Central Bank of Nigeria Communique No. 114 of The Monetary Policy Committee Meeting of July 24 and 25 2017

Transcription

1. CENTRAL BANK OF NIGERIA COMMUNIQU É NO 114 OF THE MONETARY POLICY COMMITTEE MEETING OF 24 th AND 25th JULY, 2017 Background The Monetary Policy Committee met on the 24 th and 25th of July 2017, against the backdrop of a relatively improving global economy. However, protectionism in trade and immigration; fragilities in the financial markets, remain the key risks to global economic stability. On the domestic front, the economy is on a path to moderate recovery with a positive short- to medium-term outlook, premised largely on fiscal stimulus and a stable naira exchange rate. Inflation expectations also appear sufficiently anchored with the current stance of monetary policy. In attendance were 8 out of 12 members of the Committee. The Committee examined the global and domestic economic and financial environments in the first half of 2017 and the outlook for the rest of the year. External Developments The momentum witnessed in the global economy in Q1 2017 continued through the second quarter, driven by a generally accommodative monetary policy stance in most advanced economies, moderation in energy prices and improved global demand. The emerging markets 1
2. and developing economies , are experiencing positive spillovers from somewhat improved commodity prices and developments in the advanced economies. The growth prospects for this group of countries in 2017 are expected to rise to about 4.6 per cent from 4.3 per cent in 2016. Complemented by the momentum in other blocks and a potential positive prospect for expansion in world trade, the IMF in its July edition of the World Economic Outlook (WEO) projected global output growth in 2017 at 3.5 per cent from 3.1 per cent in 2016. The MPC, however, noted some headwinds confronting the optimistic outlook to global growth arising mainly from receding market expectations of expansionary U.S. fiscal policy, weaker than expected growth in the U.K due to difficult BREXIT negotiations and geo-political risks associated with the forthcoming German general elections. In addition, the Committee noted the downward trend in global inflation after earlier indications of an uptick as the U.S. continues to build up inventories in shale oil, while emerging economies such as Brazil, Russia and South Africa witness strong economic headwinds leading to sharp downturn in output. Domestic Output Developments Data from the National Bureau of Statistics (NBS) showed that the contraction in the economy moderated to 0.52 per cent in Q1 2017 from 1.30 per cent in Q4 2016. The data further revealed that fifteen economic activities recorded positive growth in Q1 2017, showing strong signs of recovery. The Purchasing Managers Index (PMI) for 2
3. manufacturing and non-manufacturing activities stood at 52 .9 and 54.2 index points in May and June 2017, respectively from 52.7 and 52.5 index points in May 2017, indicating an expansion for the third consecutive month. Similarly, the Composite Index of Economic Activities (CIEA) rose from 55.85 to 59.50 index points between April and June 2017. The Committee noted the continuous positive effects of improved foreign exchange management on the performance of manufacturing and other economic activities. Non-oil real GDP grew by 0.72 per cent in Q1 2017, reflecting growth in the agricultural sector by 0.77 per cent in the same period. Provisional data also showed that the external sector remained resilient in Q2 2017, as the overall Balance of Payments (BOP) position recorded a surplus of US$0.65 billion, equivalent to 0.8 per cent of GDP. The Committee hopes that the implementation of the 2017 budget and the Economic Recovery & Growth Plan (ERGP) will further strengthen growth and stimulate employment. Developments in Money and Prices The Committee noted that money supply (M2) contracted by 7.33 per cent in June 2017, annualized to a contraction of 14.66 per cent, in contrast to the provisional growth benchmark of 10.29 per cent expansion for 2017. The development in M2 reflected a contraction of 7.45 per cent in net foreign assets (NFA) in June 2017. Similarly, M1 contracted by 7.98 and 10.70 per cent in May and June 2017, respectively, consistent with the directive of the MPC that expansion in narrow money should be controlled. On the other hand, net domestic credit (NDC) grew modestly by 1.02 per cent in June 2017, (annualized at 2.04 per cent), driven mainly by net credit to government, which 3
