Tale of mixed economic fortunes with ‘lone’ policy plan

Godwin Emefiele, CBN Governor

Economic management requires complementary application of monetary and fiscal policies. Nigeria’s case is either lopsided or outright absence, with the attendant implications, which appear mixed. CHIJIOKE NELSON reviews the development.

There is no gainsay that the last one year has witnessed a great volume of policy turnover, especially in the monetary policy side. Even in the absence of clear fiscal direction and response, the monetary side has always scripted something out to get going “when the going gets tough.” But it is no longer in doubt that the monetary “arsenal” at the moment are just little above the crumbs. But how has the overall economy fared?

With the failure of the fiscal complementarity, especially from the eve of international oil price volatility to date, data have shown a multi-faceted monetary policy responses from the regulator- The Central Bank of Nigeria (CBN). While the trajectory has defied its oddity to keep the economy afloat, it has not on the average fared well, at least not without backlashes.

A perusal of the records showed that the responses, which took off from the foreign exchange segment, switched the Wholesale Dutch Auction System to the Retail Dutch Auction System, followed by the devaluation of the currency, that was dubbed a technical one. There was also an introduction of a two-way quote system with the “liberalization” of the foreign exchange trading system as the regulator moved all demand to the Inter-Bank Foreign Exchange Market. But with relentless pressure, several administrative controls were introduced, including controversial 41 items that are not valid to access foreign exchange at the official windows. There is also a consistent liquidity injection and mop-ups and the list continues.

At the last count, 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.

Given the height of the country’s faltering economic indices, a new twist was added to it with the planned phase out of the Nigerian bond from JPMorgan’s index- Government Bond Index-Emerging Market.

The economic situation now, thus appeared to be at crossroad between domestic stability and external balance, with huge task for the monetary policy managers to review developments in the global and local economies.

But in reaction to the series of poor economic indicators, which have prompted CBN’s multiple monetary policy responses in recent times, a civil society group has called on the President Muhammadu Buhari and relevant financial regulatory authorities to take immediate and fast-tracked steps, to avert the mooted recession, before it hits the economy.

The Lead Director of CSJ, Eze Onyekpere, said the government should immediately constitute his cabinet or in the interim, appoint the Minister of Finance and Economy, as well as the Economic Management Team, in an effort aimed at rescuing the economy, because the “absence of synergy between monetary and fiscal policy remained one of the most potent obstacles to sustainable growth.”

The government, he said, should now unveil the economic agenda of this administration and give Nigerians the opportunity to make inputs where there is need for modification and fine-tuning.

Already, the financial market operators and other stakeholders had long complained that the absence of the new administration’s economic blueprint has been interpreted by market watchers as no economic direction (uncertainty), hence keeping huge foreign investments and investors on he sideline, with “let’s wait, watch and see” sentiment. Even before the emergence of the new administration, CBN had reiterated the need for fiscal policies to complement the monetary policies for a positive and meaningful outcome.

Besides, since July 2015, there have been assessed slowing domestic growth, persistent exchange rate uncertainty, increasing risk perception in the local market, financial system illiquidity, the absence of a fiscal economic direction (delay in forming Cabinet), heightening expectations that ratings agencies may downgrade Nigeria’s sovereign ratings and global economic fragility, all working against monetary policy targets.

Again, the directive by President Muhammadu Buharri, 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, tightened the 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,” the Head of Research at Afrinvest Securities Limited, Ayodeji Eboh, said.

While the intervention rate remains N197/$ at the Central Bank of Nigeria and interbank market rate had steadied at N199.1/$, the parallel market rate had sustained a spread of more than N20, settling at N224/$.

“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, who pleaded anonymity said.

But another market analyst said: “We expect the Monetary Policy Committee of the CBN 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.”

But CBN’s management, seemingly unrelenting in its efforts, advised the commercial banks on the urgent need to aggressively support the efforts of government at job creation by channeling available liquidity into target growth enhancing sectors of the economy.

The growth enhancers, particularly the agriculture and manufacturing sectors, according to the bank, would promote employment through the conscious efforts of financial institutions in directing their respective lending there.

The CBN Governor, Godwin Emefiele, in the communiqué of the Monetary Policy Committee, reiterated apex bank’s commitment to price stability, even as the rising inflationary trend in the midst of tight monetary policy stance remained a concern.

He said the overall outlook for economic activity is positive, as it is expected to improve on account of sustained improvement in the supply of power and refined petroleum products and progress with counter-insurgency in the North East area. These measures technically represent a fiscal contribution to monetary policy.

