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MPC: Experts weigh implications of hold-all policy decision

By a unanimous decision of 10 members, the Monetary Policy Committee (MPC) of the CBN, at its last meeting, upheld all key decisions for the umpteenth time. ABDULWAHAB ISA analyses experts’ diverse positions on the

The outcome of the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) meeting held days ago didn’t disappoint. Analysts, economy experts were on spot with predictions on the outcome. Few days before the bi-monthly meeting, finance experts interrogated by the media predicted MPC’s likelihood to adopt a hold-all policy parameters constant. Experts, who commented before the MPC meeting, had said they were not expecting a change. They predicted their observations on trending inflation, which is still in the double-digit zone, insecurity not faring better, cost of doing business still on a high trend while interest charge by banks on facilities is still at intolerable level. Like the previous sessions, the last MPC was attended by 10 members. They decided by a unanimous vote to retain lending rate (MPR) at 11.5 per cent; asymmetric corridor of +100/-700 basis points around the MPR; retain Cash Reserves Ratio (CRR) at 27.5 per cen and Liquidity Ratio at 30 per cent.

Consolidation as yardstick

CBN Governor, Mr. Godwin Emefiele, gave insights into circumstances that influenced MPC’s decisions. Specifically, he noted that the MPC recognised that the twin problems confronting the Nigerian economy that must be addressed relating to stagflation, reflected in rising inflation with simultaneous contraction in output. He said the committee acknowledged effort by the bank to rein in inflation, which has begun to yield the desired results.

“The recent developments in the domestic economy presented two broad options to MPC, which were to either aggressively address the high inflationary pressure or continue to pursue measures aimed at supporting the recovery. “Whereas the committee remained overwhelmingly committed to supporting the efforts of the Federal Government in ensuring full restoration of the productive capacity of the economy, members remained much more focused towards achieving price stability in the short to medium-term.

“The MPC noted that economic growth could be hampered in an environment of unstable prices. To this end, the choice therefore was between loosening the stance of policy to ease credit further or tighten to moderate price development or maintain a hold stance in order to allow previous policy measures continue to permeate the economy while observing global and domestic developments. “The committee noted that an expansionary stance of policy could transmit to reduced pricing of the loan portfolios of deposit money banks and result, therefore, in cheaper credit to the real sector of the economy.

On the converse, this expected transmission may be constrained by persisting security challenges and infrastructural deficits. “On the other hand, while a contractionary stance will only address the monetary component of price development, supply side constraints such as the security crisis and infrastructural deficits can only be addressed by policies outside the purview of the central bank.

“A tight stance in the view of members, will also hamper the bank’s objectives of providing lowcost credit to households, Micro Small and Medium Enterprises (MSMEs), agriculture, and other output growth and employment stimulating sectors of the economy,” CBN governor said. Instructively, MPC urged the bank to sustain its numerous interventions. Specifically, it directed CBN to increase the Targeted Credit Facility from N300 billion to N400 billion. The decision, MPC reasoned, would enable TCF facilities (household and SME) to reach more Nigerians.

Experts’ view

Experts differ in opinions on the decisions and canvassed different positions in an interview with New Telegraph. Mr. Ibrahim Shelleng, the Managing Director/ Chief Executive Officer, Credent Investment Managers Ltd, assessed decisions and the implications, saying “CBN has continued its hawkish policy amidst multiple fiscal challenges that limit the effectiveness of monetary policy.

“The slight uptick in Q1 GDP figures would have further buttressed CBNs stance to maintain key parameters. However, with very slow growth, it could be argued that the apex bank may consider a downward review of the MPR to allow for cheaper funding to the real sector but with underlying structural challenges, the absorptive capacity of credit in stimulating the economy is limited.

“There is the added problem of foreign exchange illiquidity which must also be managed therefore higher interest rates may continue to attract foreign portfolio investors to boost FX liquidity.” He was of the view that “the targeted credit facilities are a muchneeded boost to SMEs but perhaps not far reaching enough as it may not permeate to much needed sectors of the economy. The informal sectors will often be left out due to inadequate documentation and business structures.” Responding to measures announced by MPC, finance adviser and wealth management expert, Mr.Gabriel Idakolo, noted that the cautious stand taken by CBN was largely responsible for increased inflationary pressure. “The CBN has taken the cautious stand again by retaining the MPR at 11 5 per cent.

These measures have increased inflation in the past and the various CBN interventions have still not yielded positive results to turn around the economy,” he said. According to him, to increase productivity in the economy, there should be the loosening to allow more access to capital by key sectors of the economy.

“If we want continuous improvement in the GDP and be on the road to substantial recovery of the economy, loosening the policy stance of the MPR is the way to go. The MPR policy stand has made the naira to witness continuous devaluation month-on-month. CBN has not been able to generate enough forex to service demands by forex users, thereby hampering productivity,” Idakolo noted. However, Prof. Uche Uwaleke, a former commissioner and one time Head, Banking and Finance department, Nasarawa State University, endorsed the decisions. “I think a hold position was the most expedient decision to take, given the prevailing economic condition of the country.

As long as stagflation continues to challenge the economy, the CBN’s monetary policy stance will be dictated by the need to strike a balance between tackling inflation and supporting economic growth. “Against the backdrop of elevated inflation, a reduction in MPR or other policy parameters, though persuasive, will only serve to worsen forex pressure despite recent attempts to unify exchange rates, and exacerbate inflationary trend.

On the other hand, given weak economic growth and the need to support an economy still reeling from the impact of COVID’19, tightening monetary policy via increase in MPR is capable of rolling back the modest progress being made. “It’s instructive to note that the non-oil sector GDP actually tanked during the first quarter of 2021. So, maintaining the status quo while strengthening CBN’s intervention initiatives in critical sectors of the economy is a wise decision,” Uwaleke said.

Last Line

Routinely, every outcome of MPC meeting is a product of cross fertiliser of members’ opinion. The last MPC was not different. Ten members in attendance unanimously voted to adopt a hold-all policy parameters constant. The decision is to bolster economic recovery and consolidate on previous gains.

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