4. grew by 5 .91 per cent. Credit to the private sector, however, declined relative to end-December 2016 by 0.02 per cent. The MPC noted the widening fiscal deficit of N2.51 trillion in the first half of 2017 and the growing level of government indebtedness and expressed concern about the likely crowding out effect on private sector investment. The constrained growth in the monetary aggregates provides evidence of weak financial intermediation in the banking system arising from the constraints imposed by developments in the macroeconomy. Headline inflation (year-on-year) declined for the fifth consecutive month in June 2017, to 16.10 per cent from 16.25 per cent in May, and 18.72 per cent in January 2017. Core inflation moderated to 12.50 per cent in June from 13.00 per cent in May 2017 while the food index rose marginally to 19.91 per cent in June from 19.27 per cent in May 2017. This development was traced to intermittent attacks by herdsmen on farming communities, sporadic terrorist attacks in the North-East and other seasonal farming effects. The Committee was particularly concerned about the unabating pressure from food inflation but hopeful that the situation will dampen in the third quarter as harvests begin to manifest. The Committee also attributed the moderation in inflation to be partly due to the effects of the relative stability in the foreign exchange market, stemming from improved management, which promoted increased inflows. Against this backdrop, the Committee reiterated its commitment to sustain and deepen flexibility in the foreign exchange market to further enhance foreign exchange flow in the economy. The Committee, however, noted the protracted effects of high energy and 4
5. transportation costs as well as other infrastructural constraints on consumer price developments and expressed hope that government will fast-track its reform agenda to address these legacy issues . The Committee noted that while responding to the current tight monetary policy stance, inflation still had a strong base effect which is expected to wane by August 2017. Money market interest rates moved in tandem with the high level of liquidity in the banking system. The interbank call rate opened at 16.13 per cent on May 25, 2017 and closed at 4.43 per cent on June 29, 2017. However, the average inter-bank call rate during the period stood at 12.49 per cent. The movement in the net liquidity position reflected the effects of OMO, foreign exchange interventions, statutory allocation to state and local governments, and maturity of CBN Bills. The Committee noted the improvements in the equities segment of the capital market as the All-Share Index (ASI) rose by 33.33 per cent from 25,516.34 on March 31, 2017, to 34,020.37 on July 21, 2017. Similarly, Market Capitalization (MC) rose by 32.84 per cent from N8.83 trillion to N11.73 trillion during the same period. Relative to end-December 2016, capital market indices rose by 26.59 and 26.81 per cent, respectively, reflecting growing investor confidence due to improvements in foreign exchange management. The Committee however, noted the seeming bubble in the capital market and cautioned on the utilization of the inflows. Total foreign exchange inflows through the Central Bank of Nigeria (CBN) increased by 35.41 per cent in June 2017 compared with the 5
6. previous month . Total outflows, on the other hand, decreased by 12.73 per cent during the same period, as a result of reduced CBN intervention in the interbank foreign exchange market, which also reduced TSA (dollar) payments balances by 61.4 per cent in the period under review. The positive net flows resulted in an improvement of gross external reserves to $30.30 billion at end-June 2017, compared with $29.81 billion at end-May 2017. The Committee noted the emerging convergence between the bureau-de-change (BDC) and Nigeria Autonomous Foreign Exchange (NAFEX) segment rates and the stability of the average naira exchange rate at the inter-bank segment of the foreign exchange market during the review period. 2.0. Overall Outlook and Risks Available forecasts of key macroeconomic indicators point to a fragile economic recovery in the second quarter of the year. The Committee cautioned that this recovery could relapse in a more protracted recession if strong and bold monetary and fiscal policies are not activated immediately to sustain it. Thus, the expected fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries, all expected to drive the growth impetus for the rest of the year must be pursued relentlessly. The Committee expects that timely implementation of the 2017 Budget, improved management of foreign exchange, as well as security gains across the country, especially, in the Niger Delta and North Eastern axis, should be firmly anchored, to enhance confidence and sustainability of economic recovery. 6
7. The Committee identified the downside risks to this outlook to include weak financial intermediation , poorly targeted fiscal stimulus and absence of structural programme implementation. 3.0. The Considerations of the Committee Notwithstanding the improved outlook for growth, the Committee assessed the implications of the uncertainties arising from the continued normalization of monetary policy by the US Fed and the implications of a strong dollar, the weak recovery of commodity prices, and the uncertainty of US fiscal policy. The Committee similarly evaluated other challenges confronting the domestic economy and the opportunities for achieving economic growth and price stability in 2017. The Committee expressed satisfaction with the gradual but consistent decline in inflationary pressures in the domestic economy, noting its substantial base effect, continuous improvements in the naira exchange rate across all segments of the foreign exchange market, and considerable signs of improved investments inflows. The Committee welcomed the move by the fiscal authorities to engage the services of asset-tracing experts to investigate the tax payment status of 150 firms and individuals in an effort to close some of the loopholes in tax collection, towards improving government revenue. However, the Committee expressed concern about the slow implementation of the 2017 Budget and called on the relevant authorities to ensure timely implementation, especially, of the capital portion in order to realize the objectives of the Economic Recovery and Growth Plan. The MPC believes that at this point, developments in the macroeconomy 7