But Mr. Mustapha Suberu of Eczellon Capital Limited, in a note to The Guardian, said the easing of Cash Reserve Requirement (CRR) from 31 per cent to 25 per cent is positive for the banks and forms part of efforts to make monetary policy count for the overall good of the economy.

Suberu said that the development signals that the era of restrictive monetary policy may be over and the apex bank may have commenced the path of accommodative monetary policies to support growth and employment in the economy.

“Commercial banks are no doubt the biggest winners of the committee’s decision as it should unlock liquidity for the banking industry, which could be channeled towards credit creation. From our estimates, total banking industry deposits was about N17.6 trillion as at the end of August 2015. This implies that the six per cent reduction in CRR would likely reduce the amount being sterilized by the CBN from N5.5 trillion to N4.5 per cent trillion, thus injecting additional N1 trillion into the banking industry.

“While the policy pronouncement by the MPC may have seemed positive, the potential downside of this move may be on the stability of prices in the economy, especially the Naira. We believe unlocking additional liquidity in a period where the CBN seeks to maintain exchange rate stability and curtail inflationary pressures may be counter-intuitive, as this could likely add to the pressure on the domestic currency and by extension, increase the general price level in the country,” he added.

Also, the Sub-Saharan Africa Banking Analyst and Head of Research – Nigeria, Renaissance Capital, Solanke, said the apex bank simply restored the system’s liquidity levels to where they were pre TSA debits, by releasing to the banks the Naira equivalent of what was moved.

“This is positive for the banks because there were significantly more foreign exchange TSA debits than the naira last week, which implies that more Naira earning assets should be supportive of asset yields in near term.

“Banks with more Naira than foreign exchange deposits should be proportionately bigger beneficiaries from the CRR ease. Within our universe, Fidelity, Diamond, FBNH and Skye banks rank tops, but FCMB, Zenith and GTBank are not that far behind.

“A core reason attributed to the CRR ease was the MPC’s desire to see the banks invest more in critical sectors such as agriculture and mining, to help drive growth and reduce unemployment. We do not see this happening near term and think today’s decision is likely to put downward pressure on treasury yields as banks aggressively invest the released CRR in T-Bills and bonds,” he said.

But CSJ Director, Onyekpere, warned that as a way of putting the economy on the path of sustainability, the public and private sectors’ stakeholders cannot continue to grope in the dark and imagining the content of government’s economic agenda, hence the unveiling of a holistic framework has become a matter of urgent national importance.

“Create synergy between fiscal and monetary policy, unveil the Medium Term Expenditure Framework and Fiscal Strategy Paper 2016-2019 as required by the Fiscal Responsibility Act and open up public dialogue on macroeconomic policies for the medium term. The MTEF should have been ready by the end of June 2015; but it is better late than never.

“Take steps to release resources for investment in capital projects considering that no funds have been released for the implementation of the entire 2015 federal capital budget. This will facilitate and attract private sector investments and help kick-start economic revival.

“Critically review the continued subsidy for imported petroleum products. As an alternative, design a subsidy regime that will encourage local refining and value addition in the petroleum sector. The Government is invited to consider the complete removal of petroleum subsidy as from the 2016 federal budget,” he said.

He added that CBN should take steps to further reduce the CRR to not more than 10 per cent and closely monitor the sources of demand pressure on the foreign exchange market to ensure that funds are not diverted to demands for foreign exchange, but applied to “specific growth enhancing and asset creation lending by banks”.

It is noteworthy that economy and policy “wheels” rolls with information, hence, going forward, there is need for disclosures on the administration’s achievement and what is to be done in the short and medium term to revive the economy. And quarterly media briefings by the President on his administration  is recommended.

Steps must also be taken to cut down the cost of governance- allowances and overhead costs of running the bureaucracy across all arms of government, to free up resources for national development, especially investment in infrastructure. This is the platform that supports monetary policy to become a portent economic tool.

“Government should critically review the continued subsidy for imported petroleum products, but as an alternative, design a subsidy regime that will encourage local refining and value addition in the petroleum sector. The Government is invited to consider the complete removal of petroleum subsidy as from the 2016 federal budget.

“The organised private sector, labour and civil society should begin a robust and intensive proactive engagement of the Federal Government to ensure that the present inertia and policy void is converted into actionable energy for development. Before it is too late, the time to act is now,” Onyekpere added.