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CBN spots odds against government’s multi-trillion naira economic interventions

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CBN Communique

The Central Bank of Nigeria (CBN) has highlighted factors capable of tempering the expected impact of efforts put in place by the federal government to revive the economy after the disruption caused by Coronavirus pandemic and other global headwinds.

The apex bank stated this in its Monetary, credit, foreign trade and exchange policy guidelines for fiscal years 2020/2021’ just released.

Although the CBN stated that various measures so far advanced by the government to save the economy are commendable, there are headwinds that may undermine these expectations.

According to the CBN, these include increased Federal Government deficits, which may narrow fiscal space and crowd-out private investment; underutilization in the labour market due to weakened aggregate demand; and a build-up in inflationary pressures resulting from the increase in Value Added Tax (VAT) and border protection.

Specifically, it said, “headline inflation is expected to hover around 13.97 and 14.15 per cent at end-December 2020, owing to supply shocks which may likely happen due to decline in economic activities globally as a result of COVID-19 pandemic that started in China in Q4:2019.”

Other factors in this regard include demand shocks emanating from domestic and international lockdowns; food supply shocks associated with non-tariff border protection; and effect of the implementation of the new budget and minimum wage.

Sequel to the COVID-19 pandemic, the viability of the external sector in 2020 is expected to deteriorate, given the present worsening current account balance and depletion of external reserves driven, largely, by decelerating export receipts, particularly oil, CBN noted.

“Specifically, the degree of external reserves accumulation is expected to decelerate, as outflows are expected to outweigh inflows.

“As a result, external reserves are expected to lie between $29.9 billion and US$34.3 billion at end-December 2020 (predicated on current declining oil price between US$20 and US$40),” the report read.

This development, in addition to exchange market pressures, emanating from speculative activities in the BDC and I & E segments of foreign exchange market, is expected to exert pressure on the naira exchange rate.

In addition, expectation of increased risk aversion behaviour by investors may also negatively impact on capital inflow, as they flee to safe-haven assets.

Also, it is projected that the fiscal space may be limited in 2020, given escalated vulnerability, as a result of sharp decline in oil prices, occasioned by weak global oil demand and price wars between Russia and Saudi Arabia.

It is believed that this development undermines the implementation of Government’s capital programmes, impede public investment on infrastructural development and could culminate to higher debt profile and attendant debt service obligations of the Government.

CBN said: “If the COVID-19 pandemic effects became severe, Government may increase fiscal policy responses to ameliorate the impact on the populace,” it stated.

Amid all these negative factors, the CBN however forecast that the outlook for the Nigerian economy is mildly optimistic, as its growth trajectory is expected to slow-down in 2020 on account of the tepid global demand, resulting from the COVID-19 pandemic, depressed global aggregate demand and supply, and the oil price war which has resulted in supply glut and decline in crude oil prices.

In this regard, output growth is expected to lie between -3.1, -1.0 and 0.24 per cent in 2020, predicated on low oil price between $10 pb, $20 pb and $30 pb.

It noted that to ameliorate the impact of slow economic activities arising from the COVID19 pandemic, fiscal and monetary policy responses were put in place to neutralize the adverse effects on growth-inducing sectors of the economy.

“On the real sector, the measures include the credit interventions in the health sector (N100bn), Micro, Small and Medium Enterprises (MSMEs) (N50bn) and manufacturing sector (N1 trillion).

“These initiatives are expected to encourage and expand domestic production, improve productivity as well as generate employment opportunities,” it said.

Additionally, the apex bank noted in the report that growth in consumer credit by deposit money banks (DMBs), propelled by the CBN policy to raise the Loan-to-Deposit Ratio (LDR) from 60.0 per cent to 65.0 per cent and Global Standing Instruction (GSI) clause, would improve credit delivery to households and MSMEs as well as moderate unemployment and sustain the growth trajectory.

It added that the financial sector is expected to remain resilient in 2020, on account of the accommodative monetary policy stance, continued efforts by the Bank towards ensuring financial system stability and credit expansion policies.

Furthermore, the renewed policies aimed at enhancing the payments system and cash-less initiative are expected to sustain efficiency, safety and confidence in the Nigerian payments system.

Against this background, policymakers are expected to nurture the fragile phase of the economy with caution and employ appropriate policy instruments to tackle the likely adverse effects that may emanate as a result of the COVID-19 pandemic.

The fiscal space should be optimally utilized, along with the implementation of structural policies to boost growth and welfare over the medium-term.

More importantly, the CBN stressed that harmony between fiscal and monetary policy remain crucial to sustain and strengthen growth in the future.

“Finally, structural reforms, particularly executing the much-delayed power sector recovery plan, implementing the financial inclusion strategy, and addressing infrastructure gaps remain essential to boosting inclusive growth.

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