Thursday,August 13 / 02:34 PM /Central Bank of Nigeria / Header Image Credit: Channels TV

ADAMU, EDWARD LAMETEK

The 274th meeting of the Monetary Policy Committee(MPC) held against the backdrop of sustained global economic and financialuncertainties. The economic setbacks arising from the COVID-19 pandemic havecontinued to linger, leaving both global aggregate demand and aggregate supplywell below normal levels. At the end of Q2 2020, several economies were alreadyin the contractionary phase of the business cycle. In June, the IMF furtherdowngraded its global growth outlook by an extra 1.9 percentage points,implying a projected decline in world output of about 4.9 per cent in 2020.

In the same vein, both the World Bank and theOrganization for Economic Cooperation and Development (OECD) see global outputslowing by about 5.5 and 6.0 per cent, respectively, in 2020. Global tradecontinues to be a major casualty of the COVID-19 pandemic and has been forecastto decline by as much as 20 per cent in 2020, which would be higher thanobserved during World War II. From accusations of espionage and concealment ofCOVID-19 to Hong Kong interference, the two global trade leaders, China and theUnited States of America (USA), have remained embroiled in geo-politicalcontroversies, putting at risk a sizeable share of global trade. Confronted bythe decline in activity and a weak medium-term outlook, most countries havecontinued the gradual easing of lockdowns, while also implementing variousforms of economic stimulus. The size of stimulus continues to grow with somecountries doing as much as 17 per cent of GDP.

Meanwhile, global inflation has remained muted in theadvanced economies, but rising in some emerging markets and developingeconomies (EMDEs). This divide has been blamed on exchange rate depreciationdriven mainly by external capital retreat and low commodity prices. Yet,monetary policy continues to be generally accommodative across the advanced andEMDEs, aimed at limiting the damage to output and employment caused by thePandemic. Eleven (11) out of thirteen (13) central banks routinely monitored bythe CBN had reduced their policy rates at least once since March 2020.

The remaining two, Bank of Japan (BoJ) and theEuropean Central Bank (ECB), already had zero or almost zero rates prior toMarch 2020. Aligning the global trends with the domestic context increases mypersuasion about the merit of prioritizing support for economic activity in theshort- to medium-term. There is no doubt that the lingering externalvulnerabilities would continue to pressure economic activity in Nigeria andmost EMDEs especially through their impact on commodity prices and exportdemand. It is not surprising, therefore, that the challenges facing economicgrowth locally have remained active.

Low oil prices and the hangover effect of thelockdowns have meant a rather slow resumption of activity. The situation isclearly expressed by the outturn of key indices of domestic economic activityin the second quarter of 2020. Manufacturing and non-Manufacturing PurchasingManager's Indices (PMIs) stood at 41.1 and 35.7 index points in June 2020,respectively, indicating contraction in both cases. In fact, most analystsbelieve that the economy contracted in Q2 2020. There are, nevertheless,reasons to expect improvement in the second half of the year. First, as fromJuly, we expect the impact of the economic stimulus by the Federal Governmentand the CBN to start showing - in fact, the Bank's in-house business outlooksurvey has so suggested. Second, after hitting the floor during the lockdown,economic activity could pick-up much faster than currently estimated tocompensate for loses in Q2, particularly as credit to the real sector continuesto grow.

Technically, the next 2 to 3 months should witnessbusinesses racing to meet pent-up demand in many sectors of the economy. Thethird basis is seasonality - the period, August - October, traditionallywitnesses substantial harvest of farm produce, which comes with increase incommerce and related activities. Other than low economic activity, the domesticeconomy faces other important vulnerabilities to which monetary policy mustrespond at this time. First, consumer price pressures have remained. In June2020, all measures of inflation (headline, food and core) increased. Headlineinflation increased to 12.56 per cent from 12.40 per cent in May 2020. Foodinflation increased marginally to 15.18 per cent from 15.04 per cent in May,while core inflation inched up to 10.13 per cent from 10.12 per cent.

Since June 2019, inflationary pressures have beenbuilding particularly in the food segment, owing to persistent conflict in themajor food-producing regions of North-East and North-Central geo-politicalzones of the country and other supply factors like the partial closure of thecountry’s land borders. The COVID-19 supply disruptions aggravated the supplyshortfall, stoking more consumer price pressures in the domestic economy asfrom April 2020. The increase in headline inflation in June 2020, like in theprevious month, was largely driven by food inflation. Staff forecasts indicatethat headline inflation could maintain an upward trajectory up to August,driven largely by food prices, but with earliest moderation coming in September2020. Inflation risks in the economy are generally stemming from food supplybottlenecks, exchange rate pressure, energy cost and system liquidity.

Second, the country's Balance of Payments (BOP)remained in deficit in Q1 2020 but with some improvement in the currentaccounts where deficit narrowed to about US$4.9 billion from US$6.9 billion inQ4 2019. Weak external position, which means pressure on the naira exchangerate, has been aggravated by low oil prices and slowing global economy. Thenaira exchange rate depreciated at the I&E window by about 6.4 per cent,year-to-date, mainly due to the rate adjustment at the interbank window.Following a higher rate of depreciation at the BDC segment, the premium betweenthe I&E and BDC rates had widen lately. The depreciation pressure on thenaira exchange rate combined with upward trending inflation creates complexityfor monetary policy at a time when economic activity requires a boost.

This complexity calls for a cautious approach that isunderpinned by instrument diversity. The Bank's interventions in the realsector have remained robust and well-tailored to deliver speed in employmentelastic sectors including agriculture, manufacturing and solid minerals. It isgratifying to note that the economy has received and continues to receivesubstantially higher amounts of credit compared with periods of similar crisisin the past. Between June 2019 and June 2020, total credit rose by N3.46trillion (about 22 per cent), of which new credit in June 2020 alone accountedfor N773 billion, up from N412.7 billion in May 2020.

The number of new credits (recipients) similarly roseby about 42,000 to 93,578 from 51,700 in May. The huge credit output in theeconomy was underpinned by improved resilience of the banking system. As atend-Q2, most financial soundness indicators (FSIs) performed well relative to regulatorybenchmarks. In spite of macroeconomic challenges, banking industry tier onecapital accounted for 87.22 per cent of the total qualifying capital atend-June 2020; capital adequacy ratio (CAR) stood at 14.96 per cent withnon-performing loans (NPLs) ratio of 6.4 per cent and provision ratio of 118.9per cent. The surge in new credit and its major destinations includingagriculture and manufacturing in recent months, obviously lend credence to theefficacy of extant real sector support (policy) initiatives of the Bank - theminimum loan-to-deposit ratio (LDR), the differentiated cash reservesrequirement (DCRR) and the development finance interventions.

Having signaled an easy direction for monetary policyin support of economic activity at the May 2020 meeting of the Monetary PolicyCommittee, I felt persuaded to vote for a hold on all policy parameters at theJuly 2020 meeting. I did so with the understanding that the Bank's routinesterilization actions will be sustained to keep system liquidity as close aspossible to its optimal path. I also saw a compelling ground to wait and seemore of the impact of the previous 100 basis points policy rate cut and thestimulus packages most of which will continue to run through the second half ofthe year.

ADENIKINJU, ADEOLAFESTUS

International Economic Development

COVID-19 pandemic continues to exert a cloudy anduncertain effect on the global economy. The possibility of a second wave ofinfections from the virus, given the recent spikes in some countries is castinga doubt on expected 'V' shape recovery of the global economy. While oil pricescontinue to be strong and equity markets rebound in many advanced and emergingeconomies, the rise in unemployment and weak economic growth for Q2 2020 inmany countries are major challenges. Aggregate demand and aggregate supplyremain weak and volatile. In short, the immediate outlook of the global economyis still tenuous and volatile.

The trade tensions between the USA and China, and thelack of clear guidance on the nature of exit agreement between the UK and EU atthe end of 2020 will also affect global recovery. World trade is alreadyprojected to contract by -11.5% in 2020. The recovery in 2021 will beinfluenced by how existing geopolitical issues are resolved and the emergenceof an effective vaccine for the coronavirus. Central banks in most countriescontinue to implement quantitative easing to support economic growth, restoremarket confidence and boost aggregate demand.

Domestic Economic Development

The presentation by the Bank's Staff on the BankingSystem Stability shows that the banking system remains resilient, strong, andcoping well under the current challenging environment. The Financial SoundnessIndicators (FSI) remain solid. The Capital Adequacy Ratio (CAR), andNon-Performing Loans (NPLs) ratio are trending in the right direction. The Loanto Deposit Ratio (LDR) policy has boosted aggregate credit to the economywithout impacting negatively on the NPLs ratio. Measures of bank performancelike assets, deposits and credits to the economy also continue on a northwardtrajectory. Banking credit grew, albeit marginally, between May 2020 and June2020. The increase in aggregate credit to the economy in spite of the pandemicsuggests that the economy is responding well to current policy measures. Stresstests on the banking industry also confirms a resilient sector that is able tosurvive the effects of COVID-19 pandemic and volatility in the oil market.

