Governor Central Bank of Nigeria (CBN), Godwin Emefiele, said on Tuesday that he does not anticipate that liquidity glut arising from recent open market operations (OMO) ban for non-bank investors and corporates would fuel speculative demand for dollars with adverse effect on the naira either in the near or medium term.
He said that the apex bank is rather noting a ramped-up FX demand for the importation of raw materials, plant and equipment, which indicates increased manufacturing output as also reflected in the 3rd quarter GDP numbers which ramped up to 2.28 percent from 1.94 percent in the 2nd quarter of 2019.
Emefiele was responding to BusinessDay fears that the excess liquidity arising from the recent OMO ban could find outlet in the FX markets leading to a possible pressure on the dollar-naira exchange rate.
“To be honest, we have not seen that; if at all, I would say that what is happening is that as a result of banks increasing their lending, naturally some of these loans will go into importation of plants and equipment and some of the data we have show that there was increased importation of plants and equipment which for us is positive,” Emefiele said, assuring again that the CBN would continue to meet genuine demand for FX.
“That is what we rather see as the impact so far on the FX market – importation of raw materials and equipment needed to expand production,” he said.
This comes as the CBN took a decision on Tuesday to leave all benchmark rates unchanged, including the Monetary Policy Rate (MPR) at 13.5 percent; Cash Reserve Ratio (CRR) at 22.5 percent, Liquidity Ratio (LR) as well as the Asymmetric corridor around the MPR at +200/–500 basis points.
Emefiele said the CBN is confident of the outcomes of its monetary policies so far and therefore does not see any immediate compelling reasons to adjust rates.
Such policies, he said, include current policy on loan-to-deposit ratio, which has resulted in loans and advances rising by over N1.1 trillion between June and October 2019 and helped in boosting credit to the agricultural and manufacturing sectors, hence the positive outcome on the GDP.
“We are going to appeal to the banks to continue to work harder and grant loans to the private sector, particularly the agriculture and manufacturing sectors,” the governor said.
He also expressed the MPC’s hope that the loan-to-deposit ratio (LDR) initiative is sustained as interest rates being paid by borrowers have so far dropped by up to 400 basis points between June and October 2019.
These have happened with corresponding decline in non-performing loans (NPLs) to 6.5 percent at end-October 2019.
Addressing the press on the outcomes of the two-day MPC meeting in Abuja, Emefiele raised concerns on rising inflation, which he attributed to soaring food prices, but was confident that recent policies were good enough to quell the trend in near term.
Headline inflation (year-on-year) saw an uptick from 11.24 in September to 11.61 percent in October 2019.
Emefiele said this was anticipated as part of the seasonal end-of-the-year uptick in prices, though was further accentuated by the border closure, an expected temporary food supply shock which he was confident would adjust over the medium-to-long term as the economy increases investments in food production.
“The CBN’s continued intervention in the agricultural sector is expected to improve medium-term food supply,” he assured.
But analysts are sceptical about the direction of the foreign exchange and external reserves.
“Given recent pressure on inflation, it was always something of a forgone conclusion that the MPC would hold the MPR steady,” Razia Khan, managing director, chief economist, Africa and Middle East Global Research, said.
“The real question is around whether investors will be appeased by the messages on the FX rate. Is there tolerance for FX reserves going down as well as up, and will investors ‘buy’ the CBN’s message around the ongoing commitment to FX stability? We think, for now, these messages are received clearly by all stakeholders,” Khan said.
The Nigerian land borders were closed to address the incidence of increased cross-border banditry, smuggling and dumping, insurgency and the illegal trade practices of neighbouring countries whose economies had become dependent on Nigeria through smuggling through the borders. He said MPC members who unanimously voted to keep the rates were conscious that, while tightening may encourage capital inflows, it also has the downside consequence of constraining the already nascent recovery in output growth.
The committee also noted that a reduction in the policy rate will improve growth prospects, but in view of the uptick in inflationary pressures, it decided that the balance of risks was in favour of protecting price stability.
“Considering the recovery, decline in market interest rates, growth in domestic credit amongst other positive developments, the Committee felt that there would be more gains in the short to medium term in holding policy at its current position,” he explained.
Emefiele said MPC members believe that sustaining the MPR at its current level is crucial for better understanding of the unfolding impetus of growth before deciding on any probable variations.
“They also think that holding current policy position offers pathways for appraising the effect of the heterodox policies to encourage lending by the banking industry without varying the policy rate as the downside risk to growth and caution on inflation looks stable,” he said.
“The MPC is also of the view that the improvements in the macroeconomic indicators such as the GDP, NPLs, capital adequacy ratios (CAR), and the LDR suggest that current monetary policy stance is yielding results. It, therefore, feels that maintaining the current stance would be necessary in order to sustain the improvements,” he further said.
Emefiele also reiterated the committee’s call on government to urge the Pensions Commission to improve the prudential requirements for the over N9 trillion pension funds to refocus their investment portfolio away from their traditional choice of government securities in favour of other viable long-term investments in real estate, manufacturing, agriculture, and infrastructure.
But he raised the need for strong visibility of fiscal and structural policies to improve infrastructure and investment conditions in the economy.
Onyinye Nwachukwu, Abuja, Hope Moses-Ashike & Bunmi Bailey, Lagos
