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Fiscal, monetary authorities move to bridge policy gap

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By Emeka Anaeto, Business Editor & Emma Ujah
AHEAD  of of the decision of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN)  on interest rate, fiscal and monetay policy authorities have moved to bridge gaps between them on monetary policy rate direction  against the need to stimulate economnic growth and curtail inflation.

Financial Vanguard investigation over the weekend revealed that the CBN’s MPC would stick its Monetary POlicy Rate (MPR) contrary to the position of the Ministery of Finance.

Retreat: From left: CBN Deputy Governor, Financial System Stability, DR Okwu Joseph Nnana, CBN Deputy Governor, Operations, Mr Adebayo Adelabu, Honourable Minister of Finance, Kemi Adeosun, Prof. Sam Olofin of NISER Ibadan, CBN Governor, Mr Godwin Emefiele, Honourable Minister for Budget and National Planning, Senator Udoma Udo Udoma, CBN Deputy Governor, Economic Policy, Dr Sarah Alade, Honourable for Trade and Investment, Dr. Okechukwu Enelama and CBN Deputy Governor, Corporate Services, Alhaji Suleiman Barau at the Two-day Monetary Policy Committee retreat in Abuja over the weekend.
f the fiscal authorities, was coming at a period when the country faced serious economic challenges.

He added that finding a sustainable solution required a broadened participation of colleagues from the fiscal side.

The  CBN boss said that the retreat, as a brainstorming session, would provide perspectives on certain Monetary Policy Committee decisions.

He said it would also close the gap on the coordination between monetary and fiscal authorities to chart a common course and take decisions to develop the economy.

In his remarks, the Minister of Budget and National Planning, Senator Udoma Udo Udoma, said both the monetary and fiscal Authorities had no choice but to work together to guarantee the country’s economic growth. He posited that the pathway to lower interest rate was to ensure monetary and fiscal authorities collaboration with the private sector.

Also speaking, the Minister of Finance, Mrs. Kemi Adeosun, and her Industry, Trade and Investment counterpart, Dr. Okechukwu Enelamah both agreed that solving challenges facing the Nigerian economy required unconventional tactics.

Adeosun, while disclosing that there remained a huge number of unbanked Nigerians whose contributions to the economy are hardly captured, said the government must devise ways to bring them into the financial mainstream.

She also hinted that, based on the current realities, the Federal Government would have to borrow more to meet its infrastructural obligation.

On his part, Enelamah emphasized the need for both monetary and fiscal authorities to ensure business, market and investor confidence, as well as policy integrity, in order to improve on the ease of doing business in Nigeria.

In her presentation entitled: “The Macroeconomic Trilemma and Monetary Policy in Nigeria,” the Deputy Governor, Economic Policy, Central of Bank of Nigeria (CBN), Dr. (Mrs.) Sarah Alade, said the onus of achieving the trilemma of low interest and exchange rates as well as low inflation should not entirely be the function of the monetary authority. Rather, she said it therefore necessitated the collaboration with fiscal authorities.

According to her, there was need for deliberate policies to ensure stability and engender growth in the economy.

MPC set to consolidate MPR

Meanwhile,  there are indications that the apex bank’s committee would retain all its key rates, settling for a ‘wait-and-see’ position in the face of improving macroeconomic indicators.

If this happens, the apex bank would be consolidating its opposition to both the Fiscal authorities, represented by the Finance Minister, Mrs Kemi Adeosun.

Also CBN’s rate regime, if retained, would be contrary to the positions of some organized private sector and policy analysts especially as regards interest rates.

For example, the Lagos Chamber of Commerce and Industries, LCCI and the National Association of Chambers of Commerce, Industries and Agriculture, NACCIMA, have been in the forefront of agitation for a reduced MPR and CRR as a means of curtailing rising interest rates and cost of borrowing.

They also believed that the present rate regime has spurred inflationary pressures while undermining real sector output.

Sources close to a Committee member confided in Financial Vanguard last weekend that members would have unanimity of position regarding monetary policy rates, MPR, Cash Reserve Ratio, CRR, and Liquidity Ratio, LR, to retain them all at levels prescribed last January, despite the oppositions.

Unanimity  of position

This means that MPR would remain at 14 per cent, CRR at 22.5 per cent and LR at 30 per cent, same levels as they were in January, 2017 MPC report.

The source also explained that because of the present macroeconomic indicators, the rates would be retained up till third quarter on 2017, indicating that even the next MPC to hold around May 2017 would not shift grounds.

