 percent in 2018) and \n49 \n \nEMDEs (of 4.5 percent in 2019 compared to 4.6 in 2018). In the US, output \ngrowth slowed down to 2.6 percent in Q4 compared with the 3.4 percent \narchived in Q3 of 2018 as a result of the prolonged government shutdown, \nslower household and business fixed investment expenditures. In the Euro area, \noutput grew by 0.2 percent in Q4, which is slower than the 0.6 percent \nachieved in Q3 of 2018. In major advanced economies, inflation is moderating \nand is trending below the 2 percent target. It is also forecasted to moderate \nfurther to 1.7 percent in 2019 compared to 2.0 percent in 2018 in these \ncountries. In the US, for instance, inflation decreased in February 2019 to 1.5 \npercent, compared with 1.6 percent in January 2019. These output and price \ndevelopments have caused a dovish monetary policy stance in the major \nadvanced economies. The US Fed, for instance, was more dovish than \nexpected, by retaining the Fed funds rate and issuing a guidance note \nshowing its intention to pause monetary policy normalization. The European \nCentral Bank has also reverted to monetary accommodation by providing \nlow-cost loans to commercial banks. The bank has also pushed forward the \nlikelihood of rate hikes to the end of 2020. These developments have caused \nvolatility in the global financial markets as portfolio rebalancing moved capital \nfrom equities to fixed income markets. A key implication of these \ndevelopments is the increased likelihood of capital flows towards the Emerging \nMarkets and Developing Economies (EMDEs). Although there was a mild \nrecovery in the international oil market following OPEC production ceiling, the \ngrowing investment in the production of Shale oil in the US coupled with the \nChinese drive towards the elimination of machines that use fossil fuel by 2024 \nsuggests that the long-term threat to oil market recovery remains real. These \ndevelopments indicate that the Federal Government should, as a matter of \nurgency, intensify its current efforts at structural reforms aimed at economic \nand revenue diversification to mitigate the long-term threat to economic \nstability. The government should also focus on building fiscal buffers as a means \nof improving the resilience of the economy to short-term oil markets \nfluctuations. \n50 \n \n \n2.2. Domestic Economic Developments \nThe real output recovery observed in the last quarter of 2018 is expected to \ncontinue at a faster rate into the first and second quarters of 2019, while the \nmoderating inflation is expected to remain sticky above the upper bound of its \ntarget band owing to moderate inflationary pressure in the near-term. \n \nAvailable data shows that positive growth in domestic output was sustained in \n2018. Real output grew by 1.98 per cent in 2018 compared to 0.82 percent in \n2017. Indeed, on a quarterly basis, the rate of recovery has significantly \nincreased since the second quarter of 2018, rising from 1.5 percent in Q2 to \n1.81 percent in Q3, and then to a higher than projected rate of 2.38 percent \nin Q4. The non-oil sector, which contributed 92.94 percent to the real GDP, was \nthe primary driver of growth during Q4 as it grew by 2.7 percent. The oil sector, \nwhich added 7.06 percent to the real GDP, contracted by about 1.63 percent \nduring the quarter. The primary drivers of the non-oil GDP were services and \nagriculture. The growth in agriculture was attributed to the improvements in \ncrop and livestock production, forestry and fishing. Although industrial \nproduction index declined, in Q4 of 2018, due to the poor performance of the \nmining, the manufacturing and non-manufacturing Purchasing Managers’ \nIndex (PMI) have increased in March 2019 due to increased consumer \ndemand and moderation in input prices. Staff forecasts show that output \ngrowth will continue to rise in 2019 driven by moderating inflation, stable \nexchange rate, financial system stability, enhanced credit flows to the real \nsector, effective implementation of the ERGP, CBN's special interventions in \nAgriculture and SMEs, addressing food supply and distribution problems \nincluding \nfarmers/herders \nconflicts. \nSome \nof \nthe \ncritical \nrisks \nto \nmacroeconomic stability include moderate inflationary pressure beginning \nfrom April 2019, low credit to the real sector, increased fiscal deficits and high \ndebt level. \n \n51 \n \nAvailable data shows that headline inflation has marginally declined (year-on-\nyear) from 11.37 percent in January 2019 to 11.31 percent in February 2019. This \ndecline was mainly due to the decline in food inflation from 13.51 percent in \nJanuary 2019 to 13.47 percent in February 2019. Core inflation has also \ndeclined from 9.91 percent in January 2019 to 9.80 percent in February 2019 as \na result of moderation in the prices of processed foods, housing, water and \nelectricity. Staff forecasts suggest that inflation would continue to remain sticky \nclose to the upper bound of its target band. This is because