The Economic Report showed the domestic economicperformance since the last MPC Meeting in May, 2020. Although, the real GDPgrowth for Q2 2020 was not available as at the time of the July Meeting,however, the Q1 2020 real GDP growth rate of 1.87% was quite impressive againstthe background of Covid-19 challenges and the volatility in the oil market.Staff estimates shows that the annual real GDP growth for 2020 would liebetween -1.31% and -1.65%. This is significantly higher than the World Bank,IMF and even the National Bureau of Statistics (NBS) projections for Nigeriafor 2020.

Headline inflation rose to 12.56% year-on-year in June2020 from 12.40% in May 2020. Food inflation and core inflation also rose overthe same period. The growth in composite prices were driven by monetary andstructural factors. The outlook for inflation for medium term remains elevateddue to constraints in global and local supply chains arising from the effectsof the COVID-19 pandemic as well as Nigeria's idiosyncratic factors. Totalbanks credit to the economy increased marginally from N46,600.82 billion inApril 2020 to N46,710.68 billion in May 2020. Equity market indicators, likemarket capitalization increased by 5.83% from N12.0 trillion at end-April 2020to N12.7 trillion on July 17, 2020.

The foreign exchange market continues to experiencesignificant pressures as the exchange rate of the naira to the US dollar rosefrom N443.89/US$ in May 2020 to N447.71/US$ in June 2020 at the BDC window, andfrom N386.17/US$ to N386.39/US$ at the Investors' and Exporters' (I&E)window. The depreciation in both markets are driven by both fundamental factorsand speculative activities of economic agents. External reserves decreased fromUS$36.49 billion in May 2020 to US$35.77 billion by end-June 2020, also currentaccount balance as a share of GDP stood at -4.25% in Q1 2020.

The fiscal operations of the Federal Government fromJanuary to May 2020 indicated that revenues underperformed with negativevariance of -48.8% and expenditure by -4.89%. Rising share of debt service ingovernment expenditure is worrisome and would expectedly worsen due to theimpact of COVID-19 pandemic and the downturn in the global oil market.

Decision

In my view we may have passed the most serious periodof the pandemic, though significant headwinds remain. However, recentresurgence of the virus in several countries implies that sustained globalrecovery will very much dependent on the discovery and wide application ofeffective vaccines against the virus. Rising inflation limits the policyoptions available to address the current headwinds in the economy. It alsolimits the extent to which Nigeria can retain and attract foreign capital asrising inflation erodes the real interest gap between Nigeria and advancedeconomies. The high fiscal deficit and the negative accretion to foreignreserves are challenges the economy has to overcome in the medium to long term.

However, there are positive developments in theeconomy. The price of oil stands at over US$40 per barrel. This is above thebenchmark price in the revised 2020 budget. The economy and economic agents areresponding positively to the current intervention programmes of the CentralBank and the Government. Regulatory measures to protect the financial sectorare working well and should be monitored continuously. The Central Bank shouldtop up the Target Credit Facility (TCF) of N50 billion for households and SMEsto meet increasing demand for the Fund.

The economy is slowly recovering from the effects oflockdown. It is also responding well to the various supportive programmes.Current and planned intervention programmes will help to expand aggregatesupply and mitigate inflationary pulses. Government must use the challengespresented by Covid-19 to deliberately support sectors that will be critical tothe Nigerian economy of the future. We need to allow existing measures to workthemselves through the economy before considering further policy changes.

Decision

On the basis of above considerations, I cast my voteas follow:

i)        Maintain MPR at 12.5%

ii)      Retain Asymmetric Corridoraround the MPR at +200/-500 bases points

iii)    Retain CRR at 27.5%

iv)     Maintain Liquidity ratioat 30%.

AHMAD, AISHAH N.

At the July 2020 Monetary Policy Committee meeting, Ivoted to reduce the MPR by 50 basis points from 12.5 per cent to 12.0 per cent;and maintain other parameters at existing levels - the asymmetric corridor at+200/-500 basis points; CRR at 27.5 per cent; and liquidity ratio at 30.0 percent. Data presented at the meeting, which highlighted rising global anddomestic uncertainties due to COVID-19, provided justification for furtherloosening of the policy stance.

Coronavirus pandemic: uncertain but pervasive impacton the global economy. Whilst its effect continues to unfold, COVID-19 hasclearly had more negative implications on global economic activities in thefirst half of 2020 than earlier anticipated, with significant contraction inoutput, sharp slump in aggregate demand, plummeting trade amidst escalatingpublic and corporate debts as evidenced. These adverse developments are partlyreflected in the IMF's revised global growth projection of 4.9 per centcontraction in 2020 in its June 2020 World Economic Outlook update, 1.9percentage points lower than the April 2020 projections; solidifying theCOVID-19-induced economic shock as the worst experienced in several decades.

Although significant fiscal and monetary stimulus, andgradual reopening of economies has helped drive some modest recovery,(unemployment rate in the US dropped to 11.1 per cent in June 2020 comparedwith 13.3 per cent in the previous month; China's output grewquarter-on-quarter by 11.5 per cent in Q2 2020, compared with 9.8 per centcontraction in Q1 2020), reports of rising COVID-19 infections in severalcountries, raises fears that a second wave of infections would further hampereconomic activities over the medium-term. As at July 20, 2020, the World HealthOrganization reported total COVID-19 infections of over 14.5 million, includingover 607 thousand deaths, up from 5.5 million infections and 350 thousanddeaths as at May 28, 2020.

Domestic economic momentum requires further support toforestall contraction. While the Q2 2020 GDP numbers are being expected,leading indicators of output growth signal significant decline in economicactivity. For instance, the Manufacturing and non-Manufacturing PurchasingManagers' Indices were below the 50 index-points benchmark with ManufacturingPMI declining to 41.1 index points in June 2020 from 42.4 index points in May2020, largely attributed to slower growth in production levels, new domesticorders and employment. Staff forecast of a 1.03 per cent contraction in outputfor Q2 2020, on the back of continued adverse impacts of the pandemic oneconomic activity, presses home the urgency to build economic resilience andforestall a recession.

Although headline inflation (year-on-year) increasedfor the 10th consecutive month, rising to 12.56 percent in June 2020, the rateof acceleration is relatively slow, and hopefully may be reaching its peak asthe food supply gap - a key driver of inflation - is being contained viainterventions by the CBN and other complementary fiscal measures designed toboost domestic food production. Monetary induced inflation also appears to beunder control as money market rates remain fairly stable, with growth in broadmoney supply at 1.64 per cent in June 2020, well below the indicative benchmarkof 11.74 per cent for 2020.

Slight recovery in crude oil prices from $34.8/b to$43/b between May 28 and July 18, 2020, provide a little bright spot, althoughit remains low and volatile, with negative implications for exchange ratestability and fiscal consolidation. It will be important going forward, toimprove supply and liquidity in the foreign exchange markets to preserve pricestability. Fiscal initiatives such as the Economic Sustainability Plan andNational Gold Purchase Program are steps in the right direction.

Thankfully, the financial system has remainedresilient albeit with regulatory support. Staff reports presented at themeeting show marked increase in the number of loans restructured; as at July20, 2020, 22 banks submitted requests to restructure 35,639 loans of businessesimpacted by the pandemic, representing 41.92 per cent of the total industryloan portfolio. This has partly reflected in improved industry risk profile, asNon-Performing Loans ratio declined from 6.6 per cent in April 2020 to 6.4 percent in June 2020. Net interest margin remains robust despite lower interestincome, perhaps due to much lower industry interest expense, as market depositrates continue to decline.

The Loan-to-Deposit Ratio (LDR), Global StandingInstruction, streamlining of access to Open Market Operations securities andother complementary measures have been strong tail winds which havestrengthened intermediation - via increased lending to the key sectors such asmanufacturing, agriculture and consumer markets (gross credit grew by anadditional N300billion from N18.6 trillion to N18.9 trillion between end-Apriland end-June 2020, respectively) and lower market lending rates, which haveinsulated the financial system from the worst impact of the pandemic. Theseefforts are being supported by ongoing CBN interventions - the N50 billionhousehold and SME facility, out of which N49.195 billion has been disbursed toover 92,000 beneficiaries, N100 billion healthcare and N1.0 trillionmanufacturing and agricultural interventions alongside significantinterventions in other growth enhancing sectors, with remarkable implementationsuccess.

Sustained credit to the real economy - particularlyfor SMEs and households - will be crucial to economic recovery, therefore maintainingbanking industry liquidity will be paramount. Thankfully, healthy industry cashreserve levels provide adequate ammunition in this regard. Support for theseimportant sectors, responsible for about 48 per cent of GDP (according to NBS),will be crucial to boost aggregate demand and bridge the existing negativeoutput gap, which will also help temper inflation.

Overall, the key challenge remains preserving thepositive industry performance in the light of spillover effects from thepandemic. Given uncertainty about the length and depth of the crisis,particularly without a vaccine and worries about a second wave of infections,the Bank must remain vigilant for any changes in the macroeconomic environmentthat pose a threat to resilience and financial stability.

Given moderated inflation expectations, and in view ofheightened global and domestic uncertainties, the Committee has room to focuson output growth in addition to its primary mandate of price stability, in themedium-term. In that regard, the Committee advised the Bank to retain the LDRand Differentiated Cash Reserve Requirement policies, while sustaininginterventions in critical sectors of the economy, given their relativesuccesses, to help boost domestic output and support the economicsustainability agenda of government.