Adeosun, in the wake of third quarter 2016 MPC meeting, urged the MPC to revise down monetary rates, arguing that it has pressured interest rates and hampered economic growth. The economy had just slid into recession then. A source in the ministry told Financial Vanguard that the minister still stands by her position but reiterated that the ministry has already moved on to influence growth through expansionary fiscal measures already incorporated in the 2017 budget while implementation of similar measures by Federal Government agencies to reflate the economy under the 2016 budget was on-going.

The MPC had hiked policy rates twice in the past one year, and Financial Vanguard learnt that the policy executives at the apex bank believe the high lending rates in banks and rising inflation in the economy were not caused by its high Policy Rate regime as they attributed the developments to other macroeconomic factors.

CBN Governor, Godwin Emefiele, equally alluded to this position in a recent statement when he said that “what is happening in Nigeria is cost-push inflation, exacerbated by supply shortages in food, fuels, and foreign exchange. He also noted that the CBN’s position was informed by the contradictory macroeconomic circumstance of the country where recession was happening at same time as rising inflation, which required unorthodox and creative treatment.”

He stated further: “In view of the fact that our current episode of inflationary pressure is coinciding with contracting economic growth, we have to recognize that the dilemma it poses to policymaking.

“This is because no single macroeconomic policy can address rising inflation and slow growth simultaneously, because fighting inflation may require implementing policies that might, in the short term, be inimical to economic growth, whereas, adopting expansionary policies to stimulate growth usually worsen inflation.”

This situation, according to the MPC source, is the reason the Committee has been compelled to retain the rates at present high level rather than concede to reducing rates.

He explained that the rate regime which amounted to an adoption of tight monetary policy is also the reason Nigeria has seen a deceleration in the rate of month-on-month inflation.

Emefiele had stated also that in times of high inflation, reducing interest rates make inflationary pressures much worse, with a second round effect of making economic growth even less possible.

Analysts’ positions

But many financial analysts have given reasons why CBN would retain current positions, indicating that the apex bank had little room to either increase further or reduce the rates given some prevailing monetary and macroeconomic circumstances.

A policy change now is too soon – FSDH Merchant Bank

Analysts at FSDH Merchant Bank Limited stated: “We expect the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) to hold rates at the current levels.

“Although both the inflation rate and foreign exchange rate have shown signs of improvement in the last few weeks, a change in monetary policy might be too soon. We believe more time is required before a monetary policy change can be effective under the current situation.”

Going by recent developments in the international economy where the Federal Open Market Committee (FOMC) of the U.S Federal Reserve Bank increased the Federal Funds Rate at its March 2017 meeting, FSDH reasons that any rate reduction would heighten capital outflow from Nigeria into USA where rates would have become more competitive.

They stated: “The expansionary fiscal policy plans of the Trump administration may lead to further rate hike in 2017. The increase in the Fed Rate may increase the dollar denominated yields and may lead to capital flight from the emerging markets economies. Thus a drop in rate in Nigeria which may lower the yields on the fixed income securities may be counterproductive.”

Domestic macroeconomic circumstances: On the domestic front, they believe recent indicators of positive change in macroeconomic indicators should be put under watch and waited for sustainability before a policy adjustment response.

They stated: “We are of the opinion that the Nigerian economy should move into positive territory in Q2 2017. This recovery is based on the improvements in crude oil production, oil price above US$50/b and the rise in external reserves.

“The growth in the Agricultural Sector supported by the Anchors Borrowers Program (ABP) of the CBN will also contribute to the recovery of the Nigerian economy.

“The planned FGN Savings Bond and the efforts of the Federal Government to reflate the economy will also support this argument. The inflation rate dropped for the first time in 15 months in February 2017 in line with our expectation.

“The inflation rate decreased in February 2017 to 17.78%, from 18.72% in January 2017. The drop in the inflation rate was because of base effect. The imminent increases in the electricity tariff and the pump expected increase in food production in the country on account of favourable policies will dampen food prices, which may lower the inflation rate. We expect the MPC to maintain a “wait and see” approach and hold rates at their current levels.”

Similarly they also believe the positive developments in the oil sector and external reserves need to be waited upon to sustainability before a policy change in the direction.

They stated: “The combination of improved crude oil production and the increase in oil price have boosted the external reserves. This has increased the supply of foreign exchange necessary to maintain stability in the foreign exchange rate, resulting in an increase in investors’ confidence in the economy. A rate cut may be too soon.