of a moderate \ninflationary pressure expected in the near-term arising from the late \nimplementation of the 2018 budget, increased fiscal deficits, inadequate \npower supply. The stability in the exchange rate has been sustained. There was \nslight appreciation (of about 0.51% compared to January) at the Investor and \nExporter (I&E) window, which averaged N361.82/US$ at the end of February \n2019. It further appreciated by 0.37% to N360.47/US$ in March 2019. The BDC \nrate had similarly appreciated, by 0.09%, to N359.33/US$ in March 2019. This \nrelative stability was achieved through the sustained intervention by the CBN \nin the foreign exchange market as well as the activities of the I&E window. This \nsustained intervention was enabled by the significant level of international \nreserves, which stood at US$44.92 as at 20th March 2019. Indeed, the exchange \nrates at the BDC segment and I&E window appear to be converging towards \na more unified rate. \n \n3. The Basis for My Policy Choice \n \nI voted to keep all the policy parameter unchanged in today’s meeting \nbecause, on the one hand, as available data and staff forecasts show, \ninflation will continue to be sticky above its target band. A moderate \ninflationary pressure build-up is expected to begin in April 2019 and may last \nuntil July 2019. Achieving the price stabilization objective, therefore, requires \nthat monetary policy should remain tight. On the other hand, output recovery \nhas been sustained and is expected to increase in the medium-term. Although \n52 \n \nit is tempting to ease the monetary policy to increase the speed of output \nrecovery, doing so may threaten the inflation objective. Reducing the interest \nrate may also raise the exchange rate pressure. Overall, I believe the current \nlevel of real interest rate is appropriate to balance the objective of price and \nexchange rate stability and sustain output recovery. \n \nConsequently, I voted to: \n \n Retain the MPR at 14.00 percent; \n Retain the CRR at 22.5 percent; \n Retain the asymmetric corridor at +200/–500 basis points; and \n Retain liquidity ratio at 30.0 percent. \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n53 \n \n10. \nSHONUBI, FOLASHODUN A. \nGlobal Economic Developments \nThe preponderance of growth slowdown across different economic divides at \nthe end of 2018 has generated significant doubt on growth prospects for 2019. \nBesides Japan, which grew marginally by 0.9 per cent in 2018, there were \nsignificant slowdown in the United States, United Kingdom and the euro-area. \nSimilar trends were recorded in China, Russia, Brazil, India and South Africa, \namong others. Consequently, the World Economic Outlook (January 2019) \nprojected global growth at 3.5 per cent in 2019, from 3.7 per cent in 2018, \nmainly, on account of the drag in growth in most of the major economies. \nThough this global macroeconomic condition poses a challenge for monetary \npolicy in Nigeria, the prospect for higher and stable international crude oil \nprices, as well as, positive fundamentals attractive to foreign inflows provides \na reasonable buffer. \n \nDomestic Prices and Output \n \nDespite the projection of uptick in inflation from the expected impact of \npossible changes in energy prices and wage increase, inflation has \ncontinued to trend downward in the last two months, while the \npersisting short fall in household consumption spending capacity may \nconstitute strong drag to inflation in the near term. Headline inflation, on \nyear-on-year basis, fell for the second consecutive month to 11.31 per cent in \nFebruary 2019, from 11.37 per cent January 2019, mainly, due to decline in food \ninflation. This represented a reversal of the sudden uptick in the last quarter of \n2018, possibly on account of seasonal spending effects. Likelihood of \nadjustments in the fiscal space, however, constitutes the major near-term risk \nto inflation. \nThough the oil sector remained a major drag on output growth, gradual \nexpansion in the non-oil sector, continue to facilitate steady growth, \nhighlighting the positive impact of diversification efforts of the CBN and \nthe Federal Government. Growth remained weak from 0.82 per cent in 2017 \n54 \n \nto 1.93 per cent in 2018, reflecting upward trend from the second quarter, with \nthe highest growth of 2.38 per cent recorded in the fourth quarter 2018. \nExpansion in the non-oil sector, at 2.0 per cent, was the major driver of overall \ngrowth, with moderate contribution to growth observed in the agriculture, \nmanufacturing and construction sub-sectors. With the purchasing managers’ \nindex and credit condition reports showing positive sentiments towards future \nexpansion in production and general business activities and supported by \nstable exchange rate, which allows for long-term business planning, growth is \nexpected to be stronger and deeper. Notwithstanding the positive outlook, \nthe fragility of growth highlights call for intensification of growth supporting \nmeasures at all