Business & Economy - News - March 22, 2022

CBN laments impact of fuel crisis on inflation, as MPC retains benchmark policy rates

By Bassey Udo

With geo-political tensions mounting, and the impact of the Russia-Ukraine on the global economy, the Central Bank of Nigeria on Monday lamented the effect of the current fuel crisis on inflation, as its Monetary Policy Committee opted to retain controlling benchmark monetary policy parameters for the ninth consecutive time since September 2020.

At the end of its meeting on Monday, the Chairman of the MPC and CBN governor, Godwin Emefiele, said the committee resolved unanimously to retain the monetary policy rate at 11.5 percent, with asymmetric corridor of +100/-700 basis points around the MPR; cash reserve rate (CRR) at 27.5 percent, and Liquidity Ratio at 30 percent.

The MPR is also known as the cost of lending by banks to its customers,while CRR is the least cash level the banks must have as its reserve with the apex bank.

At the peak of the COVID-19 pandemic in 2020, the MPC decided to adjust the MPR by 100 basis points, from 12.5 percent to 11.5 percent.

The decision was to ensure that businesses, especially micro, small and medium enterprises (MSMEs), have access to liquidity at affordable rates to grow and manage the impact of the pandemic.

However, on Monday Emefiele noted the lingering impact of the pandemic on the country’s economy,
amidst heightened geopolitical tensions and persisting global
macroeconomic uncertainties.

The National Bureau of Statistics (NBS) in its latest report observed a marginal decline in the country’s real Gross Domestic Product (GDP).

The report, which highlighted the aggregate value of goods and services in the economy over a period, showed GDP dropped from 4.03 percent in the third quarter of 2021 and 0.11 per cent in the corresponding period of 2020, to 3.98 percent (year-on-year) in the fourth quarter of 2021.

Although the performance remained in the positive territory, the fifth consecutive quarter of real output expansion, since the exit of the economy from recession in 2020, the NBS attributed this to the growth in the non-oil sector, from 10.99 percent in Q3 2021 to 12.36 percent in Q4 2021.

The Committee expressed concern over the increase in headline inflation (year-on-year) from 15.60 percent last January to 15.70 percent in February 2022.

The Committee blamed the rise in the core inflation to rising energy prices as a result of the current scarcity of Premium Motor Spirit (PMS), popularly called petrol, increased cost of Automotive Gas Oil (AGO), and hike in electricity tariff.

Due to the subsisting fuel supply disruption, which began with the importation of adulterated petrol from Belgium early this month, petrol price has skyrocketed in most parts of the country, along with the price of diesel and aviation fuel.

While petrol has been selling for an average N200 and N250 per litre in some parts of the country, from the official ceiling price of N165 per litre, diesel and aviation fuel attracted prices ranging from N650 to N700 per litre.

The impact of the crisis in fuel supply has since reflected in the cost of all goods and services, as transportation costs rise exponentially, amid the crisis in electricity supply, which peaked last week with the crash of the national grid, cutting power supply to about 1,100 megawatts.

Regardless, the MPC said it remained optimistic in the performance of the economy as a result of the CBN’s sustained interventions in various sectors, apart from its fiscal support to rein in legacy structural constraints.

It urged the fiscal authorities to take steps to redress the current challenges hindering the injection of fiscal and monetary stimuli to the real economy.

Despite the continued resilience of the banking system, with further moderation of the ratio of non-performing loans (NPLs) from 4.90 percent in December 2021 to 4.84 percent in February 2022, the MPC noted Liquidity Ratio (LR) above its prudential limit at 43.5 per cent in February 2022, while Capital Adequacy Ratio (CAR) moderated slightly from 14.5 percent in December 2021 to 14.4 percent in February 2022.

The declining level of global trade, especially export of crude oil, the MPC noted, impacted the country’s external reserves, with a 1.95 percent drop in the accretion, from $40.21 billion on January 25, 2022 to $39.44 billion as of March 17, 2022.

Noting the impact of the global price increase in petroleum and other products, which it said resulted in the importation of inflation into the country’s economy, the MPC advised the government to take decisive steps to contain the situation affecting the cost of living and purchasing power of Nigerians.

Of concern to the Committee has been the high rate of crude oil theft in recent time, and its impact on government revenue and accretion to the national reserves.

Urging the CBN to continue deploying its monetary policy mandate to intervene in the economy, the MPC called for increased collaboration with the government to rein in inflation and ensure sustained growth.

Also, the MPC called on the CBN to continue to deploy funds to output-stimulating and employment-generating sectors of the economy.

On its decision, the MPC said it was concerned that the global situation on rising prices may
continue in the near term, but urgent actions by both the monetary and fiscal authorities to halt rising inflation, may begin to moderate.

Also, the MPC said not only would a decision to tighten monetary policy reverse the improvement so far recorded in credit expansion, it was of the view that it would not necessarily tame the inflation on a sustainable basis.

Again, further cut to the policy rates, the MPC said, would trigger excessive liquidity flow, further fuel inflationary and foreign exchange demand pressures.

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