MPC meeting: CBN cautions FG on external borrowing
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) yesterday cautioned the federal government on the sharp increase in the size of the nation’s external debt which rose by 109 percent to $21.6 billion as at September 30th 2018, from $11.28 billion on June 30th, 2015.
Meanwhile, the committee retained the Monetary Policy Rate (MPR) at 14 percent. It also retained the Liquidity Ratio and Cash Reserve Ratio at 30 percent and 22.5 percent respectively.
CBN Governor, Mr. Godwin Emefiele, disclosed this while briefing the press on the outcome of yesterday’s meeting of the MPC in Abuja.
He said, “On external borrowings, committee noted the increase in the debt level advising for caution, noting that it could fast be approaching the pre-2005 Paris Club exit level.”
Speaking further on the committee’s position, the Emefiele said the committee was not in any way neither condemning nor saying external borrowing was wrong but that adequate care must be taken to avoid a debt trap.
Nigeria sealed a $18 billion debt relief deal with the Paris Club on October 20, 2005 after tortuous negotiations lasting two days and two nights in Paris to conclude many months of debt relief campaigns and negotiations/
The then Minister of Finance Mrs. Ngozi Okonjo-Iweala who led the Nigerian delegation signed on behalf of the federal government while the Chairman of the Paris Club, Mr. Xavier Muscat of France led representatives of the fifteen-member club to sign on behalf of their respective countries.
Under the agreement, Nigeria was to pay the balance of $12. 4 billion, of the over $30 billion debt stock, in three tranches commencing at the end of that October and to be concluded in March 2006 to enable the country exit the club completely.
In the first tranche, Nigeria cleared arrears by paying about $6.4. billion. The second tranche was the payment of about $1.3 billion, while the last tranche was payment of the balance of about $4.4 billion.
– Projects 2.28% GDP growth for 2019 –
The MPC however in its outlook for the economy differed from the IMF forecast of 2.0 percent economic growth in 2019, saying it expects the economy to grow at 2.28 percent this year.
The CBN Governor said: “The outlook for growth, however, remains fragile as the late implementation of the 2018 budget and the residual impact of flooding and security challenges, constitute headwinds to growth.
“The economy is projected to grow by 2.0 per cent by the IMF, 2.2 per cent by the World Bank and 2.28 per cent by the CBN. Key headwinds to these forecasts, however, are softening oil prices, persistent security challenges arising from insurgency in the North East and herdsmen attack in some parts of the country and perceived political risks associated with the 2019 general election.
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On inflation, he said: “The Committee observed that the near-term risks to inflation remain: the residual impact of flooding on agricultural output, insecurity in parts of the food producing belts of the country, exchange rate pass-through to inflation due to weakening oil price and campaign-related spending towards the 2019 general elections. Accordingly, the MPC urged the Federal Government to sustain its current effort towards improving security to ease the food supply chain bottlenecks.”
– Reasons for retaining policy rates –
Explaining the decision of the MPC to retain the MPR, liquidity ration and the Cash Reserve Ratio at current levels, the CBN Governor said: “In the light of the observed risk confronting the economy, including the global and domestic inflationary pressures, which have intensified the risk of currency depreciation, the MPC was of the view that a loosening option was very remote.
“Weighing the balance of its judgement on price stability conducive to growth, the MPC felt that tightening would result in the loss of the gains so far achieved, noting that this may drive the banks to reprice their assets; thus increasing the cost of credit as well as elevating credit risk in the economy. It will also worsen the position of non-performing loans of the banks.
“The Committee also felt that tightening would dampen investments and hamper improvements in output growth, given the already fragilegrowth performance so far achieved. In the light of the above, the MPC decided by a vote of all eleven (11) members to keep the policy parameters unchanged from their current levels.”
– Establishment of National Microfinance Bank –
Defending the decision to establish a national microfinance bank, Emefiele said the step had become compelling given the fact that over N90 billion was sitting in the CBN waiting to be distributed to small business operators and farmers.
Floating the bank, he said, became necessary because it would open branches in all local governments, to close the gap left by lack of bank branches, especially in the rural areas, making it difficult for people in those places to benefit from policies aimed at funding MSMEs and small farms.
– Analysts commend decision to retain MPR –
Meanwhile, analysts have described the decision of the MPC to retain the MPR and other policy rates at current levels as ‘prudent’.
Commenting, analysts at Lagos based Vetiva Capital Management Limited, said: “We consider this early decision by the MPC to be prudent given that pricing pressure appears slightly under control, even as near-term fiscal activity supporting growth remain thin, as policymakers focus on the upcoming political vote.
“Nonetheless, we maintain our view of a policy rate hike at a later meeting this year given expected pressure on both inflation and the exchange rate. While the apex bank has been able to maintain exchange rate stability so far, the prospect of rising rates from the U.S. Federal Reserve as well as monetary tightening from the ECB could spark a more hawkish bias later in the year.”
Analysts at FSDH Merchant Bank also said: “The MPC’s decision is in line with the view of FSDH Research released in our report entitled “Keeping Policy Rates at Current Levels is Still Prudent”.
On the implication of the MPC decision, they said: “In order to address the ensuing risks to possible increase in inflation rate in Nigeria and the weak exchange rate, FSDH Research believes the CBN will continue to use the sales of Government securities to influence interest rates and yields. Therefore we expect the yields on fixed income securities to increase marginally from the current levels in coming weeks.”