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CBN continuous pro-growth policies, intervention can pull economy out of recession

It is no longer news that the Nigerian economy slid into recession in the third quarter of 2020, following a second consecutive quarter of contraction in output. What is important, going forward, is what the government can do to complement the efforts of the Central Bank of Nigeria (CBN) which has been fighting on all fronts, including overlapping into fiscal responsibilities such as engaging in development financing, to stabilize the economy, writes Hope Moses-Ashike.

Cumulatively, the economy has contracted by -2.48 percent. While this represents an improvement of 2.48 percent points over the -6.10 percent growth rate recorded in the preceding quarter (Q2 2020), it also indicates that two consecutive quarters of negative growth have been recorded in 2020, according to the National Bureau of Statistics (NBS).

Following Nigeria’s first confirmed COVID-19 case in late February, lock-downs were imposed in Lagos, the country’s economic hub and Abuja the capital of Nigeria from late March until early May.

Looking at the global markets, COVID-19 and its associated impacts have been the major driver of market performance across the world. The pandemic resulted in a fall in oil prices and in the value of the US dollar (US$), persistent decline in yields across countries following the universal implementation of loose monetary policy by Central Banks and boom in liquidity following global rate cuts, according to a report by FSDH research.

In the commodity market, the precious metal market flourished on average, gaining 14.1% and 14.9% on Gold and Aluminum prices (Jan.-Nov. 2020).

The report noted that sentiment in the cash crop market was mixed as the price of Cocoa gained by 18.4% while that of Coffee decreased by 6.9% (Jan.-Nov. 2020).

In the capital market, all the stock markets tracked by FSDH gained in 2020 (Jan.- Nov. 2020) despite being hit by the COVID-19.

Among the tracked stock markets, the Nigerian Stock Exchange recorded the highest gain in 2020 with year to date (Jan.-Nov. 2020) of 30.5%.

On a domestic scene, analysts at FSDH research said the problem with the Nigerian economy is beyond COVID-19; it is more of a structurally-weak economy affected by externally-induced shocks.

However, the 2020 recession is unique and more severe on household and businesses. With COVID-19, businesses were forced to shut due to lockdown and social distancing. This had a toll on individuals’ income, corporate and government finances.

How is the current Recession different from the 2016 recession? The analysts said there was deeper contraction in 2020 as economic growth reached its lowest point at the first contraction in Q2 2020 (-6.1%). The depth of contraction narrowed in 2020 Q3 (-3.62%).

While at the height of the 2016 recession, 10 out of the 19 economic sectors contracted, in 2020 Q2, 13 sectors contracted.

“The CBN has a critical role to play during the contractions of a country,” said Olalekan Aworinde, senior lecturer, Department of Economics, Pan-Atlantic University, Lagos.

He said the recent recession is as a result of a negative supply shock, and that as the recession threatens, the Central Bank can use an expansionary monetary policy to increase the money supply, increase the quantity of loans, reduce interest rates, thereby leading to an upward shift in the aggregate demand.

Aworinde noted that only the activities of the monetary policy cannot resolve the contractions in the economy. There is the need to use a mix of fiscal and monetary policies.

The expansionary fiscal policy should involve spending hikes of the government and a reduction and in the tax rates so as to increase the disposable income of the people, he said.

“An increase in the disposable income will accelerate the level of aggregate demand which will eventually makes the country to be out of recession, he said.

However, he said the danger in the increase in the disposable income is that it may influence individuals to save more provided the available income is able is able to take care of their basic necessities of life.

The higher level of savings will serve as a withdrawal from the economy, which will later lead to a fall in the aggregate demand, said Aworinde.

On his part, Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria, said despite devaluing the naira a couple of times in a bid to unify the exchange rates as recommended by the International Monetary Fund (IMF), monetary policy response has been largely pro-growth in recent times in response to the pandemic.

