The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will be faced with a tough policy choice of boosting economic recovery and tackling inflation in the year 2021, according to the 2021 economic outlook of the Lagos Chamber of Commerce and Industry (LCCI).
In an economic review of 2020 and outlook for 2021 released on Sunday and signed by Muda Yusuf, its director-general, the chamber noted that the policy dilemma will put the committee in a very tight position in the coming year and might propel it to retain policy stance till the first half of year when it gets clarity regarding the dynamics of the global and domestic economic landscape.
The chamber said the CBN will likely sustain its developmental finance efforts in 2021 while also maintaining its stance on minimum loan-to-deposit ratio (LDR) requirement.
“We believe credit flows will yield limited outcomes if the structural challenges stifling domestic productivity are unresolved. We are also of the view that the CBN will most likely sustain its policy of keeping interest rates low to enable investors to raise capital at cheaper rates,” the chamber said.
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The LCCI noted that a broad-based synchronisation of fiscal and monetary policies is critical in achieving the twin objectives of output growth and price stability.
“Looking forward, we expect factors such as oil price & production, GDP growth, inflation rate, FX trends, private investment inflows, credit to the private sector and domestic interest rates to influence monetary policy direction in the short to medium-term,” the chamber predicted.
Inflation in November rose to 14.89 percent from 14.23 percent in October as food prices rise sporadically on border closure and high production cost faced by farmers. Central banks rarely cut the interest rate in periods of high inflation, but investors and small businesses are in search of single-interest funds to expand. The Monetary Policy Rate in Nigeria is 11.5 percent, but South Africa’s repo, equivalent to Nigeria’s MPR, is
3.5 percent. Kenya’s MPR is 7.25 percent, while Zambia’s is 8 percent. Ethiopia benchmark interest rate is currently 7 percent while Namibia’s is 7.75 percent. The average lending rate in Mali is estimated at 9.12 percent while it is 4.25 percent in Botswana.
The chamber noted that headline inflation will remain elevated in 2021 as the combination of food supply shocks, FX policies, higher energy costs, FX illiquidity, heightened insecurity in major food-producing states continue to mount pressure on domestic consumer prices.
“Poverty levels in Nigeria will continue to rise and the living standard will deteriorate without robust productivity growth. The country needs the right policies and institutions to spur productivity growth and to have this achieved requires the adoption of best practices in human and physical capital development, governance, and economic openness.”
It further noted debt stock, which stood at N31.01 trillion in June 2020, will rise and debt-servicing to revenue ratio will be elevated as Muhammadu Buhari’s government continues to seek loans to fund projects.
“Looking forward, a resurgence of Covid-19 pandemic in the year 2021 may propel the Federal Government to take on more (concessionary) borrowings to fulfil fiscal obligations. Additionally, a potential FX adjustment in a bid to ease pressure on the local currency (naira)might possibly expand Nigeria’s external debt portfolio and total debt stock in the year 2021.”
On the 2021 budget, the chamber predicted a modest budget performance in the light of current realities.
“Global oil demand is expected to remain subdued in the first half of the year 2021 considering the resurgence of covid-19 pandemic in Europe, America, and parts of Asia,” it noted.
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