A further rate cut in my view, relatively early as theeconomic impact of the pandemic unfolds, will complement ongoing efforts tostimulate the economy, providing further impetus for recovery to mitigate arecession in 2020.

ASOGWA, ROBERT CHIKWENDU

Background:

At this July MPC meeting, the global economic outlookremains uncertain and split between early recovery from the COVID-19 pandemicand the possibility of a second wave of the pandemic in the third quarter of2020. Albeit this uncertainty, the focus is on recovery, but this may still bevery slow as the lingering effects of the pandemic will severely limit growthand surely, many countries are expected to plunge into recession in 2020. Themost significant contractions may be in the developing economies as countriesthat rely extensively on commodity exports and tourism are bound to sufferdisproportionately. Generally, the global outlook may face considerablechallenges in the long term especially with new fears of another wave ofCOVID-19 and the uncertainty about when an effective vaccine will be readilyavailable. For policymakers, the urgent task is how to ensure that currentfiscal and monetary policy responses succeed in supporting consumer andinvestor confidence which can lead to a speedy normalization of both thecommodity and financial markets.

For Nigeria, fiscal balances seem deteriorating, butrecent marginal uptick in oil prices provides some hope. Inflation has beensticky upwards, but reflect more of temporary supply shortages and structuralbottlenecks. The several support policies initiated by the Central Bank topromote lending especially for distressed firms and households are particularlytimely and may help in mitigating the supply and demand shocks, but need sometricky balancing. Future monetary policy actions should, therefore, seek todeepen the recovery support policies along with dedicated monitoring to ensurequick results, and also not to worsen the domestic inflationary outlook orjeopardise the future stability of the financial sector.

The Global Economic Outlook and theRecovery from the Effects of COVID-19

In the first and second quarters of 2020, the COVID-19pandemic caused unprecedented declines in economic outcomes across the globe.CBN staff report shows that output growth in the US by the first quarter of2020 contracted by -5.0 percent compared to a growth of 2.1 percent in thepreceding quarter. In the Euro Area, growth also contracted by -3.6 percent inthe first quarter of 2020 compared to 0.1 percent in the previous quarter.There were similar first quarter contractions in the UK and in Japan. Recentdowngrades to economic growth forecasts in most countries across the globereflect the lingering adverse effects of COVID-19 on supply chain disruptions,tightening of financial conditions, private sector uncertainty, drops in tradeand commodity prices, as well as, falling household disposable incomes.Overall, global growth in 2020 is now projected at -4.9 percent, which is afurther 1.9 percentage points downgrade from earlier forecasts.

For the advanced economies, the output growth droppedfrom an earlier forecast of -6.1 percent to -8.0 percent in 2020 and the worsthit economies according to CBN staff report included Italy, Spain, France, UK,USA, Germany and Japan. For the advanced economies, GDP is expected to reboundby 4.1 percent in 2021. There have also been significant downward revisions fordeveloping economies reflecting the strong spread of the pandemic in placessuch as Latin America and the lockdown effects in India. In Brazil and Mexico,the GDP declines is now forecast at 9.0-10.0 percent while for India it is alsoexpected to fall by more than 4.0 percent in 2020. The collapse in commodityprices coupled with the slowdown in tourism has affected several otherdeveloping economies especially in Africa. On inflation, there have beendiverging trends across countries of the globe. Several middle and low incomecountries including Argentina, Iran, South Sudan, Venezuela, Ghana have beenexperiencing rising consumer prices since the onset of COVID-19 pandemic. Bycontrast, consumer prices have declined in the US, UK, China and other highincome countries.

For those countries experiencing price declines duringthis COVID-19 pandemic, the dynamics reflects the plunge in internationalenergy prices and the relatively stable prices of food items. In the low andmiddle income countries, increased food prices mostly arising from supplydisruptions due to COVID-19 have been the key factor driving the rising inflationrates. In few countries however, the rising price of imports and themonetization of fiscal deficits may also have impacted inflation during thisperiod. A variety of far reaching fiscal and monetary support policies havebeen deployed in many countries across the globe in response to the economicand social shocks from the pandemic. In the US for instance, the government hasso far provided fiscal support approaching US$3trillion including loans tofirms, States and Local governments as well as direct transfers to households.Besides, the US Federal Reserve cut policy rates to near zero with severalother nonconventional monetary accommodation measures including large scalepurchases of government debt, mortgage backed obligations and corporate bonds oflower levels of government.

In the Euro Area, several governments have initiatedsignificant fiscal support programmes to complement the European Central Bank'soffer of low interest loans to banks and its assets purchase programme. InGermany for instance, the government provided fiscal stimulus worth of 4.5percent of GDP in addition to an envelope of over 20 percent of GDP in loanguarantees for the corporate sector, while Italy introduced a fiscal stimulusplan in excess of 4 percent of GDP. In China, the fiscal and monetary stimulusworth over 2.8 percent of GDP included several liquidity injections, tax reliefand special bond issuances. A large number of countries in Africa have alsoimplemented several fiscal and monetary support measures in addition to cuts ininterest rate as a way of cushioning the effects of COVID-19 pandemic ongrowth. In Egypt, in addition to the Central Bank's slashing of policy rates by300 basis points on March 16, 2020, the government is also implementing afiscal stimulus package of approximately 1.8 percent of GDP which includes anextended social transfer schemes including monthly grants to irregular workersin the worst hit sectors such as tourism. In South Africa, CBN staff reportshowed that the government temporarily expanded support to the unemployedthrough transfers to vulnerable households. In many countries, these initialfiscal and monetary policy responses to the COVID-19 crisis have beensuccessful at least in protecting worker's jobs and ensuring that firms haveaccess to liquidity. There are however suggestions that once economicactivities begin to normalize, there will be additional need to prudentlywithdraw the large scale fiscal and monetary stimulus provided during thecrisis without endangering the recovery process. This will at least ensure thatfuture stability of the financial systems across the globe is not threatened.

The Domestic Economic Outlook:

It is clear that the COVID-19 pandemic caused declinesin economic activity in Q2 2020 compared to the first quarter of 2020,eventhough official GDP figures are yet to be released at the time of the JulyMPC meeting. The contraction of both the manufacturing and non-manufacturingPMIs between April and June 2020 showed that production levels and businessactivities have remained low since the crisis. There are three key downsiderisks which have generally characterized Nigeria's domestic economic outlooksince the COVID-19 crisis. First, fiscal deficits have been widening as revenuedeclined because of the pandemic. Second, inflation rates have been sticky onthe downwards side as supply disruptions affect prices of food andnon-alcoholic beverages. Third, tightening balance of payments have beenthreatening the stock of foreign reserves thus creating pressures on exchangerates. On the fiscal deficit, the depressed oil export earnings amid theCOVID-19 pandemic has weighed in heavily on the fiscal revenue for 2020.

Generation of non-oil revenue is also facingconsiderable challenges in 2020 because of the low level of domestic economicactivities even with the recent increases in the rate of VAT from 5.0 percentto 7.5 percent before the COVID-19 pandemic. Government's recent efforts havebeen to marginally reduce the expected recurrent expenditures in 2020, whilstincreasing borrowing so as to maintain current capital spending. There arehowever concerns that increased dependence on borrowing with oil prices stillat low levels will see the already elevated debt servicing costs soar in thecoming years. On the inflation rate which has consistently increased month-onmonth even before the COVID-19 outbreak, a key concern is the effect of aprolonged regime of negative real interest rates on the economy especially asthe recovery process evolves.

In the coming months, we expect modest recoveryespecially as oil prices pick up and the effect of government's fiscal stimulusand various Central Bank's support measures shore up consumer demand and firms' capacity to invest. This recovery will, however, remain fragile given the highuncertainty of the pandemic and the growing possibilities of a second and eventhird wave of outbreaks. On the banking sector, the outlook is similar to theposition at the last MPC meeting in May 2020 as the balance sheets of mostbanks remain strong with marginal increases in the key profitability indicators(ROE and ROA) in June 2020. CBN staff report also show monthly successiveincreases in the banking industry's deposit, credit and overall assets size,while the Non-Performing Loans ratio declined between April and June 2020. As Isuggested in my last MPC statement of May 2020, it is necessary to have standbymacro-prudential support policies which will be ideal to maintain bankingsector resilience at this crisis period whilst promoting further lending bybanks to support the economic recovery process.

Decision:

The outlook of the Nigerian economy remains splitbetween gradual recovery from the third quarters of 2020 onwards if thepandemic stabilizes, and a delay in economic recovery up to 2022 if a second orsuccessive pandemic waves occur. The reality, however, is that countries withstronger fiscal and monetary policy support will have smaller permanent GDPlosses than for those where policy support has been limited or ineffective. Fornow, the initial monetary policy response in Nigeria has been quite strong.Besides, cutting policy rates in May 2020, the loan restructuring forbearancegranted to banks, as well as, the targeted credit intervention for healthcare,manufacturing, creative industry, SMEs and households will be key for areasonably strong bounce in the third and fourth quarters of 2020. Thechallenge is to ensure that these facilities are disbursed in time and areeffective in accelerating consumer demand as well as firms' survival andcapacity to expand which will guarantee early economic recovery.

