In a reversal of actions from just four months ago, the Central Bank of Nigeria (CBN) unexpectedly tightened monetary policy in Africa’s largest economy.
The CBN raised the benchmark rate (MPR) by a percentage point to 12 percent, amid worries that rising inflation pressures from a weaker naira and excess liquidity will spread more broadly in the economy.
The cash reserve ratio (CRR) was also increased to 22.5 percent, Governor Godwin Emefiele said in a speech Tuesday in the capital, Abuja.
The CBN had in November 2015 eased MPR from 13 to 11 per cent to reflate the economy and boost critical growth sectors, but is now concerned that such previous efforts did not elicit the required response from the Deposit Money Banks which rather preferred to keep the monies in their vaults or at best advance loans to government, hence the surfeit of liquidity in the interbank market.
This comes as banking sector Non Performing Loans (NPLs) have almost reached the 5 percent threshold as the economy continues to slow, making it practically difficult for debtors to repay their loans.
“It is true that as a result of challenges facing the economy, there are unfortunately cases of not being able to service their loans. And so there has been some rose in NPLs.
“But we have a threshold of maximum of 5 percent, and we have tried to keep it at about between 3 and 3. 5 percent, but unfortunately this has risen to a an upper band of 5 percent.
“That is currently being reviewed by the committee of governors and discussions would be held by the banks that are concerned to begin to look at the types of loans and credits that have been granted and what measures would need to be taken by the banks to ensure that the NPL is contained,” says Godwin Emefiele.
The naira plunged to as low as N325 per dollar in the parallel market since the last policy meeting in January, which has led to elevated inflation expectations.
Inflation rose by 11.4 percent in February on an annualised basis from 9.6 percent in January, the National Bureau of Statistics (NBS) said last week.
“The rising inflationary pressure was traced to the lingering scarcity of refined petroleum products, exchange rate pass through from imported goods, seasonal factors and increase in Electricity tariff,” Emefiele said.
Policy makers lowered the benchmark interest rate by 2 percentage points to 11 percent in November to help support an economy hit by plunging oil prices.
Inflation is now well above the CBN’s targeted band of 6 to 9 percent, which may have triggered the move to hike after beginning an easing cycle.
“Inflation jumped well above expectations and the CBN hike may be partly a response to that,” Charles Robertson, Global Chief Economist at Moscow-based Renaissance Capital said.
“The 200bp rate cut in November 2015 probably contributed to naira weakness in the unofficial market – so partly reversing that cut now –is helpful for the currency. This will not strengthen the unofficial naira appreciably but it should slow further deprecation. The rate cut last year was about cutting government borrowing rates – and this is evidently less of a priority today,” Robertson said.
The liquidity surge from that monetary easing however failed to stimulate the economy, as banks shunned new lending.
“The Committee further noted that previous efforts to reflate the economy in order to spur growth did not elicit the required response from DMBs, hence; the surfeit of liquidity in the interbank market,” Emefiele said.
Emefiele added that yields on domestic instruments have to be competitive to attract much needed foreign inflows.
Some analysts question whether the interest rate hike would be enough to compensate for currency risks associated with an illiquid FX market.
“I don’t know if this tightening will attract the investments we are expecting. The immediate thing you will see will be spike in fixed income market. For the equities market, I don’t think that the decision will have much impact because the fundamentals driving that market are different,” Pebina Yinkere, financial analyst at Vetiva Capital Management Limited said.
Johnson Chukwu, managing director and chief executive, Cowry Asset Management limited said, “The implications of tightening of monetary policies is that the slow growth in GDP may worsen in the absence of major stimulus from the fiscal side. If however the budget is immediately approved and implementation starts in earnest, the expansionary nature of the budget will offset the negative effect of the contractionary monetary policies. While the choice of whether to focus on stimulating economic growth or fighting inflation is the discretion of the members of the Monetary Committee, it is doubtful if the increase in Cash Reserve ratio and Monetary Policy Ratio will have any moderating effect on the inflation rate given that the upsurge in inflation was not driven by credit expansion to the private sector.”
According to analysts at Time Economics, an economic consulting firm focused on Communications, Research, Strategy and Markets, based in Abuja, “The hike in CRR signals efforts to tighten liquidity in order to combat inflation, considering the soon-to-be passed budget for 2016, which is expected to inject liquidity into the system. The decision to narrow the asymmetric MPR corridor is geared towards encouraging banks to deposit excess funds with the CBN. Nevertheless, we believe the ingredients for growth, particularly fiscal choices –especially the delay in passing of the 2016 budget, as well as infrastructural and regulatory policies which drive investment flows– are all outside the remit of CBN”
Bola Agbola, executive director, cashcraft asset management limited said, “I doubt if the recourse to tight monetary policy can reverse the nation’s fiscal imbalance at states and federal level , the foreign exchange crisis and return of surging inflation .The monetary policy stance must be complemented by more profound fiscal policy which should follow the passage of the 2016 budget and a shift in the foreign exchange policy from fixed to managed float . We are back to 1984/86 foreign exchange rationing era and the wild margin between official and parallel market era of 1993 and 1995 both of which led to unfair arbitrage opportunities and stagnation of the economy .”
The Nigerian economy expanded 2.1 percent in the fourth quarter of 2015, according to the NBS, the slowest pace since 1999.
The CBN has tried and failed to keep the naira and inflation stable by restricting foreign-exchange supply.
The policy, which is backed by President Muhammadu Buhari, has led to the naira being pegged at 197 to 199 per dollar since last year.
Razia Khan, Chief Economist, Africa Global Research at Standard Chartered Bank, London said the CBN move gives the impression that the tightening was aimed at the parallel market.
“Given the nature of the parallel market, we’ve always argued that even more significant tightening may be needed to affect developments on this market. The transmission of monetary policy does not work as easily as would be the case if most of the activity were taking place on the interbank market,” Khan said in an e-mailed comment.
Emefiele said the CBN was fine-tuning its widely expected new framework for FX trading.
“The committee charged the bank to speed up reforms of the foreign exchange market to improve certainty and eliminate noise and opportunities for arbitrage,” Emefiele said.
Nigeria’s tightening will make it join peers like South Africa and Egypt which have hiked rates recently.
“Strategically, it makes sense because he needs to have a credible statement ahead of World Bank meeting next week. It is an extraordinary meeting and the decision was expected, though not without flaws,” Bismarck Rewane, CEO, of consulting firm Financial Derivatives Limited said.
PATRICK ATUANYA, IHEANYI NWACHUKWU, HOPE MOSES-ASHIKE & Onyinye Nwachukwu
