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MPC And Investors’ Fragile Confidence



In this report, MARK ITSIBOR writes that the fear and the inability of the Monetary Policy Committee ( MPC) to hold its first meeting in the year, earlier in the week, in deliberation on interest rates for the country this January, may damage the  investors’ fragile confidence on the economy. This may just be unnecessary. 

If you asked those who have been following recent developments in the nation’s economy few days to January 22nd and 23rd, 2018, when the first bimonthly meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria was scheduled to hold, about their thoughts on the likely outcome of the meeting (supposing it was held), many would have almost put their lives on the line and swear that nothing was going to change.

The popular opinion among economic analysts was that the MPC would retain the Monetary Policy Rate (MPR) at 14 per cent, alongside all other policy parameters based on the prevailing micro and macroeconomic trends.

The Committee had in the course of its last meeting in November 2017, held Cash Reserve Ratio (CRR) at 22.5 per cent, Liquidity Ratio: 30 per cent and Asymmetric corridor: +200 and -500 basis points around the MPR. Those who felt that the Committee would have most likely held the parameters in their positions till now, argued that the little but gradual improvement in key indicators of the economy, drop in inflation and relative stability in the oil sector do not have the merit or weight to warrant the review of the interest rate, which is the major issue around the MPC meeting. The prediction was that the MPC was going to hold the interest rate on its current position and watch developments in the next few years. And so, it turned out to be.

The CBN governor, Mr. Godwin Emefiele in a statement to announce that the MPC meeting was not going to be held in January 2018 as a result of the committee’s inability to form a quorum as stipulated in the CBN Act 2007, gave reasons why the management of the bank did not bother to either review the interest rate upward or downward. In spite of the statutory meeting not holding in January, the CBN Governor pointed to the fact that key economic indicators continue to move in the right direction.

It will be recalled that President Muhammadu Buhari last October nominated Mrs. Aisha Ahmad as Deputy Governor of the Central Bank of Nigeria. He also sought the confirmation of Adeola Festus Adenikinju, Aliyu Rafindadi Sanusi, Robert Chikwendu Asogwa, and Asheikh Maidugu as members of the CBNs Monetary Policy Committee.

However, none of the nominees has been confirmed by the Senate, thereby preventing the committee from forming a quorum. The Second Schedule of the CBN Act (Section 12(5) and 54, stipulates that the MPC shall meet at least four times in a year and that the quorum shall be six members, two of whom shall be the Governor and a Deputy Governor or two Deputy Governors.

Emefiele has obvious reasons to play the expectant even though he did not preempt the possible outcome of the meeting. He cited the recovery in oil prices and boost in domestic production, Nigeria’s exit from recession in 2017, decline in inflation rate to 15.37 percent, and accretion to the country’s Foreign Exchange Reserves, which now stands at $40.78 billion as some of the positive indicators, stressing that these underscored the fact that the Nigerian economy remained strong.

Nigeria has witnessed recovery of oil prices and crude oil production since the third quarter of 2017. At 1.8 million barrels daily production, Brent crude futures LCOc1 – the international benchmark for oil prices – is between $67 and $70 per barrel, up over 43 cents recorded at the end of 2017. That is directly having a great impact on the nation’s foreign reserves. Nigeria has recently been witnessing a geometric growth in her foreign reserves occasioned by the increase in oil revenue.

On the other hand, inflationary pressures in the economy continued to moderate with headline inflation (year-on-year) receding for the 10th consecutive month to 15.37 in December  from 18.97 in February 2017, which suggests that things are indeed looking up for Nigeria. These developments were attributable to the contraction in money supply, favourable but dwindling base effects, and the relatively stable naira exchange rate.

Despite that, the CBN management and its co-travelers believe that those indicators of growth and stability in the economy still need to be nurtured and allowed to fester before actions are taken on them to avoid policy summersault and sustain investors’ confidence. The major concern for the monetary authority is fact that the direction of the prices of oil (which is defines the volume of Nigeria’s reserves and extension, strength or otherwise of the economy) is determined by developments at the international market; and not within the whims and caprices of the domestic market.