My preference is to allow the effects of the recentpolicy rate cut to gain traction, whilst sustaining the ongoing Central Bankcredit intervention activities for some time, because removing the support tooearly could also stop the recovery process in its tracks. I thus voted to: 

• Retain the MPR to 12.5 %
• Retain the CRR at 27.5%
• Retain the Asymmetric Corridor at +200/-500 basispoints
• Retain the Liquidity Ratio at 30.0%.

ISA-DUTSE, MAHMOUD

1. Introduction

The earlier expectation that the Covid-19 pandemicwould be contained by end-June 2020 has faded following the continuing battleto arrest the spread of the virus in many countries. Moreover, the fear of asecond wave of infection only serves to aggravate the problem. This scenariohas significantly slowed down the pace of global economic recovery as businessconfidence wanes. On this account, the International Monetary Fund (IMF)recently downgraded its growth forecast for the second time in three months tounderscore the unabating uncertainties in the world economy. Given theinterconnectedness of economies around the globe, Nigeria will continue to reelfrom the effects of the global pandemic, particularly as policy headroom getstighter. Therefore, it becomes necessary for the authorities to intensifyeffort aimed at addressing security challenges and other headwinds constrainingthe country's growth and development.

2. External Economic Conditions

The global economy is expected to shrink further in2020 due to the unrelenting pandemic and slower than expected pace ofre-opening of economies. Thus, the IMF projected that global output would nowcontract by -4.9% in 2020 - a downgrade of 1.9 percentage points from theforecast of -3.0% in April. The revised forecasts cut across all regions of theworld. In particular, growth in the advanced economies is forecast to contractby as much as -8.0% in 2020, while emerging market and developing economies(EMDEs) are expected to witness a -3.0% contraction in output. Sub-SaharanAfrica is expected to witness a "nose-dive" with growth of -3.2%.

Broadly, global inflation is projected to deceleratein both the advanced economies and EMDEs on account of the persisting demandand supply shocks. However, mild inflationary pressures have continued on anupward trajectory in Nigeria due largely to endemic structural factors thatconstrain domestic production. Taking into cognizance the production cuts byOPEC+ members, the drop in US crude inventories and the gradual opening ofeconomies from long periods of lockdown, crude oil price is projected to hoveraround US$40/barrel for the rest of 2020. Although price recovery is sluggish,yet the current trend seems to provide some assurance that the NigerianGovernment's fiscal policy as contained in the revised 2020 budget will beimplementable given the oil benchmark of US$27pb.

The stabilization of oil prices at low levels hasserious consequences for portfolio flows, external reserves and foreignexchange rate management. The IMF (June 2020) observes that portfolio flowsinto emerging markets have recovered after the record outflows in the firstquarter for countries with stronger credit ratings. Thus, it becomes imperativeto strengthen effort at improving the investment climate in Nigeria. Majorfinancial markets around the world have commenced an upward trend on the backof gradually rising economic activities. However, the subtle fear of a secondwave of pandemic may constrain faster recovery of markets as the downside risksto full economic activities linger. In Nigeria, a similar trend is evident asboth the All Share Index (ASI) and Market Capitalization increased by 5.50% and5.85%, respectively, between April 30 and July 17 2020, but are yet to fullyclimb back to pre-crisis level.

3. Domestic Economic Conditions

Although the growth data for Q2 2020 is still beingawaited from the National Bureau of Statistics (NBS), in-house projections bythe CBN indicate that real GDP is expected to contract by -1.03% in Q2 2020 whichtranslates to a reduction of 2.9 percentage points when compared to the actualgrowth rate of 1.87% obtained in Q1 2020. However, the annual real GDPpredictions from multiple sources are grimmer for 2020. The World Bank and IMFproject that the Nigerian economy will contract by -3.0% and -5.4%,respectively, in 2020, while CBN forecast suggests a possible contraction notexceeding a magnitude of -1.65% in 2020.

Moreover, the World Bank avers that the pandemic maythrow as many as five million Nigerians into poverty. Therefore, the goal ofgrowth with equity should be pursued relentlessly by both the fiscal andmonetary authorities to scale down the projected negative impact of thepandemic on the Nigerian economy. The continuing uptick in the general pricelevel has resulted in a negative real interest rate as headline inflation,year-on-year, stood at 12.56% in June 2020 compared with 12.40% in thepreceding month. On a month-on-month basis, headline inflation also rose to1.21% from 1.17% during the review period.

Between May and June 2020, both food and coreinflation (year-on-year) rose from 15.04% and 10.12%, to 15.18% and 10.13%,respectively but on a month-on-month basis, core inflation declined, while foodinflation inched up. The monthon-month decline in core inflation points to thefact that Nigeria's inflationary challenge is more of a structural phenomenonthan monetary. A closer analysis shows that the key contributor to annualheadline inflation is the food and nonalcoholic beverages component. Inparticular, there is need for more investment in the domestic production ofwheat, rice, milk products and fishery resources to douse the momentum ofimported inflation. Consequently, a major imperative is the creation of asecured environment to boost agricultural production.

The forbearance measures deployed by the regulatoryauthority have promoted confidence and stability in the Nigerian banking systemas the risk of short-term losses has been curtailed through the restructuringof loan terms and conditions in response to Covid-19 pandemic. At the sametime, new credit continues to find its way into businesses and households. Thisscenario should not only be sustained but further proactive measures should bedesigned to facilitate continued smooth operations in this critical period ofseemingly unavoidable recession may be Nigeria's worst since the 1980s.

4. Voting Decision

A tightening policy option may dampen inflationarypressures, promote portfolio flows and reserve accretions but it may alsoconstrain credit extension and worsen the pandemic - induced slump in output. Aloosening stance of monetary policy on the other hand may be consideredappropriate in view of the current recessionary quagmire confronting thecountry. However, the economy is already in a loosening mode given the recentpolicy rate cut in May 2020. Moreover, the huge monetary and fiscal stimulusbeing pumped into the economy has increased liquidity. Therefore, it isreasonable to maintain a policy status quo to allow enough time for recentinitiatives to permeate the economic system. In view of the foregoing, I votedto hold all policy parameters as follows: • MPR at 12.50% per annum • Theasymmetric corridor at +200/-500 basis points around the MPR • Liquidity ratioat 30.0% per annum CRR at 27.5% per annum.

OBADAN, MIKE I.

Introduction

With the coronavirus pandemic not showing signs ofearly containment in most countries, the global economy has continued toexhibit uncertainties and vulnerabilities. In the United States which boasts ofthe largest economy in the world, a second wave of covid-19 infections has beenraising great concerns leading to threats by a number of states to re-lockdowntheir economies. The same scenario is playing out in several other countrieswhich had re-opened their economies rather pre-maturely. Generally, the patternin some countries has been lockdown of economic activities, easing of lockdown,fresh wave of infections and lockdown/threats of return to lockdown due tospikes in COVID19 infections. These create uncertainties and continue to haveserious implications for recovery of the global economy and individualeconomies. For Nigeria, in particular, whose economy is not diversified andcontinues to rely precariously on crude oil for domestic revenue and foreignexchange earnings, the implications of a weak global economy remain highlyworrisome.

Global Developments

Against the backdrop of poor growth performance ofmost economies in the first quarter of 2020, there are doubts about globaleconomic growth and trade prospects. In the first quarter, most advancedeconomies contracted and could go into recession in the second quarter. Againstexpectations, the COVID-19 pandemic has not been contained in a satisfactoryway and the development and availability of a vaccine considered as thepossible cure appears not to be insight. Consequently, the IMF has downgradedits 2020 growth forecast for the world economy from -3.0 percent in April, 2020to -4.9 percent in June. The output forecast for the advanced economies hasalso been downgraded from - 6.1 percent to -8.0 percent in 2020. Indeed, themajor international organisations - IMF, OECD, World Bank - and nationalregional central banks have forecast negative growth for the world majoradvanced and Emerging Market Developing Economies (EMDEs) except China in 2020.The global economy and most national economies had been forecast to growstrongly in 2021, for example, the global economy by 5.4 percent. But this isno longer certain as covid-19 seems not to be in a hurry to go away. Likeglobal growth, global trade has continued to perform poorly due tointernational trade and travel restrictions, weak global aggregate demand,lockdown of economic activities, notable supply chain disruptions, amongothers. In the first quarter of 2020, global trade contracted by 3.9 percent.In 2020, international organisations - World Trade Organisation, UNCTAD, IMF,World Bank and OECD - have projected global trade to decline by between 11.0and 20.0 percent. Weak growth and trade increase poverty and impact negativelyon citizens' welfare. The oil market has continued to experience uncertaintiesand volatility amidst concerns over a second wave of the covid-19 pandemic.

It remains vulnerable to several shocks - supply,demand, economic lockdowns, etc. The impact of the pandemic and disagreementbetween Russia and Saudi Arabia on oil supply was very pronounced.Consequently, the average monthly oil price declined steadily from US$66.7 perbarrel at end-January 2020 to US$32.3 per barrel at end-March 2020 and furtherto US$14.3 per barrel at end-April 2020. Thereafter, oil prices witnessed slowrecovery following agreements on oil production cuts by OPEC+ countries andgradual easing of lockdowns by most countries. At end-May 2020, prices improvedto US$27.9 per barrel and was US$44.7 per barrel on July 17th, 2020.

