CBN Communiqué No. 124 of the MPC Meeting – May 20-21, 2019

Tuesday,May 21, 2019 06:30 PM / Central Bank of Nigeria / Header Image Credit: Youtube

Background

TheMonetary Policy Committee (MPC) met on the 20th and 21st of May 2019, amidstuncertainties in the global financial, economic and political environments. AllEleven (11) members of the Committee were present.

Global Economic Developments

TheCommittee reviewed developments in the global economy, noting with concern, thedeclining trend in global output growth, which commenced in the second half of2018. Accordingly, the International Monetary Fund downgraded global outputgrowth from 3.7 per cent in 2018 to 3.6 per cent in 2019 and further revised itdownwards to 3.3 per cent in 2019. The decrease in the global compositePurchasing Managers’ Index (PMI) in the last three months provides furtherfillip to this downgrade. The Committee noted that the weakening global outputgrowth continued amidst prevailing uncertainties from familiar headwindsincluding: the further escalation of trade tensions between the US and China;imposition of new rounds of sanctions on Iran; breakdown of BREXITnegotiations; a new wave of tension on the Korean Peninsula; vulnerabilities inmajor financial markets and rising public and private debt in some EmergingMarket and Developing Economies (EMDEs).

Despitethese uncertainties, inflation in the advanced economies remained muted andlargely below their 2.0 per cent long-run targets. As a result, most centralbanks in the advanced economies, including the US Fed, Bank of 2 England andthe European Central Bank, adopted a dovish monetary policy stance, which isexpected to remain in place in the near to medium term, as signs of weakness inthe global economy re-emerged. In the Emerging Market Developing Economies,however, developments were mixed, with inflation rising in some, but moderatingin others. In response, the financial markets witnessed the rebalancing ofportfolios from equities to fixed income securities, and some stock marketsposting losses. In the main, the Emerging Market Developing Economies areexpected to continue to benefit from the accommodative monetary policy stanceof the advanced economies through increased capital inflows.

Domestic Output Developments

Availableoutput data from the National Bureau of Statistics (NBS) showed that real GrossDomestic Product (GDP) grew by 2.01 per cent in the first quarter of 2019compared with 2.38 and 1.89 per cent in the previous and corresponding quartersof 2018, respectively. This was largely driven by the non-oil sector, whichgrew by 2.47 per cent in the first quarter of 2019 while the oil sectorcontracted by 2.40 per cent. Staff projections indicate real GDP growth of 2.34and 2.36 per cent in Q2 2019 and Q3 2019, respectively, including a reductionin the unemployment rate. The Monetary Policy Committee observed that actualoutput remains below potential, implying that the economy still had sufficientheadroom for non-inflationary growth. This is expected to be driven largely bysustained stability in the financial system; continued special interventions inAgriculture, manufacturing and SMEs sectors, by the Bank; sustained effort inimproving transport infrastructure to address distribution challenges; continuedexpansion of business activities as indicated by the PMI and increased supplyof foreign exchange to growth-stimulating sectors of the economy, among others.

TheCommittee noted the continued expansion of the Manufacturing andNon-Manufacturing Purchasing Managers’ Indices (PMI) for the 25th and 24thconsecutive months in April 2019 and broadly welcomed this positive

developmentin economic activities in Nigeria. The manufacturing PMI grew by 57.7 indexpoints compared with 57.4 index points in the previous month. Similarly, thenon-manufacturing PMI grew by 58.7 index points compared with 58.5 index pointsin March 2019. The growth in both measures of PMI were anchored by marginalincreases in production, employment level and new orders.

Developments in Money and Prices

TheCommittee noted the growth in broad money supply (M3) by 5.42 per cent in April2019 from the level at end-December 2018, annualized to 16.36 per cent, abovethe indicative benchmark rate of 14.47 per cent for 2019. This was largelydriven by the growth of 19.62 per cent in Net Domestic Assets (NDA). Incontrast, Net Foreign Assets (NFA) contracted by 5.83 per cent in April 2019relative to the level at end-December 2018. In spite of the significantunderperformance of M1 at -4.26 per cent annualised to -12.77 per cent, M2 grewby 1.85 per cent in April 2019, annualized to 5.54 per cent, which wassignificantly below the benchmark rate of 12.99 per cent for 2019. Thisdevelopment was largely due to the growth in time and savings deposits by 6.53per cent.