8. suggest two policy options for the Committee : to hold or to ease the stance of monetary policy. Against the backdrop of the outlook for the domestic and global economy; the enthusiasm around the base-effect which reduced inflationary pressures and the continuous relative stability in the naira exchange rate, there is need to maintain cautious optimism, given the potential ramification of a major deviation from the existing policy path. The Committee is not unmindful of the high cost of capital and its implications on the still ailing economy, which arguably necessitates an accommodating monetary policy stance. The MPC also noted the liquidity surfeit in the banking system and the continuous weakness in financial intermediation, but agreed on the need to support growth without jeopardizing price stability or upsetting other recovering macroeconomic indicators, particularly the relative stability in the foreign exchange market. The MPC thinks that easing at this point would signal the Committee‟s sensitivity to growth and employment concerns by encouraging the flow of credit to the real economy. It would also promote policy consistency and credibility of its decisions. Also, the Committee observed that easing at this time would reduce the cost of debt service, which is actually crowding out government expenditure. The risks to easing however, would show in terms of upstaging the modest stability achieved in the foreign exchange market, the possible exit of foreign portfolio investors as well as a resurgence of inflation following the intensified implementation of the 2017 budget in the course of the 8
9. year . The Committee also reasoned that easing would further pull the real interest rate down into negative territory. The argument for holding is largely premised on the need to safeguard the stability achieved in the foreign exchange market, and to allow time for past policies to work through the economy. Specifically, the MPC considered the high banking system liquidity level; the need to continue to attract foreign investment inflow to support the foreign exchange market and economic activity; the expansive outlook for fiscal policy in the rest of the year; the prospective election related spending which could cause a jump in system liquidity, etc. The MPC expressed concern over the increasing fiscal deficit estimated at N2.51 trillion in the first half of 2017 and the crowding out effect of high government borrowing. While urging fiscal restraint to check the growing deficit, the Committee welcomed the proposal by government to issue sovereign-backed promissory notes of about N3.4 trillion for the settlement of accumulated local debt and contractors arrears. The Committee, however, advised the Management of the Bank to monitor the release process of the promissory notes to avoid an excessive injection of liquidity into the system thereby offsetting the gains so far achieved in inflation and exchange rate stability. On the outlook for financial system stability, the Committee noted that, in spite of the resilience of the banking sector, the prolonged weak macroeconomic environment has continued to impact negatively on the sector‟s stability. The MPC reiterated its call on the Bank to sustain its intensive surveillance of deposit money banks‟ activities for the purpose of promptly identifying and addressing vulnerabilities. The Committee 9
10. also called on the DMBs to support economic recovery and growth by extending reasonably priced credit to the private sector . 4.0. The Committee’s Decisions In consideration of the headwinds confronting the domestic economy and the uncertainties in the global environment, the Committee decided by a vote of 6 to 2 to retain the Monetary Policy Rate (MPR) at 14.0 per cent alongside all other policy parameters. Consequently, 6 members voted to retain the MPR and all other parameters at their current levels while two members voted to ease the stance of monetary policy. In summary, the MPC decided to: (i) Retain the MPR at 14 per cent; (ii) Retain the CRR at 22.5 per cent; (iii) Retain the Liquidity Ratio at 30.00 per cent; and (iv) Retain the Asymmetric corridor at +200 and -500 basis points around the MPR. Thank you for listening. Godwin I. Emefiele Governor, Central Bank of Nigeria 25th July, 2017 10