levels of policy formulation. \nMonetary and Credit Developments \n \nGrowth in the monetary aggregates were generally moderate and within \nthe benchmark but remained largely disconnected from real economic \nactivities, especially with the growth in credit to the private sector. Broad \nmoney supply (M2) contracted by 1.98 per cent in February 2019, relative to its \nlevel at end-December 2019, reflecting largely the 7.74 per cent decline in net \nforeign asset (net). Net domestic credit, however, grew by 1.68 per cent, on \naccount of respective rise of 17.20 and 6.41 per cent in both credit to the \ngovernment and credit to the private sector. CBN bills held by money holding \nsectors also grew by 31.40 per cent, thus growing the broader measure of \nmoney supply (M3) by 4.31 per cent over the level at end-December 2019. \nThe dynamics of money market rates, continued to reflect the net \nliquidity condition in the banking system, which was largely buoyed by \nmaturing CBN bills and fiscal injections, but moderated by Open Market \nOperations and foreign exchange interventions. Money market rates, \nincluding inter-bank and Open-Buy-Back rates generally trended lower in the \ncurrent period, underscoring the liquidity condition in the market. The spread \nbetween the maximum lending and the average deposit rates, remained \nwide, implying high borrowing cost. Developments in the capital market \n55 \n \nreflected investors’ changing sentiments, on account of the search for long-\nterm safety and return. \n \nFinancial System Stability Concerns \nIntensification of monitoring, with special focus on targeted supervision \nand corrective regulation would further strengthen the improving trend \nof key prudential ratios in the first half of 2019. Banking industry liquidity \nratio, at 51.05 per cent in February 2019, was significantly above the regulatory \nminimum of 30.0 per cent. Asset quality also improved, mainly, as a result of \nrepayment, recoveries and disposal, though the non-performing loans ratio \nremained above the regulatory maximum. Industry capital adequacy ratio, \nhowever fell, but remained marginally above the regulatory minimum. The \ntrends generally suggest improving health of the banking industry. \n \nExternal Sector Vulnerabilities \nOverall condition in the external sector indicated improved viability, \nunderscored by exchange rate stability, balance of payment surplus and \nrobust external reserves position. Despite the marginal decline in foreign \ndirect and portfolio investments in the review period, lower import bills, \nnarrowed deficits in the income account and higher surplus in the current \naccount contributed to enhancing external sector viability. Moreover, \nsustained exchange rate stability and convergence due to effectiveness of \nmeasures by the Bank continued to enhance investors’ confidence and \nbusiness planning. \nOverall Considerations and Decision \nWith a largely growth neutral inflation levels in most major economies of the \nworld and under a slowing growth condition, the congruence of opinion is that \nof easing monetary policy to support economic growth and development \noutcomes. The general posture of monetary policy globally has therefore \nbeen focused on addressing slowdown in growth and averting recession. \n56 \n \nOn the domestic front, despite the marginal decline in the industry capital \nadequacy ratio in the domestic banking industry, mainly due to increased risk \nweighted asset, improvement in asset quality, liquidity ratio and earnings \nunderscored stability of the banking industry. There is scope for measures to \nensure that growth in monetary aggregates effectively impacts real economic \nactivities through credit and financial intermediation, especially with the lag in \nits influence on inflation. The external sector remain generally viable, \nhighlighting the need for intensification of current measures/policies to \npromote diversification and ensure rebalancing of the economic structure. \nGrowth remain weak and fragile, while threat of inflation is generally muted on \naccount of the persistently low consumption expenditure and negative output \ngap. \nIn the past 24 months, monetary policy has clearly achieved its objectives of \nprice stability, particularly with inflation and money market interest rates \ntrending down, stable exchange rate and robust external reserves. Over the \nmedium term, however, monetary policy seems to have become less potent \nin its ability to indicate level and signal trend. Thus, with current global policy \ndriven mainly by pro-growth sentiments, it is imperative that domestic \nmonetary policy begin to effectively influence and signal the direction of other \nrates in the economy, especially considering that there is a limit to the scope \nand size of direct interventions by the Bank. Moreover, price stability devoid of \ngrowth is more likely to be unsustainable. \nThough some progress has been made, the fiscal sector, as the primary \nmedium for promoting growth, must