Operators, industrialists fault CBN’s monetary policy decision

By PETER EGWUATU, Franklin Alli & NKIRUKA NNOROM

The Lagos Chamber of Commerce and Industry, LCCI, and other operators in the financial sector have criticised the decision of the Central Bank of Nigeria CBN) to retain its policy which seeks to tighten money supply.

The Monetary Policy Committee (MPC) of the apex bank after its meeting on Tuesday decided to retain its tight money supply policy by retaining the Monetary Policy Rate (MPR and the Cash Reserve Requirement (CRR) at 12 percent , while Liquidity Ratio was retained at 30 percent.

Prior to the MPC meeting, there have been widespread calls on the CBN to ease money supply by reducing the MPR, which is the benchmark for interest rates in the economy. The CBN however dismissed these calls saying, “The Committee observed that while there were compelling arguments for monetary easing at this time based on the continuous moderation of core inflation, slowdown in Gross Domestic Products (GDP) growth and evidence of fiscal prudence,. the short-term gains may not be sufficiently adequate to overturn the long term implications of sending a wrong signal that the tightening cycle was permanently over. Economic experts, however, criticised the MPC decisions saying it is detrimental to business and economy.

Reacting to the decision, Muda Yusuf, LCCI Director General, warned that the continuation of a tight monetary regime by the CBN would have the following grave consequences on the economy: “Persistence of high interest rate, deepening of the unemployment crisis, stock market recovery would continue to be slow; the capacity of banks to support the economy would remain severely constrained while the recovery of the real economy will remain sluggish.”

He said that the reality of the current economic and business conditions is a cause for concern, saying that “It causes escalating unemployment crisis, profit margins are declining; consumer demand is weak; prohibitive interest rates; decelerating economic growth and high mortality rate of small businesses.

“These conditions call for policy choices that would stimulate the economy, even at the risk of inflation.  Boosting economic activities would increase output and invariably moderate inflation.  The MPC decision to retain a regime of tightening is ill advised and insensitive.

We appreciate the concern of the CBN about inflation, exchange rate stability and the preservation of foreign reserves.

“However, given the present socio economic conditions, stimulating the economy should be paramount at this time.

Monetary policy decision should ideally be situated in the context of this reality; the interest of the larger economy and the welfare of the citizens.  The ultimate aim of economic policy is to impact the lives of the people.  Economic policies are not ends in themselves, but means to an end!  The fiscal authorities also have a critical role to play in revamping the economy, but regrettably, the effectiveness of fiscal policy has been significantly weakened by corruption and pathetic institutional capacity,” said LCCI.

CBN Gov Lamido Sanusi

In same vein, analysts at the Financial Derivatives Company Limited, FDC,  also called on CBN to end its tight money supply policy in 2013 by allowing interest rate and exchange rate depreciate.

“In 2013, the CBN will have to moderate its stance to allow the interest rate to decline and exchange rate depreciate,” they said in the company’s monthly economic publication released recently.

Also, Mr Wale Oluwo, Managing Director, Investment Banking, BGL Securities, said “I believe CBN took a wrong decision by retaining the MPR at 12 per cent at a time when the general expectation amongst economists is for rates to start trending downwards, particularly when core inflation figures, as published by the Federal Bureau of Statistics, has been declining for the past four months.

The CBN appeared to have based its  decision on the  increase in headline and food inflation without giving consideration to the steady decline in core inflation.”

He noted that the decision by the CBN will stifle GDP growth and increase unemployment in the country, adding that general interest rate in the economy will also increase.

He observed that the private sector,  which is supposed to generate growth and employment will not have access to cheap funding to increase capacity utilisation and create more goods, services and jobs.

“The CBN appears not to understand the fundamentals of the Nigerian economy; they should have commenced reducing the MPR by 0.25 percent every quarter since March 2012. If indeed they know what they are doing, I expect them to start reducing the MPR from their first MPC meeting in January since the meeting of November is the last for this year.

