Appointment of turnaround managers, revival plans seen as antidotes to recession

The appointment of competent and credible Nigerians as ministers, introduction of policy which point the country in a clear direction and improvement in the ease of doing business, among other steps, have been identified as the antidote to economic decline and stunted growth.

While acknowledging the reduction of Cash Reserve Ratio (CRR) by the Monetary Policy Committee from 31 to 25 percent as step in the right direction, some analysts who spoke with   BusinessDay at the weekend, say more confidence through faster policy implementation is needed to engender confidence for banks to lend to critical sectors of the economy.

Consequently, the analysts say that with the CBN approaching its monetary policy limit, the expected growth would be achieved with the complimentary actions from the fiscal authorities, particularly, in the area of longer term structural reforms.

They also observe that the possibility of the additional liquidity in the system, arising from CRR reduction, could lead to increased demand pressure for foreign exchange, prompting further action from the CBN, which may not be available.

Economic recession is a period of general economic decline, usually accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market.

A major indicator is two consecutive quarters of negative economic growth, as measured by the country’s Gross Domestic Products, (GDP)

Godwin Emefiele, Central Bank of Nigeria (CBN) governor, announcing the outcome of the committee meeting last week, said  Broad money supply (M2) contracted by 2.23 per cent in August 2015, below the level at end-December 2014. When annualised, M2 contracted by 3.34per cent, which was significantly below the growth benchmark of 15.24 per cent for 2015

Emefiele, said that Nigeria’s overall macroeconomic environment remained fragile and painted a gloomy picture of the economy possibly sliding into recession by 2016 if appropriate steps were not urgently taken.

Consequently, MPC members unanimously left the Monetary Policy Rate unchanged at 13%+/- 200 basis points, around the symmetric corridor but with a 7 to 3 vote, reduced  the CRR to 25 percent to reflate the banking sector.

Razia Khan, managing director, chief economist, Africa Global Research, Standard Chartered Bank, London said that although “The CRR reduction will help offset some of the liquidity tightening associated with the TSA being made more operational and as a result of reduced FAAC allocations etc .  However, it is unlikely on its own to be sufficient to reverse contraction in broad money supply that Nigeria has experienced.

“Ultimately, for banks to play a bigger role in money creation and to start lending again, they require confidence to be restored.  With oil prices weak, with government revenue pressured,  with manufacturers reporting a shortage of FX for imported inputs, it is difficult to see where that surge in confidence is going to originate.

“The CRR was the absolutely the right thing to do, but confidence in future prospects is needed to kick-start bank lending.”

Speaking further, Khan said that eventually lower loan rates would also help, adding “ but this is not an option that is currently open to Nigeria, given its preference for stability in the FX rate.”

She listed confidence boosting measures to include, “Faster policy appointments,  policy appointments that inspire trust in the ability to turn things around     …at the state level, as well as the Federal level, a revival plan for the Nigerian economy, a meaningful improvement in the ease of doing business and   probably not more controls and a more difficult business environment – that tends to have the opposite effect.”

Analysts at Renaissance Capital, (Rencap)  said, “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 the decision is likely to put downward pressure on treasury yields as banks aggressively invest the released CRR in T-Bills and bonds.”

They added that while they  agree that lower CRR could improve liquidity, help lower funding costs near term, “we do not expect the banks to re-price loans that quickly, so some short term margin improvement should come through, but more reflective in 4Q15.”

Afrinvest analysts said, “Despite the projected improvement in banking sector performance and capital market activity, the impacts of the decision on the real sector, especially in an atmosphere of slowing growth, will be majorly determined by the complimentary actions from the fiscal authorities in terms of longer-term structural reforms.

“ We believe that monetary policy may be already approaching its limit in stimulating growth with the authorities only constrained to the use of the CRR instruments which impacts are limited to the financial sector.  We also note that the possibility of the additional liquidity in the system may lead to increased demand pressure for FX which may prompt needs to further introduce administrative tools to manage the exchange rate.”

John Omachonu