Economic indices throw up weighty issues for MPC today
Given the height of the country’s faltering economic indices, which took a new turn with the planned phase out of the government bond from JPMorgan’s index, the Monetary Policy Committee meeting due to resume today would have enough on hand to deliberate.
The economic situation, which seems to be at crossroad between domestic stability and external balance, would certainly task the monetary policy managers to review developments in the global and local economy, together with the financial market.
Meanwhile, three new scenarios may have been thrown up by analysts as the possible options for the MPC to tweak on- reduction of CRR to 27 per cent in order to repress the strains of the TSA implementation on financial system liquidity and banking cost of funds; leave MPR and official exchange rate unchanged at 13 per cent and N197/$ respectively.
The other is to leave all policy rates unchanged and continue to use administrative measures to ensure financial stability within the economy.
Since the fourth session of MPC this year held on July 23 and 24, there have been assessed slowing domestic growth, persistent exchange rate uncertainty, increasing risk perception in the local market, financial system illiquidity and global economic fragility.
According to the Nigerian Bureau of Statistics (NBS), the second quarter Gross Domestic Product’s growth slowed to 2.4 per cent from four per cent in the first quarter, while inflation rate sustained its upward trend year-on-year, from 9.2 per cent in July to 9.3 per cent in August.
Again, the directive by the Presidency, which kicked off on September 15, for the full implementation of the Treasury Single Account (TSA) by the Federal Ministries, Departments and Agencies (MDAs) to ensure transparency and improve fiscal revenue inflow has had impacts on financial system liquidity and increased volatility in the money market.
Already, Overnight and Open Buy Back rates reached year highs of 105.3 per cent and 100.8 per cent respectively during the period under review and closed at 50.9 per cent and 49.2 per cent apiece at the close of trading on the TSA compliance deadline.
Analysts had long predicted that TSA implementation, in addition to the harmonised Cash Reserve Requirement (CRR) at 31 per cent would weigh down banks capacity to lend and increase banking cost of funds, with about 5.3 per cent cheap federal government deposits being sterilised.
“We anticipate that DMBs would likely pass on majority of the additional-interest burden to customers, which could constrain economic capacity, although this may also increase focus on real banking- strengthening competition for retail deposits and expanding credit to the higher-margin retail sector,” analysts at Afrinvest Securities Limited said.
While the intervention rate remains N197/$ at the Central Bank of Nigeria and interbank market rate had steadied at N199.1/$, the parallel market rate had sustained a spread of more than N20.00, settling at N224/$.
Meanwhile, a new concern may have arisen over the absence of a fiscal economic direction, heightening expectations that ratings agencies may downgrade Nigeria’s sovereign ratings.
“The planned phase out by JPMorgan has only a marginal effect on the liquidity of Nigeria’s bond market, as it is dominated by local institutional investors. The other fears over rate hike by the United States Federal Reserve Bank, which expectedly should have triggered capital flight has waned as they retained rates. So, that risk is no longer imminent,” a market operator said.
But another market analyst said: “We expect the MPC to deliberate on alternative methods to further strengthen foreign participation in the Nigerian capital market given its current stance on foreign exchange rate. We also expect the MPC to deliberate on how to improve currency market liquidity to reduce foreign exchange rate uncertainty, while assessing the current financial system liquidity in the light of 31 per cent CRR on deposits and the TSA implementation.”
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