The Central Bank of Nigeria (CBN) Monetary Policy Committee rose from its first meeting of the year on Tuesday the 24th of January, 2017, announcing key decisions that will shape the economic outlook of Nigeria.
Below are some of the key decisions;
(i) Retain the MPR at 14 per cent
(ii) Retain the CRR at 22.5 per cent
(iii) Retain the Liquidity Ratio at 30.00 per cent and
(iv) Retain the Asymmetric corridor at +200 and -500 basis points around the MPR
To understand the MPC’s resolutions, it is necessary to understand what these rates mean. The MPR or Monetary Policy Rate is the rate at which the CBN, as lender of last resort, lends money to commercial banks. The CBN can determine liquidity (the supply of money in the economy) and hence control inflation by adjusting the MPR accordingly. If the Central Bank thinks that prices are too high (inflationary) it will raise MPR, forcing Commercial Banks to raise interest rates on loans and hence reducing inflation.
The CRR or Cash Reserve Ratio is the stipulated fraction of depositors’ money which banks have to hold untouched as cash in their vaults or as deposit with the CBN. The CBN can also determine liquidity and hence inflation by tinkering with the CRR. For example, it can reduce CRR to increase the money available for circulation in the economy.
The Liquidity Ratio is the portion of a bank’s total asset that is made cash or assets that can be quickly converted to cash to meet their business operations. Liquidity Ratio can also be altered by the CBN to affect the amount of money available for circulation within the economy.
The decision by the MPC to sustain the key indicators at their current level signals its efforts to maintain the delicate balance between achieving price stability and promoting growth. It also shows that the MPC is confident of its policy approach adopted since June 2016, when the current rates were first fixed.
The move also confirms analysts conviction that the bulk of the required economic adjustments is not to be made through monetary policy. Such adjustments lie in fiscal policy and in other external factors, especially factors such as the economic agenda of the new Trump administration, Brexit, the sustainability of oil prices at its current levels in the international market, and the stability in the Niger Delta region. Indeed, in the published Communique, the MPC recognized the main sources of the economic troubles to be scarcity of foreign exchange, low liquidity problem in the system created by the continued accumulation of salary arrears across states, as well as high energy prices and insufficient fiscal activity. These variables have stronger direct links with fiscal policy.
The MPC’s posts a positive outlook for 2017 predicated on expanded fiscal activity and the maturity of CBN interventions currently in the pipeline such as the Anchor Borrowers’ Programme. The MPC emphasized on the need for to finalize the 2017 Federal Budget and rapid stimulation of non-Oil activity in the economy as well as exploring alternative funding models for infrastructure projects.
What the MPC Decision Means for the Economy
Other interesting details from the MPC’s decision are that the 12 members voted unanimously to sustain all the rates at their currently levels in line with analyst expectations. The implication of the resolution is that no surprises was sprung on economic actors and commercial interest rates will remain unchanged and reasonably stable across banks.
Also, much more action is expected to come into play from the fiscal side. Specifically the government will speed up funding of projects; accelerate release of funds for social programmes like the school feeding programme and NPower; and expand investment in agricultural programmes.
The MPC alludes to the potential of the agricultural and manufacturing sectors to lead the economic recovery through diversification to reduce the economy’s vulnerability to external factors like the:
In this vain, preferential forex and lending rates targeted at agriculture and are expected to be sustained and expanded.
More action will be seen in the Niger Delta as the government does more to restore stability in the region and protect Oil output.