11. PERSONAL STATEMENT BY THE MONETARY POLICY COMMITTEE MEMBERS 1 . ADELABU, ADEBAYO The improvement in the performance of key macroeconomic variables, which commenced in the early part of the year, appears to have been fairly sustained. Recent statistics suggest that the economy may completely exit recession by the end of the third quarter, while a positive growth could be recorded at the end of the fiscal year. Of significant interest is that the growth is all inclusive, as the manufacturing sector, which has been in comatose for the past three years, is beginning to show some signs of revival. The Purchasing Manager Index (PMI) for the manufacturing sector increased by 1.2 percentage point to 54.1 points in July, which was not only the highest level since 2014, but equally represents expansion in the sector‟s activities for the fourth consecutive month. Similarly, the nonmanufacturing sector‟s PMI increased modestly by 0.2 percentage point to 54.4 points during the period, representing an expansion for three consecutive months. Inflation is still relatively high, particularly in reference to the Bank‟s target, nonetheless, headline inflation eased to 16.1 percent in June, representing a consistent deceleration for five months. Furthermore, the stability in the foreign exchange market is becoming firm and accompanied by significant reduction in premium between the two markets. In particular, the recent return of current account balances to a surplus would have profound positive influence on the overall macroeconomic condition. Apart from the positive spillover in terms of enhancement of accretion to external reserves, which would 11
12. strengthen the stability of the exchange rate , it also has the capacity to alter the structure of GDP in favour of employment enhancing sectors. This is predicated on the thesis that continuous surplus on current account is normally associated with rapid growth of tradable sectors than the non-tradable, and given that high quality employment is generated mostly in the tradable sectors, the new trend will rub off on employment and ultimately reduce poverty. On a similar dimension, the growing confidence in the macroeconomic environment is also generating a positive spillover in the equity market, with the capital market witnessing sustained rally since April 2017 on the backdrop of enhanced confidence cum optimistic outlook by investors. The foregoing positive outcomes reflect the various measures of monetary policy, particularly the improved liquidity as well as enhanced access to the foreign exchange markets coupled with the commitment of government to the Economic Recovery and Growth Plan (ERGP). The medium term outlook is fairly optimistic but replete with challenges that have considerable capacity to reverse the gains recorded so far. One of the major risks is the limited fiscal space, which may threaten discretionary expenditure that could provide strong impetus to the implementation of the ERGP. Preliminary data suggests that actual revenue of the fiscal authority significantly underperformed in relation to projection in the first half of the year on the backlash of recurring price and volume challenges in the oil sector. A key adverse outcome of this development is the elevated interest to revenue ratio in the fiscal authority‟s balance sheet, estimated to be in the neighborhood of 40 percent. The interest to revenue ratio may further rise with the continuing tightening of monetary policy stance by the Federal Reserves (Fed) of the US. My view is hinged on the strong correlation 12
13. between gross capital inflows and market risk index for most emerging economies . A rise in gross capital flows is normally accompanied by a decline in market risk index and vice versa. Given that the continuous normalization of monetary policy stance by the US Fed would, invariably, be accompanied by a shift in risk appetites and policy stance of most systemic important financial centers against emerging market economies, a reduction in capital flows to emerging economies is inevitable. Consequently, financial market risk for the domestic economy may head northward, exerting additional strain on the fiscal budget through increase in interest charges. Furthermore, the economy is expected to exit recession by the latter part of the year but the projected GDP growth is just 0.8 percent, a relatively marginal increase that could barely make appreciable impact on socio-economic condition in the country. In order for the impact of growth to reflect on poverty and welfare, it is expected that the rate should not be less than 7 percent for at least five consistent years. This may be a little bit challenging under the present regime of inflation induced high interest rate. There are at least two reasons why the interest rate may not trend downward in the near term. Firstly, the tight monetary stance on account of elevated inflation and secondly, the cost of the rising NPLs in the banking industry may be factored into the pricing models by the banks. Thus, the capacity of the banking sector to support the ongoing recovery may be constrained. Another worrisome dimension is that the short fall in government revenue has increased government demand for banks financing, leading to the crowding out of the private sector in credit allocation. In a related dimension, the Federal Government has just refunded another tranche of overcharged deductions on Paris Club debt to 13