The truth is that the rate of Nigeria’s foreign reserves is central to economic stability because it has direct bearing on inflation and exchange rate. The Chief economist at Economic Associates, Ayo Teriba found support in that argument when he said: “If we build up reserve the naira will be stable. If the naira is stable, inflation will come down. If inflation comes down, interest rate can come down. The key variable for Nigeria today, either for GDP growth or government spending or interest rate or exchange rate is external reserve. Where the reserves head, the economy will head. If you push the reserve up, you push the economy up.”

But beyond that, Mr. Emefiele and his team also noted that strong investor confidence in Nigeria had attracted inflows of about $13 billion through the Investors and Exporters (I&E) window, opened by the CBN in 2017.

According to him, these inflows have boosted FX supply and helped to stabilize the exchange rate. “We have also seen Market Capitalization of our Stock Exchange improve by 22.3 per cent from N13.21 trillion on November 30, 2017 to N16.15 trillion as at 19 January 2018, while the All-Share Index (ASI) rose by 18.8 percent from 37,944.60 to 45,092.83 over the same period,” he added, while assuring that the Management of the CBN would continue to sustain the gains recorded in the economy as well as its vigilance and proactivity to ensure overall macro-economic stability throughout 2018.

There gradual convergence between the rates at the bureau-de-change (BDC) and the Nigeria Autonomous Foreign Exchange (NAFEX) market segments orchestrated by money supply or interventions of the CBN in the foreign exchange market, as well as the stability of the exchange rate at the inter-bank segments of the foreign exchange market during the review period.

The CBN may also be banking on its earlier view that the economy has begun to show strong signs of recovery as public investment has picked up with increased housing construction at the Federal and state levels, as well as shipping activities at the ports, overall.

There had been mixed opinion on whether or not the MPC should cut benchmark interest rate as inflation rate measured by the Consumer Price Index drops to 15.37 per cent in December, 2017 and the economy fully recovers from recession. The National Bureau Statistics (NBS) announced in November, said the Nigerian economy recorded growth in Gross Domestic Product (GDP) by 1.4 percent in the third quarter of 2017.

Addressing journalists at the end of last MPC after an extensive debate on whether to hold, to tighten, or to ease the monetary policy stance last November, the CBN governor said while the MPC members acknowledged that it’s a long journey – from 1.4 to an average of 6 per cent, they still expect inflation rate to drop to the traditional level of between 6 and 9. “For a country that grows its population by an average of 3 per cent, nothing short of going back to the historical levels of average of 6 per cent would be considered good,” he stated.

“While tightening will strengthen the impact of monetary policy on inflation with complimentary effect on capital flows and exchange rate stability, it nevertheless could also dampen the positive outlook for growth,” Emefiele said in a communiqué that highlights the decisions of the committee.

The MPC also saw through the fact that “loosening may strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing, it would nonetheless aggravate the upward trend in consumer prices and exchange rate pressures,” he acknowledged.

Governor Emefiele said though the economy has begun to show strong signs of recovery as public investment has picked with increase housing construction at the federal and state levels as well as rising at the ports to support the purchasing manager index, policy makers must be aggressive in policy initiatives aimed at continuing the positive growth trajectory.

The committee called for strengthening of oversight and early warning systems in other to promptly identify vulnerabilities and proactively manage risks in the banking system.

The effectiveness of the financial system in supporting economic growth depends on a number of factors, including quality of financial infrastructure; the regulatory capacity of the central bank and its operating arms. Others are the depth of the financial market; efficiency of the payment system and effectiveness of financial intermediation that supports the real economy. Consequently, financial system stability requires the support of regulatory agencies as well as the necessary political will.