This he said has entailed a reduction in Monetary Policy Rate from 13.5% in May to 11.5% by September, reduction in CBN intervention loans from 9% to 5% including a moratorium of one year, forbearance for banks, implementation of a 65% Loan to Deposit Ratio and a raft of interventions especially in the real sector of the economy.

The increased liquidity in the banking system and the low interest rate environment engendered by the CBN has helped to buoy activities in the Stock market.

By and large, Uwaleke said the smaller contraction in real GDP recorded in the third quarter is an indication of an economy on a gradual recovery path. The reopening of the economy and stability in crude oil price are factors aiding economic recovery.

He said it is likely that a positive growth rate may happen by the first quarter of 2021 especially if the government is aggressive in implementing the Economic Sustainability Plan which it launched in response to the economic crisis of 2020.

“The major risks I see to this outlook are the growing insecurity, a fall in crude oil price next year from weakened demand in the wake of a second wave of the pandemic in oil consuming nations as well as the rising cases of COVID’19 in Nigeria which may warrant fresh lockdowns and movement restrictions,” he said.

He advised the CBN to continue its pro-growth policies, scale up its interventions especially in the Agric value chain and consider involving financially strong micro Finance banks as participating financial institutions in future interventions in order to achieve greater coverage.

Response by the Monetary and Fiscal Authorities

Given the impact on COVID-19 on key economic variables including inflation, foreign exchange, capital flows, external reserves, the fiscal and monetary authorities took unprecedented measures to prevent any long-term damage to the growth prospects of the economy.

“Our first objective was to restore stability to the economy by providing assistance to households and businesses that had been severely affected by the pandemic. In addition, we sought to stimulate economy activity through targeted interventions in critical sectors such as agriculture, manufacturing, electricity and construction. Cumulatively our intervention efforts represent about 3.5 percent of Nigeria’s GDP,” said Godwin Emefiele, governor of the CBN.

Some of the measures taken include: A cumulative reduction of the monetary policy rate from 13.5 to 11.5 percent between May and September 2020 in order to spur lending to the economy.
ii. A 1-year extension of the moratorium on principal repayments for CBN intervention facilities;

iii. Regulatory Forbearance was granted to banks to restructure loans given to sectors that were severely affected by the pandemic

iv. Reduction of the interest rate on CBN intervention loans from 9 to 5 percent

v. Strengthening of the Loan to Deposit ratio policy, which has resulted in a significant rise in loans provided by financial institutions to banking customers.

Total gross credit rose by over 21 percent over the past year, from N15.5 trillion to N19.54 trillion. In addition, over N738 billion has been provided as credit to manufacturing related activities by the banks.

vi. Creation of N150 billion Targeted Credit Facility (TCF) for affected households and small and medium enterprises through the NIRSAL Microfinance Bank.

Already, N149.21 billion has been disbursed to 316,869 beneficiaries. Given the resounding success of this program and its positive impact on output growth, the CBN decided to double the fund to about N300 billion, so as to accommodate many more beneficiaries and boost consumer expenditure which should positively impact output growth.

vii. The Bank also disbursed Agri-Business/Small and Medium Enterprise Investment Scheme (AGSMEIS) (N92.90 billion to 24,702 beneficiaries), Anchor Borrowers Program (ABP) by the sum of N164.91 billion to 954,279 beneficiaries.

viii. Mobilization of key stakeholders in the Nigerian economy through the Coalition against COVID-19(CACOVID), which led to the provision of over N28bn in relief materials to affected households, and the set-up of 39 isolation centers across the country.

ix. Creation of a NGN100 billion intervention fund in loans to pharmaceutical companies and healthcare practitioners intending to expand and strengthen the capacity of our healthcare institutions; so far 60 health care related projects are being funded to the tune of over N60 billion as a result of the intervention.

x. Creation of a research fund, which is designed to support the development of vaccines in Nigeria.

xi. Establishment of a N1 trillion facility in loans to boost local manufacturing and production across critical sectors; 53 major manufacturing projects, 21 agriculture related projects and 13 service projects are being funded to the tune of over N360 billion from this facility.

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