Analysts See A Dovish MPC Tomorrow For Credit Creation, Economic Growth

Ahead of the Central Bank of Nigeria’s (CBN) monetary policy committee meeting (MPC) schedule to hold this week, analysts say there is need to loosen up the regulator’s tightening monetary policy stance, a remains a major hurdle to beat.
They noted the recent comment by the International Monetary Fund (IMF) that the CBN should adjust benchmark interest rate upward to allow for distilling inflation rate may not be called for, as inflation is already trending downwards.
FSDH Group’s expectation at the meeting of the Monetary Policy Committee (MPC), of the Central Bank of Nigeria (CBN) which will hold between Tuesday, 03 April, 2017 and Wednesday, 04 April, 2018, is that, the short-term outlook of the Nigerian economy favours monetary policy easing in order to stimulate credit creation and economic growth.
For them, the easing may be in the form of an adjustment to the Monetary Policy Rate (MPR) or an adjustment to the Cash Reserve Requirement (CRR).
The statutory two-day MPC meeting did not hold in February due to the inability of the committee to form a quorum.
However, analysts are saying that given the economic situation which looks to be settling down from 2017 rough waters, there is a need to spur private investment and strengthening domestic economic performance.
“Maintaining the status quo is predictable, but MPC has to do something, South Africa and other countries are cutting rate. If people must feel the green light from major economic indices, unemployment must be curtailed and the best way to do that is to stimulate private investment”, analysts told BusinessSense.
Private investments performance determine macroeconomic performance to a greater extent as the segment is responsible for employing significant numbers of people in the economy. Manufacturing concerns as well as service industry need government support through friendly economic policies and spending pattern to stimulate both demand and supply.
Analysts have positioned that the rate at which individuals and companies access credits in the economy matters; CBN cannot sell at higher rate to Banks and expect that significant part of the funds will go to SMEs. Cost of funds in the banking sector is already moving north and operating cost moving along means pressure.
Some pundits say the CBN single digit inflation should be pursue gradually without killing the domestic economy. They say there will be a point that market force will place inflation at a right point without adverse effects on other metrics.
“There is a level of inflation that an economy can carry productively. The problem with Nigeria is that the economy imports inflation from outside. In its own right, inflation is not an entirely bad phenomenon but to get to that level, CBN has to brace up from inside in terms of moral suasion, credit finance to the real sector and managing interest rate for productive purposes”, Analysts at LSintelligence say.
While the external reserve has been gaining traction, Federal Government has as well been increasing her debt exposure on the back of fiscal expansion objectives. According to Financial Derivative Company Bi-Monthly update, Nigeria’s external debt has more than doubled since PMB was elected in May 2015. As at June 2015, the nation was indebted to the tune of $10.3 billion but in February, it has increased by 102 per cent to $20.85 billion.
In 2017, the nation’s debt service to external creditors was $464 million and N1.476 trillion was to settle local credits providers. There have been increases in debt service as FG increases obligations to both foreign and local investors. In 2016, $353 million was used to finance the debt stock to foreign investors and N1.228 trillion for local investors.
At the beginning of this administration, debt service incurred in the economy was $331 million and N1.018 trillion to finance FG obligation to both foreign and local investors.
“Borrowing in itself is not an economic evil. The challenge of borrowing is the utilization of the funds. Borrowing to finance recurrent expenditure is not an optimal use of the borrow funds and leaves a huge debt burden for the future generation”, FDC noted.
Crowding out private businesses from debt market was one of the major problems that the economy was facing. FG decision to dilute total debt portfolio that currently stands at N21.7 trillion with Eurobonds is positive for companies to access credits from the market.
Inflation rate is on declining, and the nation’s foreign currency exchange is stabilizing but commercial lending rate is a disincentive for private investment thereby the recent high unemployment at staggering 18.6 per cent. Combinations of these economic key performance indicators are making case for MPC decision on repurchase rate adjustments.
It may be recalled that the economy has been running with monetary policy rate at 14 per cent since July 2016. Decision to hike rate was on the back of rising inflation rate and excess liquidity in the economy. While major indices are getting better as most of them are trending towards green zone, unemployment is at its worst.
Looking at Nigeria in the eyes of other major economies in the Sub-Saharan Africa (SSA), Kenya reduces MPR by 50 basis points to 9.5 per cent in March, the country first rate cut since 2016. Last week, South Africa cut repurchase rate by 25 basis points to 6.5 per cent while Bank of Ghana gunned down rate by 200 basis points to 18 per cent.
The nation’s growth outlook is being supported by stability in the global oil prices and oil production. Due to increasing foreign earnings receipts, external reserves has been on ascendancy from about $27 billion in comparable period in 2016 to close at $46.2 billion in March, 2018.
CardinalStone Partners say that before now, the federal government funds the budget deficit with 64 per cent of local borrowings and the balance of 34 per cent with foreign borrowings. As a result, the funding of the budget deficit is primarily dependent on the local bond market, leading to increase in the supply of government debts and invariably higher and attractive yield levels.
“The attractiveness of the domestic yield has endeared foreign portfolio investors (FPIs) who typically have a short-term investment horizon. Hence, the frequent exit and entry of these FPIs create significant volatility for the domestic currency. However, with the government’s resolve to fund fiscal deficit with 50 per cent via foreign borrowings (Eurobonds), which are medium to long-term , this will significantly reduce the need to depend on FPI funds in the local bond market and therefore, reduce the volatility of the domestic currency”, CardinalStone noted.
The analysts say increase in foreign borrowings will also be a source of additional long-term foreign exchange supply which will further strengthen the position of the domestic currency.

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