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Raging debate over CBN’s retention of MPR at 12%

By Efe Ebelo, Snr. Correspondent, Abuja

For the ninth time in a row, the members of the Central Bank of Nigeria’s Monetary Policy Committee voted by a majority 9 to three, to retain the benchmark Monetary Policy Rate (MPR) at 12 per cent with a corridor of +/-200 basis points.

In addition, the bank also retained the Cash Reserve Ratio (CRR) at 12 per cent and Liquidity Ratio at 30 per cent with Net Open Position at 1 per cent

The MPR is the rate at which banks borrow from the CBN to cover their immediate cash shortfalls from time to time, as a result of which, the higher the cost of such borrowing, the higher also will be the rate at which banks advance credit to the real sector. For instance, the CBN’s lending rate of 12 per cent to commercial banks instigates the current borrowing cost of 18 to 28 per cent to the real sector.

Briefing newsmen at the end of the MPC meeting in Abuja, Governor of the Apex Bank, Sanusi Lamido Sanusi said that although the Gross Domestic Product (GDP) growth projection remained high, there are a number of risk factors likely to affect output performance.

Chief among this, he said, were perceptions of increased levels of corruption and impunity in the country, insecurity particularly in the northern part of the country as well as mixed signals from power and petroleum sector reforms.

The apex bank’s decision, was based on what Sanusi termed the yet uncertain developments in the global environment, which still call for cautious monetary policy measures, and the need to ensure macroeconomic stability at the domestic level.

Sanusi said the Committee was faced with three options, but opted to retain the MPR to sustain the gains of monetary policy while utilizing the existing space in the corridor to influence yields and exchange rates in the short term.

The options were: An increase in rates in response to the rise in headline and food inflation and pressure on exchange rates; a reduction in rates in view of declining core inflation and GDP growth; and to retain the current monetary policy stance to sustain the gains of monetary policy.

“The committee considered and rejected option one as being unnecessary, since there are no major inflationary concerns at this time.

“While acknowledging the merit of the arguments in favour of option two, it was also rejected by the majority because it could send wrong signals of a premature termination of an appropriately tight monetary stance.

“The committee, therefore, decided by a majority vote of 9:3 to accept option three and maintain the current policy stance, that is to retain the MPR at 12 per cent.”

Despite shocks from both external and domestic environments, Sanusi said the committee was satisfied with the prevailing macroeconomic stability adding that the development informed its monetary policy tightening decision since the third quarter of 2012.

He said while the growth in the domestic capital market was driven largely by the huge capital inflows, the principal risk to stability in the medium-to-long-term could be addressed through diligent implementation of sound policies of fiscal consolidation and structural reforms.

“Without these, the economy will not be able to attract long term foreign capital inflow that makes the gains of monetary policy sustainable and insulate the economy from the risks associated with external shocks and capital flow reversals,” he added.

The CBN governor, therefore, said monetary policy would seek to preserve the current gains of macroeconomic stability in the short term, while fiscal and structural reforms kick in.

He expressed the committee’s satisfaction with the level of accretion of the external reserves which stands at $49.38 billion as at March 14, 2013, representing an increase of $5.5 billion or 12.68 per cent over the level of $43.83 billion as at December 2012, a development which was attributed largely to proceeds from crude oil and gas sales and crude oil related taxes as well as reviewed funding of WDAs.

Similarly, he said the committee was comfortable with the macroeconomic stability in the economy despite shocks from both external and domestic environments a development which informed the tightening stance of the third quarter, even as the Committee urged the regulatory financial institution to continue monitoring the portfolio of direct investment flows while being conscious of the financial risk and of hot money in the event of a shock.

“Having achieved a reasonable degree of moderation in the rate of inflation, there were compelling arguments to consider easing monetary policy, at least from the perspective of stimulating growth in the real sector given the slowdown in overall GDP and agricultural GDP growth, inability of the SMEs to borrow at the current lending rates, and crowding out effects that may require monetary easing.

“The Committee carefully weighed the option of relaxing monetary policy against the likely risks in the near-to-medium term, noting that reversing the current stance of monetary policy was not likely to produce a neutral outcome, as it may signal the preference for a higher inflation rate on the part of the CBN”, Sanusi said.

 

MPC voting pattern

The CBN, last Friday, published the voting pattern of MPC members and their arguments, three voted for 50 basis points reduction in the benchmark rate to help growth and diversification of the economy away from oil rent.

In an analysis of the voting pattern analysts at FBN Capital Limited on Monday noted: “One of the three had a more strident tone, arguing that the banks exploit the high policy rate in an “oligopolistic market” and that the use of moral suasion (over, for example, the wide spreads between their lending and deposit rates) has marginal impact.

