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As MPC meets, forex, rates, recession top agenda

By Chijioke Nelson
22 May 2017   |   4:08 am
For the third time this year, the Central Bank of Nigeria (CBN), through its Monetary Policy Committee (MPC), will be meeting today and tomorrow to reappraise the earlier decisions.


Analysts see economic rebound, rates’ hold decision
For the third time this year, the Central Bank of Nigeria (CBN), through its Monetary Policy Committee (MPC), will be meeting today and tomorrow to reappraise the earlier decisions.

The subsisting policies on foreign exchange, interest rate regime and strategies to quicken the country’s exit from the unsavoury situation of recession were reached two months ago, but remain top of discussions.

According to top CBN source, “we are still in the struggle and everything about it is interlinked with each other. That is where we are headed again until we are out of it. Of course, you can see that there is a significant improvement all round, even the global community is acknowledging it.”

Of course, a lot has happened since then and inclusive recovery, devoid of number display will be important to the committee, to ensure that average Nigerian feels the impact of the policies positively.

On the domestic front, there are noticeable signals of a potential rebound in economic activities from the second quarter, just as the April Purchasing Managers’ Index (PMI) settled at 51.1 points, highlighting an improvement in overall business activity and reaffirmed that the economy is on its path to recovery.

Also, there has been improvement in government finances occasioned by increase in domestic oil production, as well as stability in global oil prices. Besides, government has been brokering debt deals successfully, in efforts to fire-off the recovery plans, which 2017 budget is part of.

Similarly, there has been significant improvement in forex management, which in turn has led to a remarkable improvement in the liquidity. New windows for investors, small businesses and sustained intervention through special wholesale and retail auctions have been recorded.

Consequently, rates have neared the much-needed convergence arena, with parallel market rates closing at N381.04/$ at the weekend, while other official windows remain stable.

Renaissance Capital’s Economist, Yvonne Mhango, said her discussions with banks showed that they are optimistic that the economy has past the worst of what one described as “the most severe downturn in 25 years”.

“One of the big themes was the year-to-date improvement in forex liquidity, which allowed for the unwinding of some outstanding obligations. Trade facilities and velocity increased as a result, according to one bank.

“During the height of the FX shortages, trade cycles lengthened to 12 months, from a typical four-to-six months. The trade cycle is now contracting. Another sees the fores rate settling at N370-N400/$.

“Banks see little incentive to lend with Treasury yields in the 20s. Non-performing loans (NPLs) tend to lag the economy, according to one bank. It estimates that there is 18 months to go of high NPLs and downside surprises,” she said.

In fact, the mix of recommendations and knock as exemplified in the observed comments of the Mhango, should be brought into the whole considerations from today, to forge the way forward for the next two months.

Also, the pace of increases in Headline inflation has been on a downward trend since February, largely due to high base effect from 2016 and more recently the improvements in forex liquidity. The latest report on inflation for April showed Headline inflation easing marginally from 17.3 per cent in March 2017 to 17.2 per cent. Core inflation settled at 14.8 per cent in April 2017 from 15.4 per cent in March.

Conversely, food inflation remained a concern, as it surged to 19.3 per cent in April, despite the improvement recorded in imported food sub-index, which went down to 17 per cent in April from 18.1 per cent in March. This highlighted a sustained pressure in domestic food prices.

Unfortunately, the MPC meeting is coming at a time the first quarter Q1:2017 Gross Domestic Product data is being scheduled and anticipated. Presumably, as cooperating agencies of government, it may be tempting to say that some figures would be made available by Nigeria Bureau of Statistics to the committee ahead of the official release as a support to their decisions expected Tuesday.

For analysts at Afrinvest Securities Limited, the growth report will still leave the economy in recession with small margin- about one per cent, but are expecting a full rebound in the second quarter report due to an improvement in oil production volumes and an uptrend in the services sector.

In a note from the securities and investment company to The Guardian, despite the global positive outlook currently, downside risks related to the United States elections, Brexit and concerns of slower growth in China still have some challenges for the country.

“The impact of the improvement in liquidity and management of foreign exchange has been evident in the performance of the equities market – which surged to a 10-month high of 28,873.44 points – as foreign investors have started returning to the market, while domestic participation has also improved.

“Accordingly, analysis of the various interesting developments within the economy over the last two months suggests that the May MPC meeting is to ‘mark attendance’, as we are of the view that the Committee would be likely satisfied with the recent traction the economy garnered.

“While the MPC will likely be comfortable with rate convergence between the street and NAFEX, the committee would reason the need to charge the CBN to revert to the recommendation on flexible foreign exchange framework which was approved since the May 2016 Meeting,” the analysts said.

But preempting the outcome of the meeting, the analysts said that while the recent downtrend in Headline inflation, especially the satisfactory moderation in core inflation from 18.1 per cent in Dec-2016 to 14.8 per cent in April-2017, could justify a rate cut, they are of the view that the MPC will resist this temptation, calling it “premature”.

“Similarly, reducing Cash Reserves Ratio (CRR) defies monetary policy logic, given the frequency of weekly liquidity mop-ups at a significantly high cost,” they said.

As at March 2017, Commercial Banks’ Reserves with the CBN settled at N3.3 trillion with CRR at 22.5 per cent. If CRR is reduced by 2.5 per cent to 20 per cent for example, a total injection of N366 billion would be pumped into the system immediately.

Given this, it will be counter intuitive to reduce CRR that is at no cost to the CBN only to mop-up with regular securities auctions at expensive rate.

“Our analysis completely rules out the possibility of a hike in CRR. The argument for maintaining status quo and consolidating on recent positives in the economy will be overriding at this May Meeting,” the analyst added.

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