Although the recent rebound is encouraging,uncertainties remain on the future direction of oil prices. In Nigeria, thevolatile nature of oil prices will continue to have implications for thecountry's macroeconomic aggregates: domestic revenue, foreign exchangeearnings, exchange rate development, price formation, capital inflows, externalreserves, balance of payments position, etc. Besides, the impact of continuedlockdown of major economies and restrictions on travel and trade will continueto be felt by the Nigerian economy through: short-supply of essential imports;rise in inflation through high import prices and exchange rate depreciation;and impact of continued uncertainties and volatility of the oil market on macroeconomicstability. Also, developments in the global financial markets are not helpfulto the Nigerian economy. For example, the volatilities in those markets amidlockdown of economic activities has resulted in dwindling net capital flows toNigeria. And as global sovereign and corporate debt is forecast to rise in2020, for both advanced and emerging market and developing economies, Nigeriamay face the challenge of servicing external debt due to low accretion toexternal reserves and exchange rate depreciation.

The major advanced countries have respondedappropriately to the impact of COVID-19 with robust fiscal and monetarystimulus packages. Large-scale fiscal and monetary injections have beenimplemented to stimulate recovery of output growth and/or mitigate recession inindividual economies and the global economy. With central banks of severaladvanced economies having moved into the zero-lower bound with respect to theirpolicy rates, they have resorted to increased use of unconventional monetary policymeasures, especially quantitative easing, to inject liquidity directly intotheir economies. This vindicates the stance of the Central Bank of Nigeria inits use of unconventional monetary measures in support of fiscal policy toaddress the challenges of growth and development in the country.

Developments In The Nigerian Economy

The Nigerian economy has continued to feel verystrongly the adverse impact of COVID-19 because of its heavy inter-dependencewith the global economy, undiversified economy, and rather precariousdependence on crude oil earnings from exports. But the impact on food securityis moderated by the Government and CBN's successful interventions in the areaof food production. With international restrictions on trade in an era of economiclockdowns, the story could have been different. However, the aggregate economicgrowth position remains weak.

The oil sector contribution to real GDP growth issignificant: 5.6 percent compared to 1.55 percent for non-oil GDP in the firstquarter of 2020. Growth in the second quarter may be worse than the 1.87percent recorded in the first quarter, while a contraction is likely in thethird quarter due to; lockdown/partial lockdown of economic activities as thenumber of COVID-19 cases maintains an upward trend in the country, low oilprices and earnings. However, the containment of the pandemic and effectiveimplementation of the COVID-19 response packages of Government, CBN and privatesector-led initiatives could limit the extent of possible output contractionand/or avert a recession.

Emerging stagflation. The country appears to have returned to a stagflationary era withsharp reduction/contraction of economic activities/shrinking growth and risinginflation. In June 2020, all measures of inflation (headline, food and core)increased, moving headline inflation further away from the implicit targetcorridor of 6.0 - 9.0 per cent. Headline inflation (year-on-year) increased to12.56 per cent in June 2020 from 12.40 per cent in May 2020 maintaining a trendwhich has been on for about ten months. Inflation has continued to inch updespite weakening aggregate demand and rising unemployment due to bothstructural and monetary factors. Normally, stagflation creates a policy dilemmawhich would be addressed with monetary policy focusing on price stability,while fiscal policy addresses the growth challenge.

However, the fiscal space is very limited to addressthe growth objective alone. Hence, while monetary policy may remain relativelytight, unconventional monetary measures should continue to support fiscalpolicy. Increased production of output/supply by the sectors supported shouldmoderate the inflationary effects from the monetary injections. In the externalsector, vulnerabilities have heightened while the key variables havedeteriorated in the COVID-19 environment of a health shock and oil price shock:weak trade and balance of payments position, limited accretion to externalreserves, capital flows reversal and external debt build-up. Without containmentof the coronavirus the prospects of these aggregates improving do not seem tobe bright. It is not all bad news at this point in time. The financial sectorhas cheering news suggesting resilience. The financial soundness indicators asat July showed improvements: non-performing loans ratio, capital adequacyratio, return on earnings and assets, and ratio of operating costs to income.Also, bank deposits, assets and gross credit improved in terms of upward trendand growth.

There is a drastic change in the composition ofbanking assets in favour of loans and advances as opposed to safe governmentsecurities which had elicited strong concerns hitherto. This, combined with thepriority sectors of manufacturing, agriculture, oil and gas attracting a significantproportion of the increase in credit, indicates that CBN's policy ofLoan-to-Deposit ratio is working. There is need to sustain the effectiveimplementation of this and related policies by the CBN. Fiscal operations ofGovernment. The fiscal operations have come under much more pressure under theCOVID-19 environment. With declining revenues and absence of fiscal buffers,fiscal deficits and public debts have continued to rise. Federation AccountAllocating Committee (FAAC) allocations to the three tiers of government havereduced significantly since early in the year due to the challenges in theworld oil market.

The Federal Government fiscal operations, as at May2020, recorded a deficit of N2.4 trillion, while the projected fiscal deficitin the revised Federal Government budget is over N5.0 trillion. Nigeria'spublic debt stock as at March 31, 2020 stood at N28,628.49 billion withexternal debt representing 34.89 per cent, while the Federal Government'sprojected debt service is about 50.0 percent of expected revenue. The publicdebt build-up poses a significant threat to debt sustainability. Now, twothings are clear. First, in the present environment of weakened economicactivities and provision of tax reliefs by the Government to SMEs to bolstereconomic activities, the space for enhanced non-oil revenue is limited.

However, one area of reform that the government needsto look into seriously relates to remittances from the operating surpluses ofgovernment departments and agencies which at present are underestimated by theagencies. The government should initiate actions to amend the FiscalResponsibility Act (FRA) 2007 to provide for an effective method of determiningremittances by MDAs to the Consolidated Revenue Fund (CRF). To this end, onesuggestion is to amend Section 22(1) and (2) of the FRA to require MinistriesDepartments and Agencies (MDAs) to deposit at least 25 percent of their revenueinto the CRF instead of 80 percent of their operating surplus which theyarbitrarily determine. This will improve availability of funds for financinggovernment activities and reduce fiscal deficits and massive borrowings.Secondly, the reforms to reduce fiscal deficits must especially be on publicexpenditure. This is one key driver of the high cost of governance whichstakeholders have continued to decry. The issue of inefficient spending andhigh cost of governance needs to be frontally addressed by the government.

The fiscal and monetary stimuluspackages. The array of interventions and measures of both thefiscal authority and the CBN to contain the coronavirus pandemic, stimulateeconomic recovery/avert recession, improve livelihoods and mitigate the adverseeffects of the pandemic are very encouraging under the circumstance of seriousfinancial resource constraint. Notable among Government’s measures is theN500.00 billion Intervention Fund to upgrade Federal/states healthcarefacilities and finance a Special Public Works Programme, and the N2.3 trillionEconomic Sustainability Plan which covers virtually all the sectors includingpayroll support to SMEs. Also of note is the tax relief to SMEs. On the part ofthe CBN, besides the extant interventions on which more reliefs have beenprovided and regulatory forbearance to banks to restructure facilities acrosssectors, it has an array of new interventions. These include: the N50.00billion Targeted Credit Facility for COVID-19 affected households and SMEs,N100.00 billion intervention to the healthcare sector, and N1.0 trillion loanfacility to boost manufacturing and production across critical sectors. It isalso leading a N15 trillion Infrastructure Company (InfraCo) Project forbuilding critical infrastructure.

Implementation of most of these policies, measures andinterventions have begun. In the case of the N50.0 billion Targeted Facility,it has been oversubscribed by households and SMEs. This will need to beaugmented by the Bank while implementation of all the policy measures should bevigorously pursued in order to realise the set objectives.

Opinion

This is formed against the backdrop of the foregoingissues of the domestic economy: weak and fragile growth situation, stagflation,and challenging external sector, the fairly robust fiscal and monetary policymeasures and the monetary policy stance at the last MPC meeting. Even with thecut in the monetary policy rate at the last meeting, the monetary policy stanceis still relatively tight. But given the need for monetary policy actions tocomplement fiscal actions to prevent recession during the year, monetary policyshould not be tightened further. A dose of monetary inflation can be toleratedfor now. Reducing the MPR is desirable. But it could worsen the liquidityproblem especially when combined with the huge fiscal and monetary injectionsin the stimulus packages. Importantly, the response of the deposit money banksto the last MPR cut as to whether they reduced the lending rates and increasedlending is not yet clear in the general environment of reduced economicactivities. Therefore, it will be necessary to further monitor the situation tobe able to assess the effectiveness or otherwise of the last monetary policydecision. Accordingly, my vote is to hold the monetary policy parameters attheir extant levels:

MPR:                                    12.5%

CRR:                                     27.5%

Liquidity Ratio:                  30.0%

Asymmetric Corridor:        +200/-500 basis points around theMPR.

OBIORA, KINGSLEY ISITUA

In light of the continued pernicious impacts of theCOVID-19 pandemic, I voted to reduce the MPR by 100 basis points to 11.5percent, while retaining the CRR at 27.5 percent, the LR at 30.0 percent andthe asymmetric corridor of +200/-500 basis points around the MPR. I believethis stance would further support a robust recovery of economic activity andgrowth, in the face of significant and persistent headwinds.

