The Central Bank of Nigeria'sMonetary Policy Committee for the first time in a long while, did not tinker with the monetary policy rates at its meeting last week, citing the prevailing regime of favourable indices as reason as money market operators anxiously await the inauguration of the new CBN Governor, Mr. Godwin Emefiele, next month, reports Festus Akanbi
True to analysts' position as reported by THISDAY last week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria at its meeting voted for the retention of all the existing monetary policy rates. At the end of the two-day meeting, which was the last MPC meeting before the commencement of the tenure of the incoming governor of the bank, Mr. Godwin Emefiele, the committee left all policy measures (the Monetary Policy Rate, the Cash Reserve Ratio, public and private sector, and the corridor around the MPR) unchanged.
Analysts had argued before the meeting that with relative stability restored to the foreign exchange market and the appreciation of the naira on the parallel market, as well as headline inflation in single digits, there was little reason for the MPC to alter any policy now. In attendance at last week's MPC meeting were nine members including the new Deputy Governor, Financial System Stability, Mr. Adebayo Adelabu. The Committee considered major developments in both the global and domestic economies up to May 2014, and the outlook for the rest of the year, noting that real Gross Domestic Product (GDP) growth remains robust. Sarah Alade's Stocktaking The meeting was also an opportunity for the acting governor of the bank, Mrs. Sarah Alade, to do a stocktaking of her brief tenure as she declared that she had been able, through the support of members of the MPC, to sustain financial system stability and restore investors' confidence in the nation's economy.
She said that despite the challenges faced by the apex bank in its efforts to maintain financial system stability, especially following the suspension of the Governor, Mallam Sanusi Lamido Sanusi, about three months ago, the committee had been able to respond to the challenges through appropriate monetary instruments and ensured that the potential shocks were contained and financial system stability was achieved.
Alade said the committee was satisfied with Nigeria's overall domestic economic environment which had remained stable. She said the key challenge for policy, in the committee's view, was that of sustaining and deepening the outcomes of existing policies.
Alade disclosed that between February and now, the Committee had worked hard to ensure foreign exchange and money markets stability, adding that at the foreign exchange market the naira has appreciated at the rDAS window, inter-bank and Bureau De Change (BDC) segments of the market. She also said the apex bank had increased modestly the country's external reserves from $37.40 billion as at the end of March 26 to $38.30 billion by May 15. She promised that the apex bank would continue to monitor the liquidity trend with a view to adopting appropriate monetary instruments in its management from time to time. She explained that the increasing liquidity in the economy and its potential threats to price system stability was not unexpected at this period of the year when companies are paying out dividends.
Noting that the money market has also remained stable, Alade said the capital market wasn't doing badly either. "So all round, I think we have achieved stability which the committee is very pleased with. "At this time of this year generally, it is to be expected when companies are paying dividends there will be repatriation of dividends. We also talked about the impact of the QE (Quantitative Easing), we had expected that there will be some capital outflow."
Good launch pad for Emefiele Analysts were however unanimous in their belief that the current scenario has removed initial obstacles that might confront the incoming governor of the central bank.
According to them, by leaving all the rates unchanged, Emefiele would not have to begin his tenure in a tempestuous manner unlike his predecessor, Mallam Sanusi Lamido Sanusi in 2008.
One of the analysts that shared this optimism is Head, Research and Investment Advisory, Sterling Capital, Mr. Sewa Wusu. He, however, reminded the incoming governor of the bank on his pledge to pursue inclusive growth and give special attention to the real sector.
He said "Given the current global economic realities and the positive impact of CBN's monetary tightening measures, there is no doubt that the incoming CBN governor will have to continue in that direction, particularly, given the need to align with the policy of defending the naira and also maintaining macroeconomic stability. These objectives are very key right now. Also recall that during his screening at the Senate he emphasised that his administration will be fair, just but firm. But clearly, I think there is need to finetune policy direction to drive low interest rates which stimulate investments and generate employment. Following the tightening bias is one point and channelling policies to enhance inclusive growth and job creation is another? What the economy needs right now is inclusive growth through job creation to boost purchasing power.
Most of the current policy directions were tailored towards the financial system, particularly the banks. There should be a shift of focus. As such, the new governor should concentrate policy measures towards the economy, peculiarly the real sector.
Favourable Global Conditions Justifying the decision of the MPC to retain the monetary policy rate, Standard Chartered's Head of Africa Research and a well-known commentator on African markets, Razia Khan, said "For now, global conditions are relatively benign - and this has provided some space to the MPC not to act in the very near-term. Inflows into Nigeria are relatively healthy; although these could be subject to reversal should global conditions change. Notwithstanding weak broad money growth, pressures may build in the future and the MPC will need to remain vigilant, watching emerging risks closely, with a preparedness to act in the future."