14. states of the Federation , bringing the cumulative amount refunded in the course of the year to about N740 billion. This amount is equivalent to about 10 percent of current fiscal year‟s budget. The fund would indeed considerably alleviate the current financial burden confronting most of the states and it is more likely that a significant proportion would be used to defray outstanding salaries and pensions. In as much as this would enhance the purchasing power of citizen and stimulate aggregate demand, it is also necessary to bear in mind that increases in aggregate demand without commensurate plan to stimulate the supply side would ultimately lead to general increases in price level, hence the likelihood of reversing the current downward trend in inflation. Apart from the challenges in the macroeconomic environment, a key risk that cannot be discounted is the rising socio-political tension on the backdrop of agitations and issuance of threats and counter threats from various parts of the country. These developments, no doubt, reduces the rating on ease of doing business index, with severe consequences on investment, output and even inflation. It is against this background that the sustenance of ongoing recovery requires a collaborative and coordinated commitment from all stakeholders, including the monetary authority, the fiscal authority and wholesale engagement with the civil societies. In view of the fact that the balance of risks to outlook is mixed, arguments for easing at this meeting are as convincing as for further tightening. The compelling reason for easing is the need to support the ongoing recovery by complementing the ERGP of the Federal Government, but I would like to quickly add that in as much as this is a desirable option, it should be seen as a long term perspective. The 14
15. current period is not appropriate because inflation is not only high , the ongoing deceleration is equally not strong enough and is vulnerable to a costly setback. This, invariably, reduces the policy choices to either of further tightening or maintaining the status quo ex-ante. The key arguments for further tightening include the need to enhance the inflow of capital to strengthen the stability in the foreign exchange market. This is more so, in the light of gradual increase in interest rate by the US Fed and rising financial market volatilities in the advanced countries. I am however of the view that the magnitude of interest rate increase should be taken cautiously because of the long term consequence on the banking sector. The prevailing interest rate differential between the advanced countries and the domestic economy is crossing the acceptable threshold and this may engender unfriendly debt-type capital flow, which could elicit unsustainable appreciation in the exchange rate and ultimately increase the fragility of the banking system. Against the perspective of the foregoing, I think the appropriate choice at this meeting is to maintain the current stance of monetary policy. Consequently, I would like to propose that all the current measures of monetary policy be retained. Specifically, MPR at 14 percent with a symmetric corridor of +2/-5 percent and CRR at 22 percent. 15
16. 2 . BALAMI, DAHIRU HASSAN The July MPC meeting came at a time when the macro level and the growth rate expectation figures have risen by 0.80% while inflation has slightly improved from 16.10% in June to 16.05% in July 2017. There was also some stability in the official foreign exchange market at N305.80 Naira to a Dollar. Stress test at the financial sector shows that the Capital Adequacy Ratio (CAR) has worsened from 12.81% in April to 11.51% in June, with slight improvement of the Non-Performing Loans (NPLs) ratio from 15.18% to 15.07% in June against the prudential requirement of 10% -15% for banks with national and international authorisation, and a maximum of 5% for NPLs ratio. The banking sector Liquidity ratio showed that all DMB‟s registered above the minimum of 30% liquidity ratio with the exception of 4 outlier banks. The stress test therefore shows that the Deposit Money Banks (DMBs) are less resilient to shocks. However, the Return on Equity (RoE) and Return on Assets (RoA) registered some improvement from 17.69% to 22.44% in June and 2.32% in April to 2.42% in June 2017, respectively, partly due to annualised effect. The financial performance indicators showed that when the four outlier banks were removed, the CAR, the NPLs ratio as well as the Liquidity ratio are all above the prudential requirement of 10%-15%, maximum of 5% ratio for NPLs. The critical question is how do we grow the economy with high rate of inflation as well as high rate of interest charged by the DMBs? It should be noted that the economy is exiting the recession by registering slight fall in inflation and rising growth rate compared to the April figures. Low inflation is partly instrumental to the growth registered in the economy in July. However, the fall in inflation is fragile because 16