The spread of the Novel Coronavirus Disease (COVID-19)has intensified in many parts of the world. Since the last MPC meeting in May,global cases have risen from 5.6 million confirmed cases and 350,000 deaths toover 14 million confirmed cases and 600,000 deaths, according to the WorldHealth Organization. Globally, the stringency of lockdown restrictions haseased, with many countries reopening and global travel beginning to pick up.Consequent upon these relaxations in lockdowns, we have seen a resurgence ofcases in a number of locations, including some States in the U.S., parts ofEurope and even in Japan and Australia. This has forced several governments tore-impose certain restrictions and roll back re-opening plans. Accordingly, inJune, the IMF revised downwards by 1.9 percentage points its World EconomicOutlook forecasts for global growth to a contraction of 4.9 percent in 2020.This includes contractions of 8.0, 10.2 and 10.2 percent in the United States,the United Kingdom and the Euro area, respectively; and contractions of 6.6,9.0 and 5.4 percent in Russia, South Africa and Nigeria, respectively.

Nevertheless, the global economy has begun to rebound,supported by strong policy responses from monetary and fiscal authorities. J.P.Morgan's Global Manufacturing Purchasing Manager's Index (PMI) rose by a recordof 5.4 points from 42.4 in May to 47.8 in June 2020. Although this remains acontraction (below 50.0), it exceeds levels in February and March this yearbefore global lockdowns were imposed. China's economy rebounded in the secondquarter of 2020, with year-on-year headline growth of 3.2 percent. Globalfinancial conditions have also eased, even for emerging markets, followingunprecedented actions taken by central banks across the world. As an example,the US Federal Reserve has continued to build up its outright holdings ofsecurities, which have increased from US$5.9 trillion on 27 May 2020 to US$6.2trillion on 16 July 2020.

Following these trends, Nigeria's economy has alsostarted to recover, as lockdown measures have been eased. According to theNational Bureau of Statistics' COVID-19 National Longitudinal Phone Survey(NLPS), the proportion of people working rose from 43 percent in April/May 2020to 71 percent in June 2020, driven particularly by commerce, services andagricultural sectors. Since the last MPC, oil prices have continued to rise,from US$36 per barrel to US$43 per barrel, although it must be noted that oilprice changes transmit to Nigeria's economy with about a 90-day lag. A furtherboost to economic activities has been the resumption of domestic flights acrossthe country, as evidenced by higher occupancy rates in hotels and pick-up intaxi activities in major cities.

Under the circumstances, the financial system hasmaintained a sound and stable position, following effective interventions bythe Central Bank. Net aggregate domestic credit grew by 5.16 percent in June2020, compared to the previous month. Stimulated by the policy onLoan-to-Deposit Ratio (LDR), the past year has seen total gross credit increasefrom N15.56 trillion at the end of May 2019 to N18.90 trillion at the end ofJune 2020. This has been driven especially by manufacturing, consumer credit,general commerce, information and communication, and agriculture. Short-terminterest rates continue to suggest some surfeit in the system with average OpenBuy Back (OBB) and interbank call rates rising to 5.75 and 11.31 percent inJune 2020, from 5.22 and 5.80 percent in May 2020, respectively. Non-performingloans (NPLs) decreased to 6.4 percent at the end of June 2020, compared to 9.4percent in the corresponding period of 2019, reflecting recoveries, write-offsand disposals.

Notwithstanding these improvements, the economycontinues to face significant headwinds to a robust recovery. The number ofCOVID-19 cases now exceeds 36,000, cumulatively, and continues to rise. Theheadline inflation rate increased slightly to 12.56 percent in June from 12.40percent in May, with food inflation at 15.18 percent. The share of COVID-19National Longitudinal Phone Survey respondents who are working remains belowpre-pandemic levels of 85 percent. Furthermore, 87 percent of households owningnon-farm businesses have highlighted difficulties in raising money for theirenterprises.

Globally and locally, it is clear that the economyfaces an uncertain path, with long-lasting consequences for the livelihoods ofmany. The decisive efforts of governments and central banks across the worldhave provided a strong foundation for the current recovery. However, it wouldbe remiss to assume that the crisis is now over, especially as there remainmany unknowns regarding the virus. In Nigeria, the Central Bank has actedproactively and forcefully through numerous successful interventions. Tohighlight a few: so far, 92,000 household and SME beneficiaries have receivedfinancial support to the tune of N49.2 billion and 61 manufacturing projectshave been catalysed by injections of N152.9 billion, whilst the healthcaresector has been strengthened by support of N93.6 billion. However, thesedisbursements are rapidly approaching the limits of these respective funds.Whilst the impact of these policies on the economy is undeniable, even moreaction is required to truly match the scale of effect of the pandemic.

It is in light of both the depth of this crisis andthe unexpected prolongation of the virus's spread that I voted to reduce theMPR. The economic fallout from COVID-19 has proven to be more pernicious thaninitially foreseen, and we must seize the opportunity to further act. Whilstthe outlook has improved somewhat, the full recovery and transformation ofNigeria's economy will continue to face significant resistance. The recentimprovement in global financial conditions has provided a window for aggressivemonetary policies, as exemplified by certain emerging market central banks evenembarking on their own forms of quantitative easing. This reprieve in themarkets could be temporary, especially if COVID-19 takes a turn for the worse.

On this basis, I voted to: 

• Reduce the Monetary Policy Rate (MPR) to 11.5percent from 12.5 percent;
• Retain the Cash Reserve Requirement (CRR) at 27.5percent;
• Retain the Liquidity Ratio (LR) at 30.0 percent; and
• Retain the Asymmetric Corridor of +200/-500 basispoints around the MPR.

SANUSI, ALIYU RAFINDADI

1.0           Decision:

In today's meeting, I voted to hold on all theparameters to allow for the combined effects of the COVID-19 interventionfunds, reduction in the MPR as well as the heterodox policy interventions towork themselves out. At least two reasons informed this decision: First,although as I argued in my Personal Statement of May 2020 that the optimalmonetary policy response to an impending recession is easing of the monetarypolicy stance, the current threat of inflation amidst rising exchange ratepressure suggests that such policy must be cautiously executed. Secondly, Ifeel it is optimal to hold all the parameters given the encouraging report fromthe banking system stability review, including the increased credit flows.

2.0 Background and Justification

2.1Global Economic Developments

The worst global economic recession since the GreatDepression, triggered by the COVID-19 pandemic, is expected to be followed by aslow recovery in 2021. Possibly another lockdown, due to a possible second waveof the COVID-19 pandemic, could further threaten the slow recovery expected inthe global output growth, international trade and oil prices.

The effect of the containment measures against thespread of the highly infectious coronavirus disease (COVID-19) on the globaleconomy is the worst economic recession the world has seen since the GreatDepression of the 1930s. As of June 2020, the IMF has estimated that the outputlost by the world economy between January and June 2020 is US$12.5trillion, andmost economies are drifting into recession. Global output, which grew by 2.9%in 2019, is forecasted to decline by 4.9% in 2020 (revised from the -3.0%projected in April), but grow at the rate of 5.4% in 2021 (IMF's projections).Given the impact of the pandemic, the strength of the expected recovery in 2021is uncertain. Even as economies start to ease restrictions and open up, sectorswhose activities require physical contacts such as hospitality, travel andtourism continue to face depressed demand. Also, there are serious concernsabout a possible second wave of the COVID-19 infection this Fall, betweenSeptember and December as the winter approaches, which may necessitate anotherlockdown. As output growth for the year 2020 is expected to be mostly negativein both the Advanced Economies and in the Emerging Markets and DevelopingEconomies (EMDEs), uncertainties in the international oil market are alsoexpected to continue, keeping global oil demand moderated amidst concerns abouta global supply glut.

Consequently, oil price, which was US$43.80/b (OPECBasket) as at 17th July, 2020, is forecasted to average US$41/b in 2020 andrise slightly to US$50/b in 2021 (US Energy Information Administration, EIA).Global trade volumes, which has started to recover, is projected to decline bybetween 11.4% (OECD's forecast) and 20% (UNCTAD's forecast) in 2020. Globalexports and international travels are likewise expected to decline by 11.5% inthe possible event of a second-wave of the COVID-19 infection. Key implicationsof this development for the domestic economy includes lower fiscal revenue,current account balance and foreign exchange receipts, with a potentiallyadverse effect on public debt, exchange rate stability and external reservesaccretion.

Inflation in the Advanced Economies has remained verylow and well below their long-term target of 2% since March 2020. As a group,inflation in the Advanced Economies is expected to fall to 0.5% in 2020 from1.3% in 2019. In June 2020, inflation in the US declined to 0.1% from 0.6% inMay. In the Euro area, inflation rose to 0.3% in June 2020 from 0.1% in May2020. In the UK, inflation increased to 0.6% in June 2020 from 0.5% in May2020. In the EMDEs, inflation is forecasted to decline slightly to 5.1% in 2020from 6.5% in 2019. In China, Ghana, Egypt and Nigeria, however, inflationincreased in June 2020. Consequently, global monetary policy has continued tobe generally accommodative to provide liquidity to businesses. At the sametime, fiscal injections target households to provide relief against the job andincome losses.