TheNet Domestic Credit (NDC) grew by 19.31 per cent in April 2019 from the levelat end-December 2018, annualized to 57.92 per cent, above its indicativebenchmark of 11.82 per cent. The growth in NDC was attributed to the significantincrease in credit to both government and the private sector by 64.44 and 9.64per cent, respectively, in April 2019, compared with end-December 2018. TheCommittee noted the developments in the monetary aggregates and enjoined theBank to initiate moves towards improving lending to the private sector andurged other intermediary institutions in the financial sector to support theseinitiatives by improving their credit delivery to boost output growth. TheCommittee noted the uptick in inflation as headline inflation (year-onyear)rose slightly to 11.37 per cent in April 2019 from 11.25 per cent in March 2019. The increase in headline inflation was drivenmainly by food inflation which rose by 13.70 per cent in April 2019 from 13.45per cent in March 2019. Core inflation, however, declined marginally to 9.28per cent in April from 9.46 per cent in March 2019. In April 2019,month-on-month headline, food and core inflation increased to 0.94, 1.14 and0.70 per cent from 0.79, 0.88 and 0.53 per cent in March 2019, respectively.The MPC noted that the recent uptick in inflationary pressure was seasonallydriven and anticipated.

Liquidityconditions in the banking system reflected the net impact of Open MarketOperations (OMO) auctions, maturing CBN Bills, statutory allocations to statesand local governments as well as interventions by the CBN in the foreignexchange market. Consequently, the monthly weighted average Inter-bank call andOpen Buy Back (OBB) rates increased to 13.98 and 16.15 per cent in April 2019from 10.80 and 12.17 per cent in March 2019, respectively. The daily unsecuredinterbank and the OBB rate, fluctuated within the standing facilities corridor,closing at 6.57 per cent and 5.55 per cent on May 10 and May 16, 2019,respectively, reflecting the reaction of the money market to the 50 basis pointreduction in the policy rate at the meeting of the MPC in March 2019.

TheCommittee observed the continued bearish trend in the equities market in spiteof the sustained capital inflows into the economy during the period underreview. The All-Share Index declined by 8.14 per cent to 28,871.83 index pointson May 17, 2019 from 31,430.50 index points as at end-December 2018, whilemarket capitalization grew by 8.53 per cent to N12.72 trillion on May 17, 2019from N11.72 trillion at end-December 2018. The recent growth in marketcapitalization reflected new listings in the market, prominent amongst whichis: MTN and Skyway Aviation Handling Company Plc and additional listing fromthe merger between Access Bank and Diamond Bank. The Committee welcomed thecontinued stability at both the Bureau-de-change (BDC) and the Investors’ andExporters’ (I&E) windows of the foreign exchange market, expressingoptimism in the recovery of crude oil prices due

tothe OPEC production ceiling and other geo-political issues affecting oilexports. The MPC also noted the steady accretion to external reserves, whichstood at US$45.42 billion as at May 16, 2019, an increase of 2.20 per cent fromUS$44.44 billion at end-April 2019.

The Overall Outlook and Risks

Theoverall medium term outlook for the global economy remains mixed and uncertainwith growing indications of persistent macroeconomic vulnerabilities, globalfinancial market fragilities, accommodative monetary policy, policyuncertainties and weakening global output. Data on the domestic economysuggests some fragility in output growth during the second quarter of 2019 withimproved outlook for the rest of the year. Accordingly, revised outputprojections indicate that the economy would grow by 2.1 per cent according tothe International Monetary Fund (IMF), 2.2 per cent by the World Bank and 2.38per cent by the CBN in 2019. This outlook is hinged on the following keyfactors: the effective implementation of the Economic Recovery and Growth Plan(ERGP); supportive monetary policy; enhanced flow of credit to the real sector;sustained stability of the exchange rate; and improved fiscal buffers; amongstothers. The Committee, thus, expects that monetary policy would focus onimproving access to credit, reducing unemployment and stimulating economicgrowth.

Committee’s Considerations

TheCommittee took into consideration the continued slowdown in the global economyand the persisting uncertainties, including the ongoing trade wars between theUS and its major trade partners, financial fragilities in a number ofcountries, the debt-constrained fiscal operations of most EMDEs, including

Nigeria,and the volatility in the oil market. The Committee, therefore, enjoined theFederal government to urgently build fiscal buffers through a more realisticbenchmark oil price for the Federal Budget. The MPC noted the 2.01 per centgrowth in real GDP during the first quarter of 2019 compared with 1.89 per centin the corresponding quarter of 2018. Although output growth in the firstquarter was slower than 2.38 per cent recorded in the preceding quarter, itemphasized that actual output remains well below the economy’s long-runpotential, indicating the existence of spare capacity for non-inflationarygrowth in the economy, an opportunity which should be explored throughincreased credit delivery to the private sector.

