By CentralBankNews.info
Nigeria’s central bank left its benchmark Monetary Policy Rate (MPR) at 14.0 percent, citing the importance of price stability and the limitations of monetary policy in influencing economic output and employment under conditions of stagflation.
The Central Bank of Nigeria (CBN), which has raised its rate by 300 basis points this year to restrain inflation, said economic growth is expected to remain “less robust” given the absence of fiscal space while there are signs that inflation is being contained from moderate price expectations in light of the tight monetary stance and an improved agricultural harvest.
Nigeria’s inflation rate rose to 18.3 percent in October – the highest since October 2005 – from 17.9 percent in September on higher food prices, with the CBN saying the “incessant pressure on consumer prices continues to come from structural factors, including high cost of power and energy, transport, production factors, as well as rising prices of imports.”
The average exchange rate of Nigeria’s naira weakened from September 1 to October 27, with the central bank saying foreign exchange inflows had declined by 31.85 percent to US$957.37 million due to lower crude oil and other government revenues.
The naira was quoted at 316.5 to the U.S. dollar today, down 37 percent this year.
Total foreign exchange outflows had also fallen by 58.68 percent to US$1.015.08 billion during the same period despite the resumption of joint venture payments.
The central bank’s policy committee “implored” the bank’s management to continue to make foreign exchange available to agriculture and manufacturing sectors by enforcing the policy of allocating 60 percent of available foreign exchange to these sectors.
Nigeria’s Gross Domestic Product contracted by an annual rate of 2.24 percent in the third quarter of this year, down from minus 2.06 percent in the second quarter and minus 0.36 percent in the first.
“The MPC noted that they key undercurrents – shortage of foreign exchange, low fiscal activity, high energy prices and the accumulation of salary arrears, especially at the sub-national levels of government, continued in the third quarter of the year,” the CBN said.
It added that these conditions could not have been improved by monetary policy instruments directly and there is a need to engineer monetary policy in such as way that gives fiscal policy the space to improve public investment in infrastructure.
The Central Bank of Nigeria issued the following statement:
“The Monetary Policy Committee met on 21st and 22nd November 2016, amidst relatively subdued global and domestic economic and financial conditions. The Committee evaluated the global and domestic macroeconomic and financial developments as well as the challenges to the domestic economy up to November 2016, and the outlook for the first quarter of 2017. In attendance were 10 out of 12 members.
The Committee acknowledged the tapered growth in global output, stemming from relatively unbalanced risks to the global economic outlook. Global recovery remains fragile in the advanced economies while the emerging markets and developing economies (EMDEs) continue to struggle against strong headwinds, including low commodity prices, slowing demand and instability of capital flows.
revised to 3.1 per cent in July and retained in October could be missed by a significant margin. The World Bank has been more cautious in retaining its June 2016 global output growth projection of 2.4 per cent. Headwinds to global growth prospects are also emanating from weak trade and financial conditions. The OECD’ Economic Forecast, September 2016 Update, emphasized that both elements underpin the current low-growth trap facing the global economy.
the average growth rate of 1.1 per cent in H1 2016.
Japan’s economy grew at a seasonally adjusted annualized rate of 0.2 per cent in Q2 of 2016 compared with 1.7 per cent in Q1 of 2016. The moderation in growth was largely attributed to weak wage growth and a strong yen. The Bank of Japan (BoJ) in a rare move at its September MPC meeting set a target for government bond yields and
introduced an inflation-overshooting commitment.
Real GDP in the Euro area is expected to maintain
or outperform its Q2 growth rate of 0.3 per cent in the third quarter. While short-term downside risks from the Brexit vote have largely subsided, the long- term potential economic impact remains uncertain. As such, the zone’s growth path remains challenged. At its October 20th, 2016 meeting, the Governing Council of the European Central Bank decided to retain its key interest rates on refinancing operations, the marginal lending facility and the deposit facility at 0.00, 0.25 and -0.40 per cent, respectively. The Council also reaffirmed its commitment to sustain its quantitative easing programme of monthly asset purchases of €80 billion (US$85.6 billion) until March 2017 and
beyond, as economic conditions dictate.
capital inflow and unstable macroeconomic environment, the prospects for their recovery look more promising. The IMF (WEO October 2016 Update) projected growth rate of 4.2 per cent, an upward review from 4.1 per cent projected in July 2016 for the EMDEs. The marginal improvement in growth outlook is expected to be powered by improvements in India and China.
Brexit vote and the recent outcome of the US Presidential Elections and uncertainties surrounding both events as well as the regime of negative interest rates and heavy fiscal and monetary stimuli in Japan and elsewhere, we expect a resurgence of aggregate demand and even higher price increases.