“The favourable price of oil in the international market and the consistent increase in oil output has increased the external reserves in recent times. The 30-day moving average external reserves increased by 9.04% from US$27.76bn as at January 24, 2017 to US$30.27bn as at March 15, 2017. A policy change at this point may reverse the recent gains.”

The analysts at FSDH sighted the positive development in the foreign exchange market as indicative of signaling positive returns of existing policies and recently introduced measures which should be consolidated before any major shift.

They stated: “The recent policy of the CBN to increase the supply of foreign exchange in the inter-bank market requires some time for the economy to feel the full impact. Thus a ‘HOLD’ decision is appropriate.”

Concluding their submissions, the analysts at FSDH stated: “Looking at the economic developments in the country and the impact of the external developments on the Nigerian economy, we expect the MPC to hold rates at the current levels.

“We are also of the opinion that the Nigerian economy should move into positive territory in Q2 2017. This recovery is based on the improvements in crude oil production, oil price above US$50/b and growth in the agricultural sector. The planned FGN Savings Bond and the efforts of the Federal Government to reflate the economy will also support this argument.”

Rates should be maintained but with attention to FX policy change —Afrinvest

Analysts at Afrinvest West Africa Plc, a Lagos based investment house, noted some mixed developments in the macroeconomic environment so far this year and observed that the CBN’s MPC decisions should reflect the circumstances while addressing major weak points.

They also indicated a support for the CBN against the ministry of finance position on rate cuts and expansionary policy measures.

But in line with the positions of the organized private sector, they warned against any further rate hike.

They stated: “As the Committee sits to deliberate on Monday and Tuesday, we are of the view that the MPC will maintain status quo on all rates whilst reiterating the need for the CBN to focus on improving liquidity in the Foreign Exchange market especially as hinted by the new ERGP (Economic Recovery and Growth Plan) document.

“Whilst the Fiscal authorities pursue an expansionary policy (2017 proposed budget expenditure is estimated at N7.3tn compared to 2016 estimates of N6.1tn) in order to reinstate the economy on sustainable growth path, we believe in the absence of a truly flexible FX market, a dovish stance by way of rate cut or reduction of CRR may not only fuel further monetary induced inflationary pressures while towing the line of the fiscal managers may also discredit foreign capital attraction into the country especially given the recent US Fed Fund rate hike.

“Similarly, a rate cut could dampen CBN’s efforts in squeezing excess liquidity from the system which could hamper the stability of the Foreign Exchange market.

“On the flipside, a hike in rate may also be sub-optimal at this time as this may further squeeze out liquidity from the banking system as banks may deploy funds towards investment securities while also constraining growth potentials, thus worsening the economic conditions.

“Therefore, on a balance of considerations, we think the MPC will maintain status quo on all rates while trying to consolidate on the gains of recent improvements that have been recorded in inflation, parallel market FX rate, increase in oil production and the release of ERGP by the fiscal authority.”

If CBN’s MPC toes this line, the Afrinvest analysts posits some implication for the financial markets and the larger economy.

They stated: “The implication on the markets, should the MPC maintain status quo, is expected to be neutral given that most foreign investors are staying on the side-line at the moment against the backdrop of an inefficient foreign exchange market.

“Currently, the equities market remains quiet and driven only by short term speculative trading and fundamentally attractive earnings release.

“In the fixed income market, we expect investor appetite to remain tilted towards shorter term government securities given the high yield offering which tends to off-set current inflation risk and also inflation expectation.”

CBN scared off rate cut because of impact on FX demand — Cowrey Assets

Yet analysts at Cowrey Assets Management Limited, another Lagos based investment house, while agreeing with other analysts sees the reason while the apex bank would not cut rates from the foreign exchange crises perspective.

They, nonetheless agreed maintaining the status quo would be the only good option in the face of new developments in the international financial market and the domestic economy.

They therefore stated: “In the current week, we expect Central Bank of Nigeria’s Monetary Policy Committee (MPC), scheduled to meet on Monday and Tuesday, March 21 and 22, to leave the benchmark interest rate – the Monetary Policy Rate (MPR), unchanged at 14% despite moderation in inflationary pressure.

“This is partly premised on the need to attract foreign portfolio inflows in order to help boost Nigeria’s external reserves, particularly in the light of recent increase in benchmark interest rate by the U.S. Fed amid signs of stronger economic conditions, particularly in developed economies, which tend to lure portfolio investors away from emerging markets.

“In addition, we believe that given CBN efforts to meet dollar demand by increasing supply, the Monetary Authorities would not want to inject significant liquidity into the market to avoid triggering excessive demand for foreign exchange.”


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