within its present low capacity, take \nspecific measures to push growth. Including further release of capital \ncomponents of the 2018 budget; passage of the 2019 budget and Petroleum \nIndustry Bills; intensifying measures to block leakages/economic sabotage; as \nwell as build fiscal buffers. These inadequacies/uncertainties have held back \ninvestments. Rising debt stock in time of increasing oil price is another source \nof worry for sustainable growth. \n57 \n \nMonetary policy must be time consistent to achieve its objective and thus must \nnow target credit access and cost to facilitate expansion in the real sector. In \nthis regard, downward trending money market interest rates provide \nopportunity for alignment of monetary policy with the present realities. The \nwide spread between deposit and lending rates also underscore limited \ncompetition. Inflationary threat from wage increase remain muted considering \nthat low cadre employee to be mostly impacted already have shortfall in \npurchasing capacity. \nIn the light of the sub-optimal level of aggregate demand and level of output \ngap, easing the monetary policy stance within the present economic \nconditions is more likely to enhance aggregate supply rather than being \ninflationary. Moreover, returns to foreign investors remain attractive, compared \nto peer investment destinations. It is thus imperative for monetary policy to \nsupport employment generation and increase in productivity so as to address \nthe challenge of weak and fragile growth. As we await the economic plans of \nthe new government, it is necessary to underscore the fact that whatever \nstrategy is adopted should be growth focused. This decision is therefore a \nsignal of direction for both monetary and fiscal policies. \nI therefore vote to: \n Reduce the MPR by 25 basis point to 13.75 per cent; \n Retain the asymmetric corridor of +200/-500 basis points around the MPR \n Retain Cash Reserve Ratio (CRR) at 22.5 per cent; and \n Retain Liquidity Ratio at 30.0 per cent. \n \n \n \n \n \n \n \n58 \n \n11. \nEMEFIELE, GODWIN I. \nGOVERNOR OF THE CENTRAL BANK OF NIGERIA AND CHAIRMAN, MONETARY \nPOLICY COMMITTEE \nThe global growth forecast was revised downward to 3.5 per cent for 2019 \nand 3.6 per cent for 2020 in the January update of the World Economic \nOutlook (WEO). The downward revision was partly attributable to the softer \nmomentum in the second half of 2018negative effects of tariff increases in the \nUnited States and China in 2018 and lower growth forecast in Germany \nfollowing the introduction of new automobile fuel emission standards. Also, in \nItaly where concerns about sovereign and financial risks weighed on domestic \ndemand. In addition, weakening financial market sentiment, contraction in \nTurkish economy as well as softer than anticipated growth in some key \nemerging market economies contributed to the downward revision. \nThe overall risks to global growth tilt to the downside. Tightened financial \nconditions and further escalation of trade tensions remains key sources of risks \nto the outlook. In addition, a “no-deal” BREXIT from the European Union and \nthe continued slowdown in China’s economy could worsen risk sentiment \nacross the globe with serious implications for growth. This could be further \naggravated by the high levels of public and private debt in the Emerging \nEconomies. \nDespite this, Nigerian economy continues on its modest recovery. Recent \ndata released by the National Bureau of Statistics NBS showed that Real GDP \ngrew by 2.38 per cent in the last quarter of 2018, up from 1.95, 1.50 and 1.81 \nper cent in the first, second and third quarters, respectively. On annual basis, \nthe economy grew by 1.93 per cent in 2018. The growth performance was \nlargely driven by non-oil growth (especially in agriculture and services sectors). \nIMF has projected Nigeria’s economy to grow at 2.0 per cent in 2019 and 2.2 \nper cent in 2020. Our in-house analysis indicates that the economy will grow \nby 2.34 per cent for 2019. The favourable growth sentiment is supported by \n59 \n \npositive Purchasing Managers’ Index (PMI) in the manufacturing and non-\nmanufacturing indexes – buoyed by the continued stability in the foreign \nexchange market and the drive for increased credits to the real sector of the \neconomy. \nData on domestic prices indicated that inflation had continued to trend \ndownwards. Year-on year headline inflation consistently dropped from 11.44 \nper cent in December 2018, to 11.37 and 11.31 per cent in January and \nFebruary 2019 respectively. The decline is observed in the two components of \nheadline. Consequently, the composite food index declined from 13.51 per \ncent in January 2019 to 13.47 per cent in February 2019, while the core \ninflation, which excludes the prices of volatile agricultural produce stood at \n9.8 per cent in February 2019, down by 0.1 percent when compared with 9.9 \nper cent recorded in January 2019. Analysis of month-on-month inflation, \nshowed a deceleration