The Central Bank of Nigeria (CBN) on Tuesday explained that the decision of its Monetary Policy Committee (MPC) to retain all monetary policy parameters unchanged was informed by the need to sustain the gains of the fragile recovery of the country’s economy from recession.
In the fourth quarter of 2020, the National Bureau of Statistics (NBS) reported that the country’s aggregate value of goods and services for the period, also known as the real gross domestic product (GDP) grew by about 0.11 percent (year-on-year), from -3.62 percent in the third quarter.
The Q4 2020 GDP performance, the NBS said, contrasted sharply when compared with the two previous negative growths of -3.62 percent in the third and -6.10 percent in the second quarter of the year.
Sustaining marginal recovery
Following the marginal recovery from the recession, the second in the last five years under the five years life-span of the current administration, the MPC during its first meeting for 2021 held in January decided to leave all-controlling monetary policy rates unchanged.
In its resolution during the meeting, the MPC retained the monetary policy rate (MPR), or lending rate for commercial banks at 11.5 percent, with the asymmetric corridor of +100/-700 basis points around the MPR, while the cash reserve ratio (CRR) was maintained at 27.5 percent and liquidity ratio at 30 percent.
The MPR is the controlling rate approved by the CBN for commercial banks’ lending activities for the period, while the CRR is the minimum cash deposit a commercial bank can hold as reserves in its account with the CBN.
At the end of its second meeting for the year in Abuja on Tuesday, the CBN governor, Godwin Emefiele said that given that the country’s economy just exited recession, the MPC considered that any decision to tighten or rein-in inflation at this time may reverse the fragile recovery and return the economy into recession.
Addressing reporters at the end of the meeting, Emefiele said the Committee was confronted with the dilemma either to focus on stimulating output, reining in inflation, or quickly moderate the restiveness among the people by curtailing growing unemployment.
Also, he said with Inflationary pressures continuing for the 18th-consecutive month, rising to 17.33 percent at end-February, from 16.47 percent in January, due to the spike in both the food and core indices, which rose to 21.79 and 12.38 percent in February, respectively, from 20.57 and 11.85 percent in January, there was need for caution.
“In the light of the foregoing, the consensus among MPC members was that, given that inflation is substantially a supply-side phenomenon, there is need to continue to focus on consolidation on the recovery process, by taking those actions that would continue to stimulate output growth, create employment, but at the same time have an eye on an effort to moderate the inflationary pressure; using the current administrative measures being adopted by the Bank in controlling monetary aggregates in the banking system,” the CBN governor said.
Monetary policy options
On whether to tighten, hold or loosen the policy parameters, Emefiele said the Committee felt that with inflation at a 3-year high and price stability the apex bank’s core mandate, a contractionary policy stance may be required to tame the rising trend.
The decision to tighten the rates, the Committee, noted, would hike the cost of capital and hamper investments required to create employment and continue to boost recovery.
On the other hand, loosening, the committee argued, would lower the rate and improve access to credit, drive investment, reduce unemployment and stimulate aggregate demand.
However, Emefiele said the Committee opted against loosening the rates as members felt such a decision would create excess liquidity, which would intensify demand pressure on the foreign exchange market, leading to further depreciation in the Naira.
Consequently, the consensus of the committee was to hold the parameters unchanged, as members were convinced this would encourage the CBN to continue to deploy its various intervention mechanisms to deploy liquidity into employment generation and output stimulating sectors to consolidate the country’s recovery process.
The meeting was held amid the uncertainty surrounding the efficacy of the COVID-19 vaccines to effectively subdue the new and existing variants of the virus, which may result in further restrictions capable of hampering the anticipated recovery in the global economy.
CBN intervention activities
Part of the apex bank’s intervention mechanisms included disbursement of funds under its various agricultural interventions towards improving food supply in the country, including ₦107.6 billion to 548,109 farmers cultivating 703,619 hectares of land between Q4 2020 and Q1 2021 to boost dry season output in support of agricultural value chain development.
As of end-February 2021, the CBN said about ₦1.487trillion was disbursed under the various agricultural programmes, including N686.59billion disbursed under the Commercial Agricultural Credit Scheme (CACS) and ₦601.75billion under the Anchor Borrowers Programmes (ABP) to 3,038,649 farmers to support food supply and dampen inflationary pressures.
Under the targeted credit facility, the CBN said about N218.16 billion was disbursed to 475,376 beneficiaries, of which 34 percent of beneficiaries were small and medium enterprises (SMEs).
Under Agri-Business/Small and Medium Enterprises Investment Scheme (AGSMEIS), the CBN governor said about N111.62billion was disbursed to 28,961 beneficiaries, 70 percent of which were in the agricultural sector.
Under the Creative Industry Financing Initiatives mainly targeted at youths, about N3.19 billion was disbursed to 341 beneficiaries, with 53 percent to the movie industry.
Under the National Mass Metering Programme, about N33.45billion was disbursed to nine electricity distribution companies (DISCOs) for the procurement of 605,852 meters, while N89.89billion was disbursed under Nigeria Electricity Market Stabilization Facility (NEMSF 2) to 11 DISCOs to improve the electricity supply industry in the country.
Another N94.34 billion was disbursed out of about N100 billion under the Health Care intervention Fund, with a commitment to expand the facility to 85 projects in the pharmaceutical industry, hospitals and State governments for both brown and greenfield projects.
The commitment is to expand pharmaceutical drug lines, acquire magnetic resonance imaging (MRI) and other equipment and upgrade laboratories and other hospital services.
Also, under the N1trillion Manufacturing Intervention Stimulus, Emefiele said about N803.36 billion has so far been disbursed to 228 projects across various sectors in agro-allied, mining, steel production and packaging industries, amongst others.