• Friday, July 19, 2024
businessday logo

BusinessDay

CBN holds rates, defends financing of FG

Godwin Emefiele-CBN

The Central Bank of Nigeria (CBN) has signalled intentions to continue financing the Federal Government through ‘ways and means’ in 2021.

“If government cannot finance its obligations, I think it will be irresponsible on the side of the CBN as the lender of last resort not to support the government,” Godwin Emefiele, CBN governor, said at the end of the Monetary Policy Committee (MPC) briefing after announcing the decision by the committee to hold benchmark interest rate at 11.5 percent.

Data from the Budget Office of the Federation show that the CBN financed the Federal Government’s deficit to the tune of N2.8 trillion last year, after the pandemic caused a wider-than-expected revenue shortfall, and widened the deficits from the budgeted N4 trillion to an actual amount of N6 trillion.

Global ratings agency, Fitch, in a report last week said the repeated financing of the Federal Government’s budget deficit by the CBN through Ways and Means was a risk to macroeconomic stability.

The practice hinders the ability of the CBN to control soaring inflation and keep the naira stable, according to Fitch.

Nigeria’s inflation accelerated to a near three-year high of 15.75 percent in December 2020, creating a conundrum for the CBN whose target is between 6 and 9 percent.

“Perhaps, the most significant outcome of the meeting is the CBN’s insistence that it will continue to support the government and the economy, through both ‘ways and means’ financing and ‘development finance initiatives’ – including targeted lending to manufacturing and agriculture,” Razia Khan, managing director/chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said.

Khan however saw little surprise in the CBN’s decision to keep interest rates on hold, giving new COVID-19-related economic concerns and stubborn inflation.

The MPC members noted the broad base global stimulus packages – including expanding credit lines, asset purchase programmes, corporate bond purchases, additional funding facilities for financial system, commercial paper purchases, special CBN lending, increase in the way and means limit introduced by the CBN all cross the world to support the recovery in their various economies and to prevent further distortions to the economy caused by the impact of the pandemic.

The aim of the CBN is to improve aggregate supply and reduce prices. Nigerian economy slipped into recession – the second since Q2 2016 – after output contracted for the second consecutive quarter. Real GDP shrunk by -3.62 percent in Q3 2020 compared with -6.10 percent in the preceding quarter, according to data from the National Bureau of Statistics (NBS).

The International Monetary Fund (IMF) on Tuesday projected Nigeria’s economy to grow by 1.5 percent from contraction of 3.2 percent in October 2020.

The decision to retain the key interest rate, agreed unanimously by members, was as a result of the weakening macroeconomic environment due to the COVID-19 pandemic, inflation and the resultant disruption of supply chains.

“The committee calls on the government to explore the option of effective partnership with the private sector to improve funding sources necessary to address the huge infrastructural financing deficit,” Emefiele said.

The MPC also voted to retain the Asymmetric Corridor around the MPR at +100/-700 basis points, Cash Reserve Ration (CRR) at 27.5 percent while keeping the Liquidity Ratio at 30 percent, Emefiele announced after the two-day meeting, while noting that the overall global economic outlook showed prospects of recovery.

Bismark Riwane, CEO, Financial Derivatives Company, said, “I liked the sober mode. Cautious optimism and realistic assumptions are my key takeaways from the MPC.”

Abdulrahman Yinusa, former CIBN Council member, said he was very pleased with the aspect where the CBN governor talked about a lot of collaboration between the MPC and fiscal policy agents, saying, “In my opinion, the real issue in Nigeria is more fiscal than monetary.”

On his part, Abiodun Keripe, managing director, Afrinvest Research, does not expect another monetary support but sees the CBN hopeful of its interventions being supportive and speeding recovery.