2.2Domestic Economic Developments and their Implications

Although new data is not available yet, the monthlyPurchasing Managers Index (PMI) and Industrial Production Index (IPI) forApril, May and June 2020 suggest that output is expected to fall during thesecond quarter of 2020. The Manufacturing and Non-Manufacturing PMIs, forinstance, fell below the breakeven benchmark of 50 points in April for thefirst time in 36 months. In May 2020, the Manufacturing PMI stood at 42.4 indexpoints. The Non-Manufacturing PMI, which was worse hit by the lockdown,improved slightly from 25.3 points in March 2020 to 35.7 in June 2020 as somerestrictions were eased. Although below the break-even point of 50, the monthlyManufacturing and nonManufacturing Employment Level indices have both improvedin June 2020.

The IPI for 2020Q2 declined by 8.8% compared with2020Q1 due to contraction in manufacturing, mining, and electricity production.Staff estimates show that the domestic output gap continues to be negative at2.35% in 2020Q1, indicating room for non-inflationary output growth. Althoughthe international price of crude oil increased steadily since April 2020,domestic oil production declined by 13.14% from 1.75 mbpd in May 2020 to 1.52mbpd at the end of June 2020 in compliance with the OPEC+ production cutagreements and the shutdown of Offshore Bonga oil field. Available data showedthat while the actual oil price was above the revised fiscal benchmark ofUS$28pb, the actual production during the quarter remained below the revisedfiscal benchmarks of 1.8 mbpd.

Consequently, fiscal (oil) receipts for the quarterare likely to fall below the budgeted, with possible adverse implications onthe level of public sector borrowing requirements amidst a rising public debt.Also, accretion to external reserves and excess crude accounts would beadversely affected. Inflation data from NBS shows that the upward trend in theheadline inflation (yo-y), which started since September 2019 when all the landborders were closed, had continued. In June 2020, headline inflation rose to12.56% (y-o-y) from 12.4% in May 2020 due to increase in both food and coreinflation. These increases are the highest since April 2019, reflecting theeffect of the COVID-19 containment measures. Food price inflation (y-o-y) rosefrom 15.04% in May 2020, to 15.18% in June 2020, driven by prices of farmproduce. Core inflation (yo-y) rose from 10.12% in May 2020, to 10.13% in June2020, due to the rise in prices of furnishings, household equipment &household maintenance.

Data on the monetary aggregates shows that Broad MoneySupply, M3, grew by 1.64 % in June 2020 (3.27% annualized), below itsprovisional benchmark of 11.74% for 2020. Aggregate credit to the economy grewby 5.16% in June 2020. Credit to the private sector grew by 9.32%, annualizedas 18.65%, which is well above its programmed target of 14.94% for 2020.Reserve Money, however, grew by 52.91% to N13,257.04 billion in June 2020,which was 6.31% above its provisional target of N12,470.52 billion for Q2 2020.This increase was due to the implementation of the recent increase in CRR.Report on the Banking System Stability Review shows that despite the challengesposed by the COVID-19 lockdown, the banking system remained sound andresilient. The industry capital adequacy ratio had increased to 15% in June2020, which meets the industry prudential benchmark. The Non-performing loansratio (NPL) has declined to 6.4% in June 2020 from 6.6% in April 2020 and 9.36%in the corresponding period of 2019.

Total Assets of the industry has continued to rise,standing at N47.82 trillion as at end-June 2020. Total banking industry creditto the economy has continued to increase even during the months of thelockdown, standing at N18.9 trillion as at end-June 2020. Following theintroduction of the LDR policy, total gross credit increased by N3.33 trillionbetween May 2019 and June 2020. Most of this increase in credit was extended tomanufacturing, consumer credit, general commerce, ICT and Agriculture. Reportsof the implementation of the CBN's COVID-19 intervention shows significantprogress in disbursements. Over 152.9 billion (or 15.2%) of the N1 trilliontargeted support for the Manufacturing sector has been disbursed. Out of theN100 billion Healthcare funds, N26.278 billion (or 26.3%) have been disbursedto fund 20 projects in the healthcare sector.

Additional 16 applications totalling N67.413 billionwere under processing. Out of the N50 billion Targeted Credit Facility forHouseholds and MSMEs, N49.195 billion have been disbursed to 91,736 beneficiaries,and N1.5 billion was disbursed to 169 beneficiaries under the Creative IndustryFinancing Initiative. Under AGSMEIS, N41.41billion has been disbursed to 11,613beneficiaries. Given that these facilities were given at 5% interest rate,successful and timely disbursement of the entire N3.5trillion will go a longway in providing the needed low-cost liquidity to businesses and households asthe economy gradually reopens. Staff projections suggest that, with asuccessful implementation of the Federal Government's Economic SustainabilityPlan, real output growth is expected to range between -0.39% and -0.16% in2020, and between 0.7% and 1.48% in Q1 2021 depending on the level of oilprice. Inflation is forecasted to continue on its upward trend throughout 2020due to the rising exchange market pressure, higher food costs due to the supplychain disruptions, the continued closure of all land borders, insecurity in thefood-producing areas, and higher transport costs. Review of the domesticeconomic developments suggests that the heterodox policies and the COVID-19interventions are showing good signs of effectiveness as credit flows to theprivate sector continue to increase despite the lockdown.

3.0          The Basis for My PolicyChoice

While I believe monetary policy must be eased in theface of an impending recession, a key consideration is the threat of inflation.Also, the various heterodox policies and COVID-19 intervention funds havesignificant potential for injecting the needed liquidity at a relatively low cost.Although the monetary aggregates under-performed in the quarter, the potentialliquidity injection from the implementation of these policies in the face ofrising inflation calls for caution in the execution of the needed policyeasing. I, therefore, voted to hold all policy parameters, for now, to allowfor the combined effects of these policies to work themselves out.

Consequently, I voted to: 

• Retain the MPR at 12.50 per cent;
• Retain the CRR at 27.5 per cent;
• Retain the asymmetric corridor at +200/-500 basispoints; and
• Retain liquidity ratio at 30.0 per cent.

SHONUBI, FOLASHODUN A.

Uncertainties about the timing and path of recovery ofglobal economy from the disruptions of Covid-19 pandemic, have heightened, dueto swelling cases of infection around the world. The spill over strain on thedomestic economy is further aggravated by price instability in the global oilmarket, amidst output reduction, in compliance with the OPEC+ oil productionquota cut deal. Even as emerging data on actual output loss in fewjurisdictions are less than projected, the overall negative impact of thepandemic has surpassed anticipated levels, on account of deeper disruptions inmost economies. Imminence of an unprecedented global economic recessionnotwithstanding, muted initial impact in the first half of 2020 amidstsustained largescale monetary and fiscal interventions in critical sectorsprovide a glimpse of hope for a less damaging effect on the domestic economy.

Global and Domestic EconomicDevelopments

The global economy continued to experience significantdownturn as a result of widespread shut-ins, induced by extended lockdowns andcontinued disruption to the global supply chain, due to Covid-19 containmentmeasures. Worsening sentiments and difficulty of navigating the aftershock ofthe health crisis across many jurisdictions, as well as, near total freeze ofglobal trade, have further deepened output loss in the first half of 2020.Despite the preliminary indication of gradual resumption of activities in someadvanced economies, cautious restart by enduring businesses trying to implementworkplace safety practices and slower recovery in economies with decreasinginfection rates have dimmed hopes for quicker recovery. The IMF, in its latestforecast, predicated on higherthan-usual uncertainty, projected a globaleconomic contraction of 4.9 per cent in 2020.

On the domestic scene, accelerated increase in generalprices continued for the 10th consecutive month, with domestic headlineinflation at 12.56 per cent in June 2020, compared with 12.40 per cent in May2020. Food inflation rose to 15.18 per cent, from 15.04 per cent in thepreceding month, as persisting shortage in supply of imported food, as well as,disruption to production and distribution of local food push prices up. Coreinflation rose marginally to 10.13 per cent in June 2020, from 10.12 per centin May 2020, possibly indicating dissipating exchange rate pass through effectto prices.

Slowdown in output growth to 1.87 per cent in thefirst quarter of 2020, on account of moderated expansion in both the oil andnon-oil sector reflected the impact of disruption to economic activities due tomeasures to contain the pandemic, and low oil price. Though employment levelindex for manufacturing PMI impressively to 38.8 per cent in June 2020, from24.5 per cent in May 2020, other indicators of production activity, includingcomposite manufacturing PMI and index of mining production declined, relativeto the levels in May 2020.

Major prudential indicators in the banking sector werewithin acceptable levels, underscoring the resilience of the sector. Growth inthe size of the sector continued, as total assets, deposits and creditmaintained their upward trend. Industry capital adequacy ratio was at 15.0 percent, same as the minimum prudential requirement, while liquidity ratiomoderated to 37.0 per cent but was above the 30.0 per cent regulatorythreshold. Non-performing loans ratio improved marginally to 6.4 per cent inJune 2020, from 6.6 per cent in April 2020. Returns on equity and investmentremained positive.