It would be good to stress the fact that MPC forms an integral part of the nation’s monetary system. It facilitates the attainment of price stability, fix interest rate and support the economic policy of the Federal Government. The MPC has the sole responsibility within the Bank of formulating monetary and credit policies as its core mandate. That explains why there is palpable fear that the continuous refusal of the Upper Legislature to approve presidential nominees to fill the vacancies in the CBN board and allow the MPC form a quorum may end up truncating the fragile investors’ confidence in the economy. Although the CBN Act provides that the MPC holds its meeting six times annually, there is still a proviso that the meeting could be held for a period not less than four times a year under critical condition(s) as the monetary authority is. No one is ready to imagine what would happen if the Legislative-Executive impasse is not put off before May this year when the third MPC meeting is billed to hold.

While he posits that there may be no immediate effect of the suspension of the meeting on the economy, the chief executive of Afrinvest West Africa, Ike Chioke warned that lingering of the situation would see investors flocking out of the country. Ike noted that if the Senate and the presidency continue to hold their stand, there won’t be an MPC in the country. The act of the CBN stipulates that the MPC meets six times in a year and at least four times. It also makes provision for emergency meetings.

Managing director and chief executive of Financial Derivatives Company, Bismarck Rewane could not agree less. He said “once investors believe that governance has broken down in the country it could lead to an erosion of confidence. If there’s an emergency, what policy adjustments will the central bank make and how quickly?”

For Chief economist at Vetiva Capital, Michael Famoroti, the development is a “blow to the idea of central bank independence in the country and could erode confidence. The key thing to watch for is how long the impasse continues. It would signify a severe political disruption in monetary policy – an unwelcome one in a pre-election year – and could cause investor jitters that put pressure on the currency and the economy.”

In the eyes of more number of economic experts, there is no cause for worry yet. Those who belong to that group say the one missed meeting of the MPC would not impact negatively on the economy, as they noted that the MPC would most likely have maintained status quo if it had met.

The CBN in a statement on Monday had noted that the apex bank will continue to run with the decisions made at its last meeting in November last year, when it left the Monetary Policy rate unchanged at 14 per cent, the Cash Reserve Requirement at 22.5 per cent, liquidity Ratio at 30 per cent and the asymmetric corridor at +200 and -500 basis points around the MPR.

Chief Economist, Africa at Standard Chartered Bank, Razia Khan in an emailed response to LEADERSHIP noted that “the one missed meeting because of the lack of the quorum should not matter too much, given that it is still early in the year, and the impact of the recent fuel shortages on prices must still be assessed.”

Likewise, chief executive of Cowry Assets Management, Johnson Chukwu while noting that it was unlikely that the MPC would tweak monetary policy if it had met, said the inability of the committee to hold its first meeting of the year is not likely to have negative impact on the economy.

Khan however noted that “if a second meeting is missed because of the lack of appointments it would draw greater attention to the functioning of Nigeria’s political system, and the impact that it often has on the economy.”

There is an assurance from the official side that everything is still under control, with a call for urgent action on the confirmation of the nominees to dowse tension in the money and capital market and sustain investors’ confidence. Emefiele said investors’ confidence in the Nigerian economy continues to be strong, based on most of the macro-economic indices and also supported by the decisions of both the monetary and fiscal policies. Stating that there is confidence by the investors’ community about what the government is doing, he added that it delights the MPC members that the level of confidence has improved and hence, you’ve seen that the activities of the monetary and fiscal authorities have resulted in the country exiting recession. The advice is that as policy makers we cannot rest on our oars. We need to remain focused.

“With tenacity, with lots of work being done, with aggression and focus being shown by the policy makers (here am talking of monetary policy, fiscal and trade policy makers), am very optimistic that we will get there in short time,” he added.

At her last meeting, The MPC also noted the structural constraints in the transmission of credit to the real sector of the economy as well as the rising unemployment level.  The Committee urged the Management of the Bank to continue to encourage the deposit money banks to accelerate the rate of credit growth to the real sector of the economy.





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