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The odds within the MPC account in 2020

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By Chibisi Ohakah, Abuja 

How did the Central Bank of Nigeria (CBN) fair in 2019? This is the question on the lips of analysts, economic observers and scholars of econometrics. Regardless of one’s position on the performance of the CBN, the general belief is that given the harsh business atmosphere last year, the apex bank fared well, and indeed, achieved a handful of objectives.

Data from the CBN, covering the last two months in 2019, showed that private sector credit expanded to N16.8 trillion as at November 2019, increasing by 1.6 trillion and N1.7 trillion when compared to January and June 2019 respectively. Also, associated loan to deposit ratio (LDR) increased to 62.87% in November from 60.71% and 57.64% in January and June respectively.

The apex bank stated that despite paucity of foreign portfolio flows and rising services import demand, which resulted in depletion in the gross external reserves, it maintained foreign exchange (FX) stability over 2019, with the parallel market and Bureau de Change (BDCs) trading at discount to the Nigerian Autonomous Foreign Exchange Rate (NAFEX) rate.

The year 2020 is relatively new, yet filled with series of uncertainties including likely lower crude oil prices, still slow economic growth, paucity of foreign portfolio flows, higher consumer prices, expanded fiscal deficit and elevated maturity profile.

At the end of the MPC meeting a fortnight ago, the committee decided to raise the Cash Reserve Ratio (CRR) to 27.5% from the previous rate of 22.5%, while holding all other policy rates constant as follows; The benchmark interest rate, Minimum Discount Rate (MPR) was held at 13.50%. The  MRR  is  the  official  interest  rate  of  the  CBN,  which  anchors all other interest rates in the money market and the economy. CBN’s decision on the MRR affects the level of economic activities and prices in the country through a number of channels. The MPC also retained the asymmetric corridor at +200bps and -500bps around the MPR

Some analysts believe that the listed risks hovering over 2020 will dominate monetary policy decisions during the year, and when on to make predictions, some of which became true after the first MPC meeting this year.  Analysts at Proshare expressed belief that the apex bank will continue to adopt unorthodox policies and will test newer policies in 2020 to ensure FX stability, support growth and limit the pressures emanating from liquidity induced inflation.

“In its first meeting in 2020, we expect the MPC will leave the Monetary Policy Rate (MPR) unchanged,” they predicted before the last MPC meeting. According to them, while it was counterintuitive and not supportive of its growth mantra, the MPC would also vote to raise the cash reserve ratio, explaining that this was informed by the CBN’s recent unusual CRR debits of Deposit Money Banks (DMBs) with ‘excessive’ bids at both OMO and SMIS FX auctions in a bid to reduce its cost of liquidity mop-up and prevent FX speculation.

“We also do not rule out some other administrative pronouncement which could limit FX demand,” the analysts said.

At the last MPC of 2019, all Committee members had voted to retain all policy parameters, MPR at 13.5%; Cash Reserve Ratio at 22.5%; Liquidity Ratio at 30% and Asymmetric corridor at +200 and -500 basis points around the MPR.

Going by the personal statements, the Committee members view was unanimous on the need to allow time for the recent monetary policy measures to demonstrate their full effects, especially in ensuring financial sector soundness and increasing credit to the real sectors of the economy.

A committee member stated the need to monitor developments and also remain prepared to adjust monetary policy in future if required so as to support overall growth in economy, whilst keeping on track the targeted inflation band.

MPC members had appraised the series of interventionist policies by CBN and encouraged a more targeted approach to reach small scale businesses. The analysts said they believe the monetary policy stance largely favored preservation of the foreign exchange and also incentivising economic growth.

Last December, the CBN Governor, Mr. Godwin Emefiele, listed the apex bank’s policy direction for 2020 in a bid to support economic growth, price and exchange rate stability. The Governor who spoke at the 54th Chartered Institute of Bankers of Nigeria dinner hinted that in 2020, monetary policy stance “will remain judicious, research driven, adequate and supportive of the real economy subject to underlying fundamentals.” He said the current tight stance is expected to continue in the near-term, especially in view of rising inflation expectations and exchange market pressures.

On foreign exchange, the CBN boss acknowledged the current capital reversals and expected pressure on market rates. He however stated the Bank’s resolve to maintain exchange rate stability in the near to medium term, anchored on the strength of the reserves. Emefiele also stated the Bank’s resolve to deepen intervention programs to support the real sector.

During the 2019 business year, CBN said it ensured that banks’ loan deposit ratio (LDR) policy did not result in deterioration in the quality of loans. Measures were therefore taken to improve credit risk assessment via consumer credit database to help determine credit worthiness of borrowers.

Expectedly, inflation rate for the month of December rose to 11.98% YoY from 11.85% in November 2019, with headline inflation in 2019 averaging 11.39% compared to 12.15% average in 2018. The apex bank said much of the successes stemmed from the feed-through of the land border closure on food prices, which more than outweighed the onset of the main harvest season, with food prices expanding 18bps to 14.67% YoY from 14.48% in November.

In their NOVA Economic Outlook (NEO) H1 2020, Proshare stated that the confluence of higher electricity tariff, VAT increase, persisting border closure and FX depreciation will determine the inflationary trend over 2020.

“While most of these triggers are expected to materialize over the second half of the year (especially the electricity tariff hike and currency depreciation), we believe the first half of the year will be impacted by the restriction on imports through the land border and feedthrough impact of the VAT increase (albeit minimal).

Recent update by Famine Early Warning Systems Network (FEWS NET) revealed that market supplies have increased, while market demand continues to decline. The lower demand reflects limited export to Niger, Chad and other neighbouring countries. The consultants said this has resulted in lower staple prices, save for the price of other imported food items like rice.

“In the same vein, we expect core prices to also decelerate post the travelling rush which usually results in higher transportation costs and higher PMS and diesel demand,” they said.

So far in January, compared to the apex bank N850 billion offer at OMO auctions, subscriptions totaled N1.37 trillion with the apex bank selling just N1.09 trillion. With CBN’s restriction of DMBs at OMO auctions, it is believed that the higher subscription level largely reflects FPI participation, the analysts said, adding that given the resurgence in FPI inflows amidst limited maturity, it is safe to assume, most of the maturing funds are being reinvested.

“As stated in the currency section of our (Proshare) NOVA Economic Outlook H1 2020 (NEO H1 2020), we believe the apex bank will run on lower reserves during the year occasioned by lower FPI flows and relatively lower crude oil prices. Accordingly, we modeled that the FX reserves could touch as low as $33.56 billion at the end of December 2020, which excluding possible foreign borrowings of $2.8 billion.

“Adjusting the modeled reserves for the foreign borrowings, we could see the reserve remain at $36.4 billion by the end of the year, which we view as good enough for the apex bank to continue its stability of the exchange rate. We however, noted that FX pressures could intensify if crude oil prices stay below $60/bbl over a longer period,” Proshare said.

As the MPC year open further in 2020, they foresee the odds largely favoring a hold of monetary policy parameters, especially with foreign investors still active at OMO auctions, and expected inflationary pressure being largely driven by supply side factors and positive impacts of loan deposit ratio (LDR) limit on private sector credits (at least for now).

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