Oluwo further sated that the policy will further depress the capital market as fund managers and banks will continue to invest in safe government instruments (Treasury Bills, Bonds etc) where they can make cheap double digit returns without taking any risks.

Accordingly, funds will not get to the private sector and their financial performance with continue to dwindle, further depressing the prices of their shares on the Exchange. Individuals and Households will also not have access to funds which will make the Nigerian economy to continue shrinking,” he said.

For David Adonri, Chief Executive Officer (CEO), Lambert Trust and Investment, “The implication of the retention of MPR at 12 percent for the capital market is that the fixed income market will continue to maintain its dominant position.

He added that prevailing high interest rate on bank borrowing and increasing public borrowing will continue to crowd out the real sector and the equities market.

Responding to the decision, FDC analysts said the apex bank is over relying on interest rate to curb inflation, and this is affecting economic growth.

Just last week, the Monetary Policy Committee (MPC) of the CBN in a bid to maintain effort to tighten money supply, decided to leave the MPR rate at 12 per cent, in spite of calls for a downward review of the benchmark interest rate.

They said, “The Monetary Policy Committee, as anticipated, left its benchmark interest rate unchanged at 12 percent during its last meeting for this year. The decision was based on inflationary risks and uncertainties surrounding the weak global economy. Other policy instruments such as the Cash Reserve Ratio and Net Open Position were left unchanged at 12 per cent and 1 per cent respectively.

“Nigeria’s annual inflation rate increased by 0.4 percent to 11.7 percent in October, primarily as a result of exceptional factors such as the flooding which resulted in an increase in food inflation to 11.1 percent. The impact of the flooding in 12 states of the country was immediate but was not as severe as expected.

Core inflation declined for the 4th consecutive month to 12.4 percent. This according to the MPC has created some uncertainty as to the appropriate policy stance to apply. The fact that leading economic indicators have remained positive for two months and the GDP growth figure for Q3 came in lower than the previous year at 6.48 percent, sends mixed signals on the direction of the Nigerian economy. In addition to this, the government is resolute in its pursuit for fiscal prudence as reiterated by the Federal Minister of Finance.

“All pointers are in favour of an end to the CBN’s tight monetary policy stance and the need to boost growth and lending to the real sector. The current contractionary policy stance has been in play since October 2011 when the MPR was raised by 275bps.

The sustainability of a contractionary stance and its stifling impact on growth and the economy justifies the need for a change in policy direction. Our view is that the overdependence on interest rates as a tool for adjustment is precarious”.

Also commenting on the retention of the MPR at 12 per cent, the Vetiva Capital Management Research unit said, “At 12.4 percent year-on-year (YoY) in October, core inflation is still elevated. Clearly, the MPC was not entirely impressed with the downtrend in core inflation, despite reaching the lowest in eight months.

Continuing, it said, “All Items less Farm Produce” components in the October inflation figures, somewhat mirrors our reasoning on the possible resurgence of demand side pressures. Like we stated in our November 18 Inflation notes, inflationary pressures on food prices are likely to rise from the lingering effects of the floods; nonetheless we expect the impact to fizzle out by the end of the first quarter in 2013. Having nursed all these concerns, we note that statistically, headline inflation should be in single digits in first quarter of 2012 and eventually average 10 percent owing to favourable base effects – this should offer some temporary comfort to the MPC.

“We however see two upside risks to inflation in 2013. First, is the pressure from imported food inflation as food commodity prices trend north (though we expect some of these impacts will be somewhat offset by a stable exchange rate). Second, is the probable reduction of fuel subsidies in 2013 – whilst we note that the 2013 budget makes “some” provision for financing this line item, the amount appropriated is unclear, as such, it may be safe to assume a portion of the subsidies may be cut. Nonetheless, we do not expect these factors to significantly derail the positive inflation outlook.”