17. energy prices , transportation cos t, food inflation, liquidity pressure due to Paris club refund are likely to heighten the level of inflation in the economy if not properly handled. It should be noted that MPC Policies over the past six months have assisted in improving the performance of the economy. However, how do we sustain the effort? How do we create an incentive for the DMBs to lend to the real sector of the economy particularly the private sector? Currently, greater percentage of the credit is going to the government rather than the private sector. It seems that DMBs have low knowledge of the various sectors of the economy. The areas they favour are usually capital intensive industries that have low employment generation area such as oil and gas, telecommunications and electricity sectors. Other employment generation areas which include agriculture, small scale industry and transport services are not favoured. The way forward requires the restructuring of the economy- This will require diversification of the economy, to be an export driven economy. Both Federal and Sub-national governments need to improve their revenue base and collection efforts and make all levels of government pro-active in promoting growth at all levels through less reliance on the oil and gas sector. The clamour for low Interest rate cannot happen now because of the high level of inflation and rising operational cost in the economy. Again, there is the need to encourage the inflow of FDI both real investment and hot money into the economy. To move the economy forward there is also need for MPC to examine the effect of credit concentration as well as banks concentration and how the two will 17
18. impact on the growth of the economy . It should be noted that banks have seen how NPLs ratio are rising due to the effect of external shocks on various sectors of the economy, for example low levels of commodity prices such as oil at the international market to grow the economy. Deficit financing of the budget and Economic Recovery Growth Plan (ERGP) 2017 is necessary. Usually Government budget deficit can be financed through borrowing or nominal money growth which is done by debt monetisation or stock monetisation or both. Debt monetisation is a situation whereby government raise the treasury bills or bond and ask the CBN to take the bonds. The CBN then monetise the bonds through growing normal money and pass it to the government to finance the deficit. It should be noted that deficit financing through money creation can be expanding at the initial level. Nominal money growth will affect lower nominal interest and real interest rate in the short term because nominal money supply takes time to impart on Inflation. However, as deficit financing through growth in nominal money supply continues and start reflecting in inflation, the inflation becomes dominant. This will further promote inflation because the money provided through nominal money creation will not be adequate for financing the deficit due to fall in the value of nominal money, hence the need for government to request for more nominal money growth to further cover the deficit. Currently, the case for loosening does not arise because the DMBs will not react in the same way if the CBN lowers the Monetary Policy Rate (MPR) so as to benefit the real sector of the economy. I maintain that if inflation trends downwards further then loosening can take place. Tightening will hurt 18
19. the economy because the DMBs are likely to raise their rates which will be detrimental to investment in the economy . Since the past policies have shown some improvement in the economy as buttressed by data presented to us, to hold will enable us to await clarity on the evolution of key fiscal variables which include budget implementation, and monetary variables such as increase or decrease in exchange rate, interest rate and inflation. On the basis of the above, I vote to hold: (i) Retain the MPR at 14 percent (ii) Retain the CRR at 22.50 percent (iii) Retain the liquidity Ratio at 30.00 percent and (iv) Retain the Asymmetric corridor at +200and -500 basis points around the MPR 19
20. 3 . BARAU, SULEIMAN Background I voted to hold on the back of relative in gains in reducing inflation, stability in exchange rate and indication that the economy will come out of recession sooner than later. In taking this decision, I am aware that the continued existing of liquidity surfeit, Government deficit and that the fact that the decline in inflation is largely due to base effect and that there exist real threat to the gains mentioned unless further tightening is elicited. However, I passed by this option and the option of easing based on the observed need for sustained stability in policy. The relative improvement in the macroeconomic environment, which commenced at the beginning of the second quarter, has been fairly reasonably sustained. The notable depreciation in the foreign exchange rates for the Naira have been largely contained and this has elicited improved confidence in both the interbank and the BDC segments, culminating in significant reduction in the hitherto huge premium at the BDCs‟ market. The latest projection by the IMF reveals that the Nigerian economy would outpace South African economy in 2018 while it is remarkable that the Economic Recovery and Growth Plan (ERGP) of the Federal Government is receiving endorsement of international development partners like the World Bank. Although headline inflation at 16.1 percent in June is still above the Bank‟s target, the good news is that deceleration has been consistently observed in the last five months. As noted in my last statement, the task at this period is to strengthen the seemingly nascent macroeconomic stability including building resilience and I am of the view that this should not be an elusive goal given that some of the major risk factors are waning. 20