Output
Data released by the National Bureau of Statistics
(NBS) in August showed that the economy slipped
into recession following a second consecutive
contraction in Q2, 2016. Domestic output contracted
in the quarter by 2.06 per cent. The latest release in November 2016 by the NBS shows that real income actually worsened in Q3, 2016 as output contracted further by 2.24 per cent relative to its level in the previous and corresponding quarter of 2015. The non-oil sector grew by 0.03 per cent, driven by Agriculture which grew by 4.54 per cent, following the 0.38 per cent contraction in Q2 2016,.
year. Members also noted that those conditions could not have been ameliorated directly with monetary policy instruments. It, however, recognized the need to continue to engineer monetary policy in such a way as to enable fiscal policy the required space to improve public investment in infrastructure.
The Committee noted that headline inflation (year- on-year) continued to rise in October 2016 to 18.3 from 17.9 per cent in September and 17.6 per cent in August, 2016, thus maintaing the upward momentum since January 2016. The increase in headline inflation in October reflected increases in both the food and core components of inflation. Core and food inflation increased from 17.7 and 16.6 per cent in September to 18.1 and 17.1 per cent, respectively, in October, 2016.
noted with the food (month-on-month) index which rose by 0.86 per cent in October from 0.81 per cent in September.
.
Monetary, Credit and Financial Markets Developments
Broad money supply (M2) grew by 10.50 per cent in
September, 2016, compared with the 8.08 per cent
in August, 2016. When annualized, M2 grew by 14.0 per cent in September 2016, above the growth benchmark of 10.98 per cent for 2016. Net domestic credit (NDC) grew by 21.88 per cent in the same period, annualized at 29.17 per cent. At this rate, the growth rate of NDC was above the provisional benchmark of 17.94 per cent for 2016. The development in NDC, essentially reflected the relative growth in credit to the private sector of 20.69 per cent in September, annualized to 27.59 per cent. Credit to government grew by 29.57 per cent in the review period, which annualized to a growth of 39.43 per cent compared with the growth benchmark of 13.28 per cent for fiscal 2016. The growth in government borrowing was largely to compensate for the continued decline in oil receipts.
External Sector Developments
The average naira exchange rate weakened at the
inter-bank segment of the foreign exchange market during the review period. The exchange rate at the interbank market opened at N305.00/US$ and closed at N305.90/US$ between September 1st and October 27, 2016. The Committee observed that total foreign exchange inflows through the CBN decreased by 31.85 per cent, from US$1,404.84 million in September to US$957.37 million in October 2016. The decrease was due to lower crude oil and other government revenues in the period under review. In spite of the resumed Joint Venture payments in October, total outflows also continued to decrease, dropping significantly by 58.68 per cent from US$2,456.86 million to US$1,015.08 million during the same period.
The Committee also implored the Management to continue to direct more focus at making foreign exchange available to agriculture and manufacturing sectors of the economy by enforcing its policy directing DMBs to allocate 60 per cent of the FX available to these sectors.
unlicensed operators currently do. Thus, to evolve an appropriate naira exchange rate that stabilizes the foreign exchange market, BDC operators must strictly observe the terms and conditions of their license.
The Committee assessed the fragile macroeconomic conditions and the strong headwinds confronting the economy. In particular, the Committee considered the implications of the twin deficits of current account and budget deficits, the rise of nationalist sentiments across the West and implications for
national elections in France and Germany as well as he forthcoming referendum in Italy. Other considerations include the yet to be unveiled long term uncertainties of Brexit and expectations of significant shifts in US economic policy. The Committee reaffirmed the urgency of prioritizing the diversification of the economy given the emerging gloomy protectionist outlook of the global economy.
meeting, leading to rising inflation and increasing negative real interest rates. However, outflows significantly dropped, lending credence to the propriety of the decisions of the July and September MPC meetings.
welcomes efforts at resuscitating planning, noting the progress made in developing the medium term economic recovery plan. The MPC urged the Federal Government to urgently assess the extent of its indebtedness to domestic economic agents and develop a framework for securitizing the debts in order to settle its outstanding domestic contractual obligations which cuts across all sectors of the economy. These accumulated debts have slowed business activities of economic agents; most of who are indebted to the banking system, thus compromising the integrity of the financial system. It also advised the Bank to commit to greater surveillance and deployment of early warning
systems in managing the banking system.
Outlook
Available data and forecasts of key economic variables indicate that the outlook for growth and inflation in the medium term continues to be challenging. Growth is expected to remain less robust given the absence of sufficient fiscal space while the current tight stance of monetary policy and improved agricultural harvests are expected to contain further price increases and moderate price expectations as the trend has already revealed.
The Committee’s Decisions
In summary, all 10 MPC members voted to:
(ii) Retain the CRR at 22.5 per cent;
(iii) Retain the Liquidity Ratio at 30.00 per cent;
and
(iv) Retain the Asymmetric Window at +200 and
-500 basis points around the MPR”
www.CentralBankNews.info
