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Emefiele’s personal statement at the 131st MPC Meeting of July 20, 2020

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At the last Monetary Policy Committee (MPC) meeting held on July 20, 2020, the Chairman of the committee and Governor of the Central Bank of Nigeria (CBN) appraised the current local and global economic realities, and led other members of the committee at the end of the 131 MPC meeting to decide key monetary indices.

Below are Emefiele’s words at the meeting:

Global macroeconomic stability was significantly impaired in the first half of 2020 due to the widespread covid-19 pandemic, leading to a high degree of uncertainty in the short-term outlook. Though many countries have begun to ease lockdown measures and relax social-distancing restrictions, the protracted adverse effects on households (in terms of income losses) and on businesses (with withered cashflows and weakened activities) are expected to acutely undermine productivity, delay recovery, and diminish prospects in most economies. Accordingly, growth forecasts are being downgraded while global output stabilisation is deferred. IMF estimate of 2020 global output contraction worsened to -4.9 percent from the -3.0 percent previously forecasted. This downgrade affected all countries and regions, with growth lowered by about 2.0 percentage points in both advanced economies and EMDEs; though positive global growth is projected to re-emerge in 2021.

Headwind from the covid-19 pandemic also debilitated business activities and weakened sentiments in the domestic economy while dampening near-term growth prospects. Combined with the concomitant softening of crude oil prices, this caused elevated FX market pressure, constricted fiscal space, destabilised household and business incomes, and decelerated economic activities. Accordingly, 2020 GDP growth may fall below the 1.9 percent recorded in 2020q1 with a genuine possibility of contractions in the remaining quarters, if not well-managed. Recent realities indicate the need for coordinated efforts among policymaking authorities to ensure a quick rebound of the economy and strengthen short-term outlook. Deteriorating prospects, due to global headwinds and local imbalances, provide opportunity for us to reposition the economy, prop domestic productivity, and strengthen demand.

…the CBN has increased the scale and scope of development financing and will intensify efforts at resolving underlying structural deficiencies

With the non-oil sector as the critical base of the economy, complete and accelerated diversification of the economy is imperative now, more than ever. In this regard, and in view of the current covid-induced adverse shocks, the CBN has increased the scale and scope of development financing and will intensify efforts at resolving underlying structural deficiencies. I note the CBN’s liquidity assistance and targeted support to incentivize domestic production, bolster supply and stimulate the Nigerian economy. The N50 billion Household and SME facility and the N100 billion healthcare intervention (both aimed at neutralising the adverse effects of the pervading shocks) have been extensively disbursed. Likewise, the N1 trillion manufacturing and agriculture intervention to spur the rebound of the economy through high impact productive sectors are being disbursed purposefully.

On domestic prices, the rising inflationary trend which began in September 2019 due to structural factors was aggravated by the pandemic-derived supply shocks. From 12.4 percent in May 2020, year-on-year headline inflation rose to about 12.6 percent in June 2020, reflecting increases in both food and core components. This is partly attributable to the lingering effects of disruptions and challenges around agricultural belts, and infrastructural complications (aggravated by covid-19 setbacks to interstate distribution network). The spillover effects of these adverse impulses are expected to persist in the short-term and abet inflation inertia for much of 2020.

Liquidity outturn in June 2020 was sub-par as monetary expansion fell below the indicative benchmark while money market rates rose. Weighted average interbank call and open-buy-back rates increased from 5.2 and 5.8 percent, respectively, in May 2020 to 5.8 and 11.3 percent in June. Annualised at 3.3 percent, expansion of broad money stock (M3) fell below the targeted 13.1 percent. This expansion fundamentally reflected the 13.2 percent annualised growth in private sector credits.

I note that both inflation and exchange rate expectations are elevated in the short-term while growth outlook is weakened

Data indicate that total gross credit grew by N3.3 trillion since May 2019 to N18.9 trillion in June 2020 showing increased lending to manufacturing, consumer credit, general commerce, ICT, and agriculture. This illustrates the continued potency of CBN’s LDR policy. Even with an increasingly fragile global macro-financial condition and rising domestic credit, the Nigerian banking sector remained largely resilient with NPLs ratio continuing to moderate from 11.2 percent in May 2019 to 6.4 percent in June 2020. Yet, I note the imperative of sustained credit flows to the private sector, especially at this critical time when the productive machinery of the economy needs liquidity support to prop domestic supply. To help local firms cushion the consequences of the pandemic, the CBN is working with banks to restructure lending and grant increased forbearance to businesses which require such to survive. The CBN will continue its drive to de-risk lending and increase targeted intervention to strategic high impact private sector ventures through effective collaboration of all stakeholders, especially on the backdrop of the imminent economic downturn.

In my consideration, I acknowledge that the objective of price and exchange rate stability remain central without losing sight of the need for output stabilisation. I note that both inflation and exchange rate expectations are elevated in the short-term while growth outlook is weakened. Economic contraction is almost certain in the 2020q2 and slowdown likely throughout 2020. This holds undesirable ramifications for poverty, unemployment and potential output. I resolutely favour measures to forestall a recession or at least curtail its lifespan and severity. Yet, it is important to ensure that measures to support growth do not undermine price stability.

I note that tightening at this time, to curb inflation, will not only negate our last decision to ease, but will further constrict domestic productivity and avoidably plunge the economy into a deeper and more painful contraction. Conversely, a further easing of policy stance will evidently support growth but will worsen inflation inertia. Besides, further rate cuts will elicit negative real MPR which could destabilise investment decisions and potentially lead to indeterminate domestic equilibrium. I am of the view that since impulses from the last policy adjustment are still filtering-through the system, it is imperative to be cautious with our decisions.

With rising inflation expectations and weak growth outlook, my inclination is to maintain the current stance of monetary policy and hold all parameters. This will allow a sustained permeation of recent policy actions -including the various counter-covid interventions- and avoid undue policy shocks to the system. In my view, an adjustment could complicate the impulse-response traverse of recent changes and culminate to indeterminate outcomes. Maintaining the status quo could, however, balance the long-run objectives of price stability and output stabilisation without disrupting the path of equilibrium.

Therefore, I vote to:

  • Retain the MPR at 12.5 percent;
  • Retain the asymmetric corridor at +200/-500 basis points;
  • Retain the CRR at 27.5 percent; and
  • Retain liquidity ratio at 30.0 percent.

 

GODWIN I. EMEFIELE, CON
Governor
July 2020

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