in the three components during the review month; \nimplying a possible slowdown on year-on-year rates in the short-term. Though \nthe current stability in the foreign exchange market continues to impact \nfavourably on inflation, near-term risks subsist; including the residual effects of \nthe 2019 electioneering spending, and supply disruptions across major food-\nbelts of the country. \nThe current stock of FX reserves at US$44.6 billion can cover more than 13 \nmonths of imports as against the international standard of 3-month import \ncover. Exchange rate has not only stabilized, but also converged across \ndifferent segments of the market. The provisional Balance of Payments (BOP) \nposition estimates for Q4 2018 showed a significant improvement in the BOP \noutcome as the overall balance of payments recorded a surplus of US$2.80 \nmillion compared to a huge deficit of US$4,542.08 million recorded in the \npreceding quarter. Similarly, the current account balance (CAB) improved \nfrom a deficit of US$1,544.41 million in Q3 2018 to a surplus of US$1,104.57 \nmillion in Q4 2018. This development was largely attributable to the significant \ndecline in import bills occasioned by our various intervention policies as well \n60 \n \nas the restriction of FX supply for the importation of 41 non-essential items that \nhas been in existence since 2016. \nBoth the broad and narrow money aggregates, M2 and M1 performed below \ntheir benchmark in February 2019. M2 contracted by 1.98 per cent over the \npreceding December 2018, about 14.47 percentage points below the 2019 \ngrowth bench mark of 12.99 per cent. Similarly, M1 declined by 6.16 per cent \ncompared with the provisional growth bench mark of 17.08 per cent. Credit \nto private sector grew by 6.41 per cent, year to date, compared to the \nprovisional bench mark of 9.41 per cent. Similarly, aggregate credit to the \ndomestic economy grew by 10.64 per cent as against its provisional bench \nmark of 11.82 per cent. It is my candid opinion that the current performance \nof monetary aggregates have been unsatisfactory and that, in particular, we \nneed to channel more credits to private sector businesses in order to provide \nthe much needed impetus to growth. The issue of enhancing credits to the \nprivate sector businesses is critical to our recovery process and effective \ncollaboration of all stakeholders is, therefore, needed in this direction. \nIn my consideration, I once again, note that stability have been achieved in \nsome key macroeconomic indicators: inflation has stabilized for more than 10 \nmonths, exchange rate has not only stabilized, but has also converged across \ndifferent segments of the market, net capital inflow has been rising, while \npresent stock of external reserves at US$44.6 billion can finance more than 13 \nmonths of imports, well over the international threshold of 3 months import \ncover. For the first time, we experience rising net capital inflow, declining \ninflation, and currency appreciation and net accretion to external reserves \nduring months of general election in Nigeria. There is no doubt that the relative \nstability witnessed since the end of the 2016 recession reflects the continued \npotency of our past policy decisions \nDespite all these, cautious policy approach is needed as growth is still low and \nthe recovery fragile. We need economic growth that would feed and sustain \n61 \n \nthe teaming population. Per capita income and unemployment rates are \ntrending outside the acceptable regions. Having achieved relative stability in \nsome of the key macroeconomic indicators such as price and exchange \nrates, there is the need to signal a new direction that is pro-growth. Policy \nshould pay greater attention to boosting growth, creating jobs and \ndiversifying the economy. We are particularly interested in price stability \nconducive to economic growth. \nI remain mindful of the fact that inflation is still trending higher than the target \nrange of 6-9 per cent, but also note that the current level of inflation is below \nthe bench mark of 12.0 per cent above which inflation becomes inimical to \ngrowth. We, therefore, have a small policy space within which we can tinker \nand support growth in order to create jobs in the economy. My indication \ntoday is, therefore, to signal support for the growth of the economy which has \nbeen low and fragile. A marginal adjustment of the current level of policy rate \nis needed to balance the objectives of exchange rate stability, price stability \nand output stabilisation. Therefore, I vote to: \n1. Reduce the MPR to 13.5 percent; \n2. Retain the CRR at 22.5 percent; \n3. Retain the asymmetric corridor at +200/–500 basis points; and \n4. Retain liquidity ratio at 30.0 percent \n \nGODWIN I. EMEFIELE, CON \nGovernor \n \nMarch 2019", "source": "CBN", "stratum": "cb_requests", "fetch_date": "2026-05-11", "url": "file:///CBN/MPC_Communiques/Monetary Policy Committee Meeting of Monday 25th and Tuesday 26th March 2019 with Personal Statement.pdf"}