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CBN rates’ hold decision: One year in perspective

Godwin Emefiele


In the last one year, the Central Bank of Nigeria (CBN) has sustained its rates’ hold, but at the same time offered government’s securities to investors at rates above the benchmark interest rate at 14 per cent and the soaring inflation, now tamed at 16.1 per cent.
 
The development might look surprising and contradictory, but globally, unconventional monetary policies of differing package and size have been trending as a match to “extra-ordinary” challenges that tend to defy economic order and theory.
 
Part of the unconventional policies by central banks come in the form of development interventions – a shift from the sole mandate of maintaining price and financial stability, while at other times, it also involves the imposition of control measures on the market and allowing a substantial time for deepening.
 
These have all been experienced in Nigeria in the last one year, particularly the “rate hold” decisions, in six successive Monetary Policy Committee meetings, as CBN counters home-grown and external shocks that presented high inflation, low growth and declined foreign exchange earnings.
 
CBN Governor, Godwin Emefiele, has said the country’s decayed infrastructure and the challenge of persuading deposit money banks to channel credit to the real sector with the environmental risks have made everyone to focus attention on rates’ decisions.
 
Delivering a paper titled: “The Dilemma of Monetary Policy and Exchange Rate Management in a Recession: Potential Options for Nigeria,” at the Second Homecoming series of the Economics Department of the University of Nigeria, Nsukka, recently, he said the challenges prompted the CBN to fashion out appropriate strategies to achieve price and financial system stability and restart growth.
 
According to CBN’s Financial System Stability Report, the challenging economic situation in the country made the banking industry’s Non-Performing Loans ratio to rise from N1.7 trillion in June to N2.084 trillion in December 2016. Was the country alone in the travails and decisions?
Sub-Saharan Africa’s Trend

An economist at Renaissance Capital, Yvonne Mhango, in a note to The Guardian said that at the moment, rate hike is off the table. “The monetary policy debate has moved to holding or cutting the policy rate. So, we revise down our 2017 policy rate forecast to 14 per cent, from 18 per cent previously.”
 
The sixth successive policy meetings saw six of eight monetary policy committee (MPC) members opt for rate hold at 14 per cent for the sixth straight time on July 25.
 
Two voted to reduce the rates, as opposed to increase or hold. To reduce rates further or keep rates steady below inflation level is off the theory, but now dictated by economy dynamics. At the meeting in May 2017, the decision to hold was unanimous.
 
The rationale for the rate hold stems from the realisation of the need to support the fragile returning growth, as rate cuts may undermine foreign exchange stability and extend the negative real interest rates currently at 2.1 per cent (Rate at 14 less Inflation at 16.1).
 
The argument for holding is largely premised on the need to safeguard the stability achieved in the foreign exchange market, and to allow time for past policies to work through the economy.
   
To fast-track the recovery, the expected fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports (increased forex), especially in agriculture, manufacturing, services and light industries, must be pursued relentlessly.
 
With the inflation rate still hovering above 16 per cent, Emefiele maintained that CBN would be failing in one of its key mandates if it cuts interest rates at this time, disagreeing with those pushing for a rate cut as a path to growth, noting that high inflation was inimical to economic growth and need to be tamed by rates’ decisions.
 
The Chief Executive Officer, Cowry Asset Management Limited, Johnson Chukwu, corroborated the Emefiele’s sentiment, saying easing at this point would be counter-productive, although the decision would make the economy to sustain its slow and painful recovery mode.
 
“The real sector fund challenge (high interest rate) will stay, but foreign exchange market will be stable as there would be no much naira to pursue dollar.
“Interbank lending will also remain high as the apex bank continues liquidity mop up, unless the promised payment of contractors, which is largely doubtful, is quickly realised,” he said.Some other African countries like Kenta and Ghana handled rates in diffrent ways:

Kenya
Analysts forecast that Kenya’s policy stance is likely to remain unchanged in short term, just as the policy makers kept it at 10 per cent in July, following that of May.
 
It had earlier raised the rates for five months, which led to the headline inflation slowing to 9.2 per cent in June, and the central bank expects inflation to continue moderating on the back of lower food and fuel prices, yet they did not lower the rates. The decision took into consideration potential violence surrounding the country’s scheduled elections and the risk of a rate hike to stabilise its currency.

