Last Tuesday, the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) met against the backdrop of what the CBN governor Mr. Godwin Emefiele described as “moderate but uneven growth in the global economy and build up of vulnerabilities in the domestic economy.” In this report, CHIBISI OHAKAH takes a look at the implication of some highlights of the meeting, which include devaluing the naira to N168 to the dollar, the call for the passage of the Petroleum Industry Bill (PIB), and raising doubts over the proposed $73 per barrel, 2015 budget benchmark
The CBN governor said the committee reviewed key developments in the global and domestic economies during the first ten months of 2014 and assessed the short-to-medium term risks to price and financial stability as well as the outlook for the rest of the year up to the first half of 2015.
Global economic developments
The committee noted that the global economic space continued to be dominated by strong downside risks to growth, including the softening commodity prices, rising geo-political tensions, and heightening threats to financial markets in the emerging and frontier economies in the aftermath of the termination of Quantitative Easing by the US Federal Reserve at the end of October 2014.
He said developments in the international oil market has intensified the risks and vulnerabilities faced by oil exporting countries in the wake of a new episode of falling oil prices. This is complicated by the absence of clear signals on how far and long this episode would last.
The committee considered that the impact of falling oil prices was severest on the oil exporting countries, favouring the oil importing countries led by the US, which has also emerged as a major oil exporter.
Domestic economic developments
In spite of positive estimates from the National Bureau of Statistics (NBS), the committee said key vulnerabilities are emerging in the Nigerian economy. It noted that the non-oil sector remained the major driver of growth recording 7.5% in contrast to the oil sector, which contracted by 3.6%. It said the robust expansion in domestic output in the third quarter of 2014 against the tepid growth in the global economy was anchored by the improved performance in services, agriculture, trade, and industry.
The committee therefore cautioned that the continuing insurgency in the North East in combination with other risks could adversely affect the growth outlook. It also noted with concern the continued decline in the contribution of the oil sector to growth and urged the political authorities for the speedy passage of the Petroleum Industry Bill to halt the trend.
The Committee commended federal government’s decision to amortize the legacy debt owed to major stakeholders in the power value chain and enjoined the political authorities to fast track the implementation of other complementary measures that would improve power generation and distribution.
It noted that the federal government created 349,343 new jobs in Q3 of 2014, up from 259,353 jobs recorded in the preceding quarter, according to National Bureau of Statistics (NBS) November 2014 survey. On their own, the CBN said it created so far 166,790 jobs under the N200 billion Commercial Agriculture Credit Scheme (CACS).
The Committee, however, recognized the upside risks to inflation in the near-term to include increased spending in the build up to the 2015 general elections, depreciated exchange rate arising from the falling oil prices, depleting external reserves, and food supply shocks from increased insurgency in the major agricultural belts of the country.
Regrettably, the Committee noted that the credit market does not reflect banking system liquidity conditions as both the prime and maximum lending rates remained largely elevated. The high interest rates notwithstanding, credit to private sector rose by 7.75% during the period. “To improve the efficiency of monetary policy, the Committee, urged the Bank to -ensure that credit levels reflected liquidity conditions in the banking system,” the governor said.
External sector developments
He said the month of September remained critical to the FOREX market. While the Bank battled to stabilize the naira exchange rate at the Retail Dutch Auction System (rDAS) window, the currency was being weakened a considerably at both the interbank and Bureau de Change (BDCs) segments.
Exchange rate at the rDAS window during the review period opened at N157.31/US$ and closed at N157.32/US$. “To maintain and stabilize the exchange rate at that level, gross official reserves declined from US$40.7 billion on 17th September, 2014 to $36.75 billion at end-October 2014. From year to date, substantial currency depreciation has occurred in comparator oil exporting countries but the naira has depreciated by only 1.74%,” Emefiele said.
At the interbank market the naira depreciated to N165.55/$ from N163.80/$. Exchange rate depreciated from N169/$ to N170/$ at the BDC. He explained that the depreciations largely reflected demand pressures arising from the falling oil prices and dwindling external reserves.
FG’s 2015 oil benchmark of $73
The Committee expressed view that the proposed 2015 budget $73 oil price benchmark may be overly optimistic, requiring considerable caution on the budget’s revenue projections. Reason, according Emefiele, being that a number of 6-month oil futures are currently signed at below US$70/barrel while improvements in technology have driven down the break-even cost of shale oil production to an average range of US$52-US$70 per barrel.
“A weak public finance may impinge adversely on growth prospects as it shows up in reduction in critical public and private consumption and investment spending,” he said, adding that the softening crude oil prices could provide necessary leverage for the fiscal authority to reduce budgetary outlays on fuel subsidy and channel such savings to growth enhancing sectors of the economy.
CBN called on the federal government to address insecurity, infrastructural and institutional challenges facing the economy. It challenged the state governments to reduce reliance on allocations from the Federation Account.
While commending the states which recorded unprecedented growth in Internally Generated Revenues (IGRs) in 2013, the committee enjoined others to strengthen their IGR mechanisms.
The Committee also expressed worry Nigeria’s depleting external reserves. It said the falling oil price has reduced the accretion to external reserves thus constraining the Bank’s effort to defend the naira and sustain the stability of the naira exchange rate.
It said that pressures in the FOREX market were aided mostly by the excess liquidity conditions in the banking system and speculative activities.
“Liquidity conditions designed to enhance the resilience and stability of the banking system, has not translated to increased credit expansion to the real sector. Rather, it has led to an upward pressure in the FOREX exchange market and Standing Deposit Facility window of the Bank while banks continually exercise a cautious approach to lending,” he said
The committee said bold policy and administrative measures in the management of the nation’s stock of foreign exchange reserves have become inevitable in order to align the market towards its long-run equilibrium path.
Available data indicates that banking system liquidity has been lavishly deployed in pursuit of speculative foreign exchange trading at the short-end of the market.
In the Committee’s opinion, a more flexible naira in the face of non-existent fiscal buffers was the most viable policy option at a time of heightened demand pressure for foreign exchange and falling oil prices.
The Committee was, therefore, of the view that if it failed in taking the right policy actions now, the market would force the Bank to take more drastic actions in the future with far less foreign exchange reserves.
In the light of the above considerations, the Committee was of the opinion that the economy stood to gain by further tightening of monetary policy stance to anchor inflation expectations; and allowing some flexibility in the exchange rate to stem speculative activities and depletion of reserves.
