The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday gave reasons why it decided to retain all monetary policy parameters unchanged.
The CBN governor and Chairman of the Committee, Godwin Emefiele, told journalists at the end of the last MPC meeting for 2019 that members also resolved to suggest to the Federal Government for the need to reconsider its $57 per barrel oil price benchmark in 2020 budget to build buffers.
At the end of the meeting held over Monday and Tuesday, the MPC aligned with the popular opinion of economic experts which said it would not be auspicious to review the monetary policy parameters at this time.
MPR, other parameters unchanged
At the end of the meeting, the CBN governor said the committee opted to retain lending rate, popularly called monetary policy rate (MPR) at 13.5 per cent, with all other policy parameters left constant.
The parameters include asymmetric corridor at +200/-500 basis points around the MPR; the cash reserve ratio (CRR) at 22.5 per cent, and liquidity ratio at 30 per cent.
The CRR is the quantum of cash the banks have with the apex banks as reserve for lending to customers.
Mr Emefiele said the decision to leave the policy parameters unchanged was informed by the feeling of members that maintaining the current monetary policy stance would be necessary to sustain the improvements recorded in the economy as a result of various interventions.
The CBN governor, who expressed the MPC’s support for the Federal Government’s decision to close the country’s land borders with her neighbour, said securing the borders should be further enhanced.
With the lull in the crude oil futures market, Mr Emefiele said the committee predicted crude oil prices would remain relatively weak into the foreseeable future
Consequently, the committee urged the government to reconsider its 2020 budget oil price benchmark of $57 per barrel to build buffers.
Also, the committee expressed confidence that despite the weakness in the external sector, efforts to ramp up domestic production through several measures by fiscal and monetary authorities will douse the adverse effects on the domestic economy.
The impact would in the medium term, he said, be through the reduction of importation of food and commodities.
Why policy parameters were retained
The official said the MPC reviewed the ups and downsides of the decision to tighten or loosen the MPR.
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The committee said although tightening may encourage capital flows into the economy, it also has the downside consequence of stifling the already nascent recovery in output growth.
On the other hand, the committee noted that a reduction in MPR would improve growth prospects.
But, in view of the inflationary pressures, the decision weighed the balance of risks in favour of protecting price stability.
“Considering the recovery in market interest rate, growth in domestic credit, among other positive development, the MPC felt that there will more gain in the short to medium term to holding MPR at its current position,” the CBN governor said.
He said in the committee’s consideration to hold the MPR, it noted the positive outcomes of actions already taken by the CBN, including the current policy of loan-to-deposit ratio, which he said has resulted in loans and advances rising by over N1.1 trillion between June and October 2019.
It further noted that these actions have further assisted in boosting credit to agricultural and manufacturing sectors, hence the positive outcomes on the gross domestic products.
The MPC expressed the hope that the LDR initiative must be sustained, as interest rate being paid by the borrowers have so far dropped by over 400 ‘basis points’ between June this year and now.
This, the CBN governor said, has happened with corresponding decline in non-performing loans to 6.5 per cent at the end of October 2019.
“The MPC is therefore of the view that sustaining the MPR at the current level is crucial for better understanding of the impetus of growth before deciding on any probable variations.
“The MPC also feels that holding its current policy position offers pathways for appraising the defects of its policy to encourage lending by the banking industry without varying the policy rates as the downside risk to growth and caution on inflation looks stable,” he said.
Improving macro-economic indicators
The MPC also said in view of the improvements in the macro-economic indicators, such as the gross domestic products (GDP), non-performing loans (NPLs) ratio, capital adequacy ratio of the banks as well as the loans-to-deposits ratio, the current monetary policy stance is yielding results.
On price development, the MPC noted the need to drive down food prices through increased support for local production of staple foods like rice, fish, poultry, palm oil, tomatoes, and others.
Urging the government to follow through the policy of backward integration in the milk industry and other priority sectors of the economy, Mr Emefiele said the CBN has made tremendous success in encouraging local production of milk by key milk importers.
The committee also identified the need for institutional reforms through policies that would automate day to day processes of key revenue generating and security institutions such as Nigeria Customs Service to provide an additional advantage of stemming smuggling, kidnapping and the ‘migration’ of terrorists to the country.
It reiterated the need for increased efficiency in public expenditure and the building of fiscal buffers.
Investments in commodities development
Mr Emefiele said significant investments have been made over the last three years to sustainable increase food supply in the economy.
Some of the key initiatives include the commodity development initiatives designed to finance the agricultural value chain of ten commodities, namely cassava, cocoa, cotton and textile, rice, tomatoes, poultry, livestock and dairy, fish, oil palm and maize.
These commodities, the CBN governor said, have received about N176 billion in funding, out of which four of the crops received over N140 billion, or 81.6 per cent of total disbursement.
These include cassava (N11.4 billion), cotton (N40.47 billion), rice (N53.4 billion) and oil palm (N34.18 billion).
He said he was optimistic that the outcome of these interventions “will help close the supply gap already envisaged in the medium to long term, including dampening domestic prices”.
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