Notimpressed by the flow of credit from the Deposit Money Banks (DMBs) to theprivate sector, the MPC called on the CBN management to urgently put in placemodalities to promote Consumer, and Mortgage lending in the Nigerian economy,noting that doing this will greatly and positively impact on the flow of creditand ultimately result in output growth.

TheMPC called for a close monitoring of the uptick in inflationary pressures inApril 2019, driven largely by food shortages during the Easter season, thecommencement of the planting season as well as persisting security challengesin some of the food producing regions of the country. The Committee, urged therelevant authorities to strengthen efforts to address the security challengesand improve food production. It encouraged financial intermediatinginstitutions to ensure that loans to the agricultural sector were channelledeffectively to end users. The MPC welcomed the improvement in financialsoundness indicators (FSIs), but noted that although the Non-Performing Loan(NPL) ratio moderated, it remained above the prudential benchmark.Consequently, the Committee considered and recommended to the CBN, a proposalto develop a comprehensive administrative, legal and regulatory framework tospeed upmthe recovery of delinquent loan facilities of the banking system;involving structured engagement with relevant stakeholders and authorities, inorder to mitigate credit risk and ultimately open up the credit delivery spacein the Nigerian economy.

TheCommittee extended warm felicitations in an expression of gratitude to thePresident and Commander in Chief of the Armed Forces of the Federal Republic ofNigeria, President Muhammadu Buhari, and the Senate of the Federal Republic,respectively, for the reappointment and prompt confirmation of the Governor ofthe Central Bank of Nigeria, Godwin I. Emefiele, for a second 5-year term inoffice. In particular, the Committee noted that the reappointment was inrecognition of the contributions of the CBN to maintaining macroeconomicstability and it would engender confidence and build policy credibility anddeliver stability to the Nigerian financial markets.

Inview of the abundant opportunities available to banks for unfettered access togovernment securities, which tends to crowd out private sector lending, theCommittee called on the Bank to provide a mechanism for limiting DMBs access togovernment securities so as to redirect bank’s lending focus to the privatesector, noting that this would spur the much needed growth in the economy. Itcalled on the Government to use all machinery at its disposal to increase taxrevenue to enable the government fund its budget adequately.

The Committee’s Decision

Theglobal and domestic developments have conditioned an environment of lowoptimism in the macroeconomic and financial sector space, forcing central banksto return to accommodative monetary policy.

Asin the past, the Committee considered the options of whether to be moreaccommodative, tighten or hold it position. The Committee felt that althoughthe slight inflation uptick should result in tightening, it nevertheless feltthat doing this will limit the ability of DMBs to increase credit at this time,given the need to support or redirect the focus of DMBs to new credit insupport of consumer, mortgage and other priority sectors of the economy,including, SMEs, agriculture and manufacturing.

Italso felt that given the fragile state of the economy, increasing the cost ofcredit would further diminish investment flow and impact negatively on outputgrowth. As regards loosening, some members felt that it was desirable toaggressively stimulate growth, restart the capital market activities andincrease lending at lower rates; which would ultimately stimulate domesticaggregate demand. Those against loosening felt that given that there was amarginal increase in headline inflation for April 2019, there is need torestrain from loosening in order not to exacerbate inflationary pressures.

Theyalso felt the economy would experience liquidity surfeit and withoutcorresponding increase in real sector output, inflationary pressures could beelevated; resulting in likely exchange rate pressures. As for members whofavoured a hold position, maintaining monetary policy rate at its present levelwas essential for better understanding of the momentum of growth beforedetermining any possible modifications. They also felt that retaining thecurrent policy stance provides an avenue for evaluating the impact of the Bank’sintervention policies to support lending to the priority sectors of theeconomy.

Consequently,the MPC decided against the backdrop of these developments by a vote of 9members out of 11, to hold all parameters of monetary policy constant. Twomembers voted, however, to reduce the monetary policy rate by 25 basis points.

Insummary, the MPC voted to:

I. Retain the MPR at 13.50 per cent;

II. Retain the asymmetric corridor of +200/-500 basispoints around the MPR;

III. Retain the CRR at 22.5 per cent; and

IV. Retain the Liquidity Ratio at 30 per cent.

Thank you.

GodwinI. Emefiele

Governor,Central Bank of Nigeria

21stMay, 2019