“The majority want a longer track record for single-digit inflation before they will back easing. The latest in-house forecasts from the CBN project headline inflation averaging 9.6 per cent year-on-year between March and August 2013, food inflation 11.0 per cent and the core measure 8.2 per cent. One statement mentioned the findings of inflation trend analysis over 38 months that inflation volatility has diminished.

“The shared view of the nine (that voted against a reduction in MPR) is that easing does not necessarily encourage bank lending to the real economy or GDP growth, given the many structural and fiscal weaknesses in the economy. One member recalled previous phases of monetary easing, none of which took Nigeria any nearer to sustainable development,” FBN Capital added.

The report noted two related themes reappearing in many of the statements of the nine: “nervousness about the direction of the oil price and about the approved 2013 budget (notably the US$79/b oil price threshold).”

 

Manufacturers’ worries

Henry Boyo, an economist and newspaper columnist, however insists the tightening has negative effects on manufacturing in the country as the CBN’s lending rate of 12 per cent to commercial banks instigates the current borrowing cost of between 20 and 28 per cent to the real sector.

“Such a high cost of borrowing increases the production cost and also makes goods made-in-Nigeria uncompetitive against imported substitutes, which are aggressively supported with conversely lower single digit interests rates in their home countries.

“Operators of micro, small and medium scale businesses have also observed that high lending rates of deposit money banks in the country are denying them access to credit thereby leading to the collapse of many small businesses,” he added.

Boyo said on the surface, the CBN would seem to have made a logical and safe decision, even if it is apparent that it would inevitably have adverse repercussions on the economy and the welfare of the people.

He noted that the common causative index of these variables is that of the ever present burden of excess liquidity, adding that if regulators of the financial services sector can cure the systemic disease of too much cash, the variables of interest and inflation rates would fall to levels that support industrial regeneration. Then also, he stressed, the Naira’s exchange rate would become stronger and induce increasing purchasing power for all income earners, a situation that would in turn stimulate aggregate consumer demand and ultimately positively drive industrial and economic growth and employment.

Analysts also posit that the tightening has not led to economic growth, and that on the aggregate, the economy, when measured by the real gross domestic product (GDP), fell by 89 basis points to 6.48 per cent in the third quarter of 2012 as against 7.37 percent in the corresponding quarter of 2011, as shown by the latest report of the National Bureau of Statistics.

Speaking on the negative impact of this development on micro businesses, Saviour Iche, President, Association of Micro-entrepreneurs in Nigeria, lamented that the CBN”s benchmark lending rate had been highly unfavorable and destructive to indigenous businesses, with some banks charging as high as 19 to 25 per cent interests rates on loans given to Micro, Small and Medium scale Enterprises (MSMEs).

Iche added that access to credit does not create room for MSMEs to grow in Nigeria, a situation that is seriously affecting the nation’s industrial development negatively.

 

Playing the ostrich?

Boyo wonders why in the light of the above, the CBN’s monetary policy has turned deaf ears to the demands for reduces cost of funds to the real sector, especially when it is clear that the fervent expectations of Nigerians for rapid industrialisation, increased employment opportunities, and enhanced social welfare cannot be realised with the CBN’s prevailing harsh monetary framework.

As if in answer to this question, Sanusi explained to reporters at the post-MPC meeting: “Having achieved a reasonable degree of moderation in the rate of inflation, there were compelling arguments to consider easing monetary policy, at least from the perspective of stimulating growth in the real sector given the slowdown in overall GDP and agricultural GDP growth, inability of the SMEs to borrow at the current lending rates, and crowding out effects that may require monetary easing.

“The Committee carefully weighed the option of relaxing monetary policy against the likely risks in the near-to-medium term, noting that reversing the current stance of monetary policy was not likely to produce a neutral outcome, as it may signal the preference for a higher inflation rate on the part of the CBN,” he added.

The CBN Governor however added that the committee carefully weighed the option of relaxing monetary policy against the likely risks in the near-to-medium term, noting that reversing the current stance of monetary policy was not likely to produce a neutral outcome, as it may signal the preference for a higher inflation rate on the part of the CBN.

 

Caution from global scene

For instance, he argued, at nine per cent and 9.5 per cent in January and February, respectively, inflation data, which largely reflected the base effect of the first and second round impact of the fuel subsidy removal in January 2012, sends a clear signal that there was still a high risk to inflation in the near-to-medium term. Furthermore, the governor said the committee observed that yields on federal government bonds have been declining steadily, signalling the impact of increased inflows while equity prices have been trending upwards.

He added that quantitative easing, especially in the United States and the European Union is already creating a potential new round of asset bubbles globally.

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