Ghana
Contrastingly, one more rate cut in Ghana may be in the offing before the end of the year, riding on the back of slowing inflation, expected to hit the 6-10 per cent target range in 2018.  An improving current account balance and sharp increase in foreign exchange reserves in the second quarter of 2017 implied the cedi is well supported.
 
Ghana is forecast to have one of the highest positive real rates in the region, implying it will continue to attract foreign exchange inflows, a positive trend for its currency.

Nigerian challenge
While CBN has pursued rates’ hold policy to check speculations at the foreign exchange market, and fight the one-time soaring inflation to restore faltering price and financial stability, Nigeria’s economic structure that now works against its earnings’ capacity and outlook remains a challenge.
 
Emefiele lamented that the institution had been unjustly castigated for taking actions in the best interest of the economy, but would not be deterred from its objective of setting it on the path of sustainable development in the medium to long-term.
 
“Interest rates reflect not just the cost of capital but also the cost of doing business, and so we need to also look at interest rates from the perspective of the lender.
 
“Given that most banks have to individually provide security, power, and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high interest rates,” he explained.
 
However, he assured that the CBN would continue to rely on moral suasion to encourage Deposit Money Banks in the country to be more considerate in interest charges on customers.
 
A currency analyst at Cyprus-Based FXTM, Lukman Otunuga, said falling oil price, at any time, has the ability to directly impact the nation’s revenues, external reserves, stability of the nation’s foreign exchange market and benchmark rate decisions.
 
“Nigeria cannot afford to stabilise the naira without foreign exchange inflows. Much attention is directed towards MSCI Emerging Market Index’s decision on Nigeria, which holds some investment decisions by the side and the pending second quarter growth reports, which should offer further insight on how the nation is faring,” he said.
 
The Managing Director, Afrinvest Securities Limited, Ayodeji Eboh, said the decision to peg the exchange rate at a level for a long time despite the pressure on the naira placed far reaching implications on decisions about interest rates, in efforts to lure eroded investors’ confidence.
 
“It created avenue for round tripping and all sorts of unethical practices in the foreign exchange market, with pass through effects from imported items that pushed inflation, which CBN struggles to tame with interest rates’ decision.
 
“It also created significant uncertainty in the economy as companies became unprofitable due to the volatility in the foreign exchange rate as well as limited access to foreign exchange to purchase input for production. These will take time to be resolved,” he said.
 
However, Chukwu added that long period of fiscal policy failures have exerted enormous influence on rates’ decisions overtime, noting that despite the huge publicity for diversification, the economy still rely heavily on imported items due to non-implementations, leaving the economy at the mercy of imported inflation, especially with the foreign exchange crisis.
 
“Nigeria, apart from adopting agriculture, should pursue development of raw materials from the sector, as well as other value chains. Otherwise, the price of imported items will always be priced into inflation models and consequent rate decisions by CBN.”

Results
To address the ongoing challenges, Emefiele said the CBN introduced policies at both the management and the Monetary Policy Committee (MPC) levels targeted at stabilising the economy.
   
As a way out of reliance on other countries’ products, which could be produced locally, he re-emphasised the need for Nigeria to invest in basic infrastructure such as roads, bridges, airports, railways and information technology.Granted, Nigeria’s economic backdrop remains challenging despite some signs of relief in the first half of 2017, but economic activity contracted in the first quarter of the year by 0.6 per cent, better than three previous quarters, and within the period that the rates’ hold have been applied.
 
Despite the four quarters of negative growth, the non-oil economy, mainly private sector operators, who are affected more by the interest rate decisions, grew by 0.6 per cent (year-on-year), while headline inflation decreased to 16.1 per cent in June 2017, from 18.7 per cent high in the period under review.
 


There is a rebound in manufacturing and continued strong performance in agriculture, which has also benefitted from the unconventional policies, while various indicators suggest an uptick in activity in the second quarter of the year, as the data is being awaited.
 
CBN now has made the foreign exchange market flexible as well as prioritise the most critical needs for foreign exchange, after restricting access to the foreign exchange for a category of 41 commodities, which it saw as being unnecessary drains to the country’s reserves.
 
For agriculture as the largest employer of labour in Nigeria, CBN is working with relevant ministries and agencies, and had supported the revamp of the sector through the Anchor Borrowers’ Programme (ABP), and other agricultural interventions. It has committed about N29 billion to the ABP with active participation of 24 states of the federation.

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CBNGodwin Emefiele


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