The fiscal authority continued to struggle withchallenges of low revenue, high expenditure and growing deficit. Despite therevision of 2020 budget, expenditure remained significantly above projectedrevenue, resulting shortfall is to be financed by increased borrowing. Thoughimport has reduced significantly, corresponding decline in both oil and non-oilexport heightened vulnerability in the external sector. Shrinking foreignexchange revenue due to low oil price and production, as well as, dryingcapital flow and remittances have precipitated an overall Balance of Paymentsdeficit, with implications for exchange rate pressure.

The monetary sector and financial markets werecharacterised by mixed developments. Annualized growth of broad money supply(M3) and credit to government were below the indicative benchmark for 2020,while growth of credit to the private sector surpassed the target. Money marketrates generally trended lower, on account of high banking sector liquiditybuoyed by increased intervention stimuli. Stock market capitalization rose, dueto listing of additional securities, while the All Share Index fell, on accountof profit taking by investors.

Considerations and Decision

Though slight rebound in the Asian economy may haverekindled hope for lesser damage to the global economy, extended disruptions inother regions have, however dimmed prospects for faster recovery. With theunprecedented amount of monetary and fiscal support helping to keep economiesrunning at minimal levels, resurgence of Covid-19 infection rate and risinggeopolitical tensions are likely to further slowdown recovery. For emergingmarkets and developing economies like Nigeria, low capital flow, dryingremittances, troubled oil market, tighter financial conditions and rising debthighlights the need to intensify measures that fully leverage peculiar robustresource base to achieve a reset of the dynamics of the domestic economy towardssustainable growth and development.

On the domestic front, while various interventions bythe Bank and Government have significantly mitigated the negative impact of thepandemic, the economy remained challenged by uptick in inflation, weak output andproductivity, high unemployment, tighter fiscal space and heightened externalsector vulnerability. Proactive measures in the banking sector by the CBN,including the Forbearance and LDR policies, have helped to forestallsignificant asset deterioration that may have arisen from the impact of thepandemic. The policies have also allowed banks to provide much needed credit tocritical sectors. I believe that by sustaining the stringent supervisory andinterventionist measures, we will be able to preserve the resilience of thesector.

The fiscal authority, as the biggest spender,obviously need all available resources to effectively play its role of majorstimulator of economic activity. I therefore urge the authority to not onlystrive to mobilise needed resources, including exploring the low interest rateregime in the domestic environment to fund the Economic Sustainability Plan(ESP), but more importantly ensure judicious implementation to further reducenegative impact of the pandemic. Sub-optimal performance of major monetaryaggregates continued to provide room to accommodate upscale of monetary andfiscal stimuli to facilitate increased economic activities.

In the external sector, I note with some concern that,while imports have fallen, the more than proportionate decline in oil andnon-oil export is an unusual trend that is creating a different form ofvulnerability. Persisting deficit trade balance effectively exposes fragilityof the sector. I therefore opined that we pursue more aggressively, measuresdesigned to ensure continuous growth of oil and non-oil tangible exports toachieve a favourable trade balance. The indigenous Gold purchase initiativealso provide an opportunity to strengthen our external sector. Addressing highinflation and interest rate, is of course a major concern for the Bank,especially towards maintaining price stability. However, considering thedevastating impact of the pandemic and the resulting productivity, output andjob losses, the task of facilitating expansion of economic activities andpromoting output growth has become imperatively urgent. Moreover, ourexperience in recent times has shown that interest rate in particular,responded more to the intervention activities of the Bank than changes in theMPR, which now serve more as a signaling and less as an anchor rate.

To date, our interventions, largely to promoteconsumption and production, have generated tremendous outcomes, includingbetter opportunities for household members to pursue their aspirations, rampingup of agricultural output, establishment of micro, small and mediumenterprises, as well as, capacity expansion in large corporations. These havedeepened ability of the economy to effectively absorb the impact of the presentshock. Hence, while we quickly appraise the impact of our actions, to identifygains and gaps, it is rational to allow some more time for the full effects ofour most recent intervention activities and adjustment of the policy rate, tofully permeate the economy. We can make the third quarter of 2020 a criticalturning point, if we sustain the productivity enhancing support foragricultural and industrial sectors.

As we sustain the progress, by taking advantage of ourpeculiar strength and allowing internal forces to drive growth, I believe thenext priority is to aggressively facilitate intervention in the infrastructurespace to significantly reduce the deficit, thereby unlocking constraints thatlimits ability of enterprises to achieve their optimal productivity andpotential output levels.

I therefore vote to retain:

• MPR at 12.5 per cent;
• The Asymmetric Corridor of +200/-500 basis pointsaround the MPR
• Cash Reserve Ratio (CRR) at 27.5 per cent; and
• Liquidity Ratio at 30.0 per cent.

EMEFIELE, GODWIN I.

Governor Of The Central Bank OfNigeria And Chairman, Monetary Policy Committee 

Global macroeconomic stability was significantlyimpaired 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 manycountries have begun to ease lockdown measures and relax social-distancingrestrictions, the protracted adverse effects on households (in terms of incomelosses) and on businesses (with withered cashflows and weakened activities) areexpected to acutely undermine productivity, delay recovery, and diminish prospectsin most economies. Accordingly, growth forecasts are being downgraded whileglobal output stabilisation is deferred. IMF estimate of 2020 global outputcontraction worsened to -4.9 percent from the -3.0 percent previouslyforecasted. This downgrade affected all countries and regions, with growthlowered 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 debilitatedbusiness activities and weakened sentiments in the domestic economy whiledampening near-term growth prospects. Combined with the concomitant softeningof crude oil prices, this caused elevated FX market pressure, constrictedfiscal space, destabilised household and business incomes, and deceleratedeconomic activities. Accordingly, 2020 GDP growth may fall below the 1.9percent recorded in 2020q1 with a genuine possibility of contractions in theremaining quarters, if not well-managed. Recent realities indicate the need forcoordinated efforts among policymaking authorities to ensure a quick rebound ofthe economy and strengthen short-term outlook. Deteriorating prospects, due toglobal headwinds and local imbalances, provide opportunity for us to repositionthe economy, prop domestic productivity, and strengthen demand.

With the non-oil sector as the critical base of theeconomy, complete and accelerated diversification of the economy is imperativenow, more than ever. In this regard, and in view of the current covid-inducedadverse shocks, the CBN has increased the scale and scope of developmentfinancing and will intensify efforts at resolving underlying structuraldeficiencies. I note the CBN's liquidity assistance and targeted support toincentivize domestic production, bolster supply and stimulate the Nigerianeconomy. The N50 billion Household and SME facility and the N100 billionhealthcare intervention (both aimed at neutralising the adverse effects of thepervading shocks) have been extensively disbursed. Likewise, the N1 trillionmanufacturing and agriculture intervention to spur the rebound of the economythrough high impact productive sectors are being disbursed purposefully.

On domestic prices, the rising inflationary trendwhich began in September 2019 due to structural factors was aggravated by thepandemic-derived supply shocks. From 12.4 percent in May 2020, year-on-yearheadline inflation rose to about 12.6 percent in June 2020, reflectingincreases in both food and core components. This is partly attributable to thelingering effects of disruptions and challenges around agricultural belts, andinfrastructural complications (aggravated by covid-19 setbacks to interstatedistribution network). The spillover effects of these adverse impulses are expectedto persist in the short-term and abet inflation inertia for much of 2020.

Liquidity outturn in June 2020 was sub-par as monetaryexpansion fell below the indicative benchmark while money market rates rose.Weighted average interbank call and open-buy-back rates increased from 5.2 and5.8 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 thetargeted 13.1 percent. This expansion fundamentally reflected the 13.2 percentannualised growth in private sector credits.

Data indicate that total gross credit grew by N3.3trillion since May 2019 to N18.9 trillion in June 2020 showing increasedlending to manufacturing, consumer credit, general commerce, ICT, and agriculture.This illustrates the continued potency of CBN's LDR policy. Even with anincreasingly fragile global macro-financial condition and rising domesticcredit, the Nigerian banking sector remained largely resilient with NPLs ratiocontinuing to moderate from 11.2 percent in May 2019 to 6.4 percent in June2020. Yet, I note the imperative of sustained credit flows to the privatesector, especially at this critical time when the productive machinery of theeconomy needs liquidity support to prop domestic supply. To help local firmscushion the consequences of the pandemic, the CBN is working with banks torestructure lending and grant increased forbearance to businesses which requiresuch to survive. The CBN will continue its drive to de-risk lending and increasetargeted intervention to strategic high impact private sector ventures througheffective collaboration of all stakeholders, especially on the backdrop of theimminent economic downturn.

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

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

With rising inflation expectations and weak growthoutlook, my inclination is to maintain the current stance of monetary policyand hold all parameters. This will allow a sustained permeation of recentpolicy actions -including the various counter-covid interventions- and avoidundue policy shocks to the system. In my view, an adjustment could complicatethe impulse-response traverse of recent changes and culminate to indeterminateoutcomes. Maintaining the status quo could, however, balance the long-runobjectives of price stability and output stabilisation without disrupting thepath of equilibrium. Therefore, I vote to:

1. Retain the MPR at 12.5 percent;

2. Retain the asymmetric corridor at +200/-500 basispoints;

3. Retain the CRR at 27.5 percent; and

4. Retain liquidity ratio at 30.0 percent.

GODWIN I. EMEFIELE, CON

Governor

July 2020

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