The decision of the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) to ease rates last week, thereby ensuring cheaper funds has divided analysts on likely impact it will have on the struggling economy.
Those on one side of the divide believe that the move is a good one that will help the fiscal stand of government in borrowing money for supplementary budget. According to that group, it will be less expensive for government to fuel spending.
On the other hand, the hardliners are doubtful of the immediate availability of foreign exchange with the easing on rates.
Despite a plunge in oil prices, CBN governor, Godwin Emefiele, 54, has resisted devaluing the currency this year, instead, ensuring foreign-exchange restrictions on imports to limit demand, a policy that’s been publicly endorsed by President Muhammadu Buhari and his deputy, Yemi Osinbajo.
Lower interest rates will help support Buhari’s administration as it ramps up borrowing to fund the budget and compensate for a drop in oil revenue in Africa’s biggest economy.
“The central bank has been talking about the harmony between the monetary and fiscal policy so it only makes sense for them to ease on interest rates so as to allow the federal government to borrow much cheaper than previously,” Adewale Okunrinboye, a research analyst at Asset & Resource Management Co., told journalists last week.
Buhari asked lawmakers last week to approve a supplementary budget for this year that seeks to raise spending by 10 per cent and increase borrowing by an additional N1.6 trillion ($8 billion).
“We expect the CBN to remain on its unconventional path,” JF Ruhashyankiko, an economist at Goldman Sachs in London, said in an e-mailed note to clients. “Any further downward pressure on oil prices is likely to strengthen, rather than weaken, the case for such an unconventional path.”
Analysts from Aftinvest agreed that the move will help the real sector growth, saying the move will surely bring about increase in credit to private sector.
“In the short term, we do not expect the ease in monetary policy to immediately translate to increased lending to the real sector, especially given the high risk in the retail/SME loans segment.
They recalled that prior to the MPC decision; there has been a regulatory maximum on the remunerable Standing Deposit Facility (SDF) placement by each bank at N7.5 billion.
“The MPC’s decision to complement this by a further 5.0 per cent cut in Cash Reserve Ratio (CRR) will add approximately N771.4 billion to liquidity level based on October data from the CBN. Although the communiqué issued by the CBN added a caveat that the additional liquidity would be released on a condition that the funds will be channelled to the real sector”, said Afrinvest.
“Structural bottlenecks, weak quality of infrastructure and the current slowdown in economic activities constitute high risk to real sector lending, which would require more adjustments by the fiscal authorities to de-risk the sector”, they said.
However, with the restriction on all cheap income lines, Afrinvest expects a significant medium term expansion in Credit to the private sector (currently at N19.1tn in October 2015 and up 6.8 per cent year-on-year (Y-o-Y) by Deposit Money Banks (DMBs). This will necessitate banks to improve on their risk management framework to identify opportunities and earn a relatively higher margin (compared to the cheap rates in the fixed income market) and buoy assets turnover and shareholders’ return.
Allen Ojo, analyst in Lagos said, what is now left to be done is for the Federal Government to ensure it complements the monetary decision by providing the enabling environment for the real sector growth and allay banks’ fears.
According to him, this is when both hands cooperate to ensure the work for the whole body (Nigeria).
Ogode Fidelis, a business man hit back at those who want the authorities to leave the Nigerian economy in the hands of hawks who are only interested in exploiting the economy to their gains in the name of a liberal economy that accommodates every suggestion.
Ogode argued that the western economies do defend certain sectors of their economies the same way the central bank is doing in Nigeria. He particularly said, the United States until now subsidises it’s agriculture sector, yet nobody has seen anything wrong with it and countries in Asia protects their auto mobile industries by placing very high duties on imported vehicles to dissuade importation and nobody is complaining. He wonders why they are frowning on Nigeria for protecting its economy as well.
But for Razia Khan, Africa analyst with Standard Chartered Bank, London, there will be no foreign exchange to import inputs for the real sector as well. She noted that the Central Bank of Nigeria (CBN) has announced a range of easing measures at its November Monetary Policy Committee meeting.
She said that, while the 500 basis points (bps) cut in the Cash Reserve Ratio (CRR) to 20 per cent was not unexpected, the decision to cut the Monetary Policy Rate (MPR) by 200bps to 11 per cent was a surprise.
“More significantly, the corridor around the MPR was also reset to an asymmetric corridor of +200bps/-700bps around the policy rate”, saw said.
She said, however, the nature of the easing – with a cut to both the MPR and the CRR – may have implications for future policy decisions.
“First, a cut in the MPR just ahead of any liberalisation of Nigeria’s foreign exchange regime, with the attendant risk of further naira weakness would have been unusual.
“The inference from today’s policy choice is that there are no plans for imminent change to the fixed foreign exchange regime currently in place”, she said.
Second, the move to an asymmetric corridor around the monetary policy rate formalises the de facto easing that had already been in place since the CBN reduced its Open Market Operations (OMOs) in July.
The new corridor, together with the lower MPR, resets the rate on the CBN’s standing lending facility at 13 per cent (15 per cent prior) and on the standing deposit facility to four per cent (11 per cent previously).
“In fact, interbank rates have trended outside of this range in recent weeks, reflecting excess liquidity in the Nigerian market. Unless new OMOs are resumed, this is likely to continue to be the case.
“The easing measures are aimed at boosting Nigeria’s real economy. How successful they are will depend on how much other bottlenecks, currently constraining real-sector activity, can be overcome. The availability of foreign exchange for imported inputs will be closely monitored”, she surmised.
Afrinvest analtsts cued in, saying the CBN’s action to buoy aggregate demand side of the economy by increasing liquidity levels and reducing market rates will have a feedback effect on price and exchange stability in the short to medium term.
“As the CBN has remained resolute in its resolve to keep administrative measures in place to reduce depletion in the foreign exchange reserves and create a contrived stability in interbank foreign exchange rates, the effects would be felt in the parallel market for foreign exchange where rates would further depreciate.”, said Afrinvest.
Source : Leadership