She, however, stressed the need for the monetary authorities to be on their guard, saying "We need to be clear that a lot of the good news is simply because US Treasury yields are lower than many would have expected with Quantitative Easing tapering in process. This has given new life to carry-trades around the world, and with Nigeria's favourable yields, the naira has benefited. However, yields on Federal Government securities have already come down a lot. Domestic risks are still significant - and it is curious that market conditions are so liquid, with the currency still stable. It begs the question how long all of the good news will last. "So for the moment, little can be taken for granted. The news is good for the moment. That is not to say that it will not change, and the incoming CBN governor will need to remain vigilant to the risks.
"It is rare to see this level of liquidity in the interbank market, combined with FX stability. Given the anticipation of additional debt maturities that will only add further to liquidity pressures, there may be a case building for further tightening - at least through OMOs - to control liquidity and safeguard FX sustainability. "In the longer-run you cannot take for granted that easy liquidity will not disrupt FX market stability," she warned. In his opinion, Head, Research and Intelligence, BGL Plc, Mr. Olufemi Ademola, believed the prevailing positive indices (single digit inflation and stable exchange rate) have been achieved substantially by the monetary policy measures adopted by the MPC. However, "Based on the continuous commitment of the MPC to keep this achievement, it is expected that the scenario will remain the same in the short time to the resumption to office of the incoming CBN governor. It therefore appears that the development will present a positive scenario for the incoming CBN regime to build on," the BGL official stated.
Anything Can Happen On the sustainability of the current positive economic indices, Wusu said it will be risky if the authority fails to anticipate a turn of events especially from the global scene.
He said, "Certainly, the global economy has shown some marginal improvement, largely on account of developments in the advanced countries, but evidence of a slowdown in China, as well as the geo-political tensions arising from the political tensions in Ukraine could pose some challenges to the global outlook. Given this unpredictability and the fact that the momentum of global recovery is still somehow very weak, I think the Nigerian economy cannot be said to be insulated from external shock. The bulk of government's revenue is from crude oil. A decline in crude oil prices at the international market will definitely induce some strain on government revenue."
The Sterling Capital official noted that already, there are strong concerns over the decline in the fiscal buffers, talking about the Excess Crude Account. This, according to him, has somehow exposed the economy to vulnerabilities arising from external shocks as reflected in the revenue shortfalls during the last FAAC sharing for the month of April.
Reality of Future Global Shocks Khan is of the opinion that Nigeria is very poorly insulated from global shocks because it is still overly dependent on oil exports, saying agricultural production may be increasing, but not yet by enough to really move the dial. She maintained that "There is still no effective fiscal buffer. If Nigeria were subject to sustained outflows - either because of an oil shock, or because of rising US Treasury yields, FX reserves would be pressured. In those circumstances, the sustainability of the FX rate would be in doubt. Even now, it is trading outside the CBN's +/-3% band around 155 on the interbank market.
For the BGL official, the increasing global economic integration indicates that most economies are now interconnected; hence no country can be said to be completely detached. "With an independent monetary policy and liberal capital movement, Nigeria is definitely not insulated from global economic volatility. The Committee accede to this fact when they noted that the external risks to the domestic economy include the prospects for increased yields and interest rates in the US and the rather low level of economic activity in the emerging markets; both of which could have repercussions for foreign exchange inflows (private and official) and stability of the naira exchange rate. The most appropriate response to these risks is to build the nation's economic buffer to prevent serious disruption in case of persistent capital reversal," he said.
Election Fever He will also not allay the fear of possible liquidity glut in the run up to the next year's election. According to him, "Recent experience shows that the country always experience increased liquidity in the run-up to general elections leading to an increase in inflation. Average inflation rate increased from 12.59 per cent in 2009 to 13.76 per cent in 2010 in the run-up to the general election in 2011. It later fell to 10.85 per cent in 2011; driven by a significant moderation from June 2011 after the general election.
Based on this experience, it appears that the fear of liquidity surfeit due to the forthcoming election is still real. The MPC also recognized this threat as one of the key internal risk factors to the domestic economy in 2014/2015." On the fears of unrestrained spending towards the 2015 general elections, Khan told THISDAY that "We've never known for political primaries in Nigeria to take place, let alone the actual elections, without seeing spending pressures of one kind or another. Admittedly, it is not yet hugely in evidence. But this does not mean that it is not going to happen. So investors will still be watching the political cycle -and will still be looking to see which risks emerge. This is partly why the preference for duration - for long-term positions, has gone away. Investors may be content to buy treasury bills, but are not buying significant amounts of longer-dated bonds." Wusu also shares the same sentiment over what spending patterns to expect as politicians brace up for next year's elections. He said, "Clearly, the fears over liquidity glut in the run up to the 2015 general elections are real.
The system is still very liquid. Developments in monetary aggregates points to increased liquidity conditions. The growth in money supply for the month of April was about 1.9 per cent. So, the CBN still has to contain liquidity pressure in order to calm anticipated inflationary pressure that will be further worsened by election spending going forward. This is owing to the fact that the election spending will raise system liquidity. As such, this could exert pressure on both the exchange rate and price level as well as heighten the already high demand for forex."