In line with wide expectations by analysts, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday, retained its Monetary Policy Rate (MPR) at 11.5 percent amid a difficult recession – citing a more pressing concern of inflation.
The decision to retain the key interest rate which was 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 MPC also 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, CBN Governor, Godwin Emefiele announced after the two days meeting, while noting that the overall global economic outlook shows prospects of recovery,
This comes as no surprise to analysts as they anticipated the retention following the current uptick in inflation rate and the weak growth rate in 2020 which translated into a recession for the second time in five years.
“I do not see them shifting ground on those key areas. It would be counter-intuitive to reduce the MPR in a time of rising inflation,” Obadiah Mailafia, a former deputy governor, CBN had told BusinessDay.
Nigeria’s inflation rose to 15.75 percent in December 2020 from 14.89 percent in November 2020, according to data from the National Bureau of Statistics (NBS).
The MPC decided to cut interest rates less than 6 months ago and due to the lag effect of monetary policies, the MPC will require more time to assess the impact of the rate cut on the economy.
The Committee held its first meeting in 2021, on a bleak background of, especially increasing macroeconomic conditions heightened by Covid-19 pandemic and soft oil prices, as well as a policy dilemma of either to combat inflation or to chase growth.
The International Monetary Fund (IMF) had in December 2020 during its Article IV consultations with Nigeria’s government authorities had rather painted a gloomy picture, part one continuing on a contraction path, due largely to the fall in global oil prices, poormacroeconomic policy management and the global novel coronavirus crisis.
Real GDP contracted by -3.25 percent in 2020 and is projected to contracted at -1.5 percent in 2021. We have officially been in recession since last year. There are also the latest figures on inflation from the NBS which have been far from edifying.
The Naira is increasingly under pressure and is currently selling at N460 to the USD in the parallel market. The current account balance has been in the red for quite a while, as capital inflows dwindle and trade performance weakens. Inflation is currently hovering at double digit.
According to Mailafia, the American economist Steve Hunke of the Johns Hopkins University places Nigerian inflation at over 33 percent, with food inflation in particular worsened by the looming crisis in the agrarian countryside, particularly in the Middle Belt, which is the bread basket of the country.
Worsening social conditions are reflected in rising hunger and higher food prices and the crisis of youth unemployment. It is currently estimated that 97 million Nigerians have fallen into conditions of destitute poverty as internationally defined.
According to the latest figures from the Debt Management Office, DMO, the national debt has ballooned to N31 trillion (which is about $85.9 billion). A sizeable chunk of this debt is owed to foreign creditors, including bilateral lenders such as China.
“The government is facing what is increasingly looking like a fiscal crisis, as government revenues continue to fall while a sizeable portion of government funds are going into debt-servicing,” Mailafia stressed, noting that “More than 400 federal agencies have been unable to pay salaries to public sector workers for several months a in a row. Nigeria’s economic challenges are compounded by the geopolitical challenges of banditry, violence and terrorism.”
Politicians often make a mess of things and then turn around and demand that central bankers clean up their mess. This is the rather bleak background against which the MPC will be meeting this coming week. Knowing their reflex action, having been an insider myself, I believe that they will tend to focus more on inflation rather than anything else. But, of course, they cannot turn a blind eye towards economic growth
“As expected, I did not see them shifting ground on those key areas. It would be counter-intuitive to reduce the MPR in a time of rising inflation.
“I therefore suspected they would want to leave things as they are in order to weather the current storm, in the hope that things will begin to improve by Q2.
“A stable and consistent monetary policy stance can help stabilize the economic outlook while helping actors to anchor long-term rational expectations,” the former CBN stressed.
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