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Monetary policy’s busy year and ‘red alert’ for 2019

By Chijioke Nelson, Asst. Editor, Finance/Economy
17 December 2018   |   3:01 am
The Central Bank of Nigeria (CBN) has signaled readiness to battle uncertainties in 2019, following reversals in global growth projections for 2018 and 2019 to 3.7 per cent from the 3.9 per cent earlier projected. In emerging market, where Nigeria plays alongside the big factors like Argentina, Brazil, Iran, Turkey, and South Africa, among others,…

[FILE PHOTO] Central Bank Governor Godwin Emefiele speaks during the monthly Monetary Policy Committee meeting in Abuja, Nigeria January 26, 2016. REUTERS/Afolabi Sotunde/File Photo

The Central Bank of Nigeria (CBN) has signaled readiness to battle uncertainties in 2019, following reversals in global growth projections for 2018 and 2019 to 3.7 per cent from the 3.9 per cent earlier projected.

In emerging market, where Nigeria plays alongside the big factors like Argentina, Brazil, Iran, Turkey, and South Africa, among others, there is also expected growth decline, driven majorly by country-specific factors- uncertainties in the financial conditions and rising geopolitical tensions, as well as higher oil import bills and oil price uncertainties, currently ongoing.

For the CBN, this is no time to relax, especially as the last is yet to be heard of Brexit, the trade war between United States and China and the persistent interest rate adjustments by the Federal Reserve.

These are potential external shocks that call for monetary policy alert. Domestically, there is also the election spending factor.

Admitting that despite the current developments in both the global and domestic economies, and based on extensive simulations, the short-term outlook of the Nigerian economy remains good, the apex bank may not give up its hold on major monetary policy stance soon going by its words. This is particular with interest rate adjustment.

“Monetary policy stance will remain judicious, research driven, adequate and supportive of the real economy subject to underlying fundamentals. The current tight stance is expected to continue in the near-term, especially in view of rising inflation expectations and exchange market pressures.

“Though we will act to appropriately adjust the policy rate in line with unfolding conditions and outlooks, the CBN will continue to ensure that the policy interest rate is delicately set to balance the objectives of price stability with output stabilisation;

“Inflation expectations are rising on the backdrop of anticipated politically-related liquidity injections. For the rest of 2018 and towards mid-2019, Nigeria’s rate of inflation is projected to rise slightly to about 11.4 per cent and then, moderate thereafter.

“Though the CBN has so far managed to maintain exchange rate stability, the current capital flow reversals from emerging markets are expected to continue to exert considerable pressure on market rates.

“This pressure could be amplified by the forthcoming elections, especially as the political market place heats up. Notwithstanding these pressures, the CBN is determined to maintain its stable exchange policy stance over the next few months given the relatively high level of reserves.

“Gross stability is projected in the foreign exchange market given increased oil related inflows and contained import bill. I will like to make it categorically clear that “sustaining a stable exchange rate is of overriding importance to us even as we continue to put measures in place to shore up reserves,” CBN Governor, Godwin Emefiele, said.

The banker noted that given the global and domestic headwinds facing the nation and the volatility that is being experienced in the crude oil market, there is no other option, as leaders interested in the progress of the nation, but to work very hard to spur job creation by reviving agricultural and industrial activities in the country.

“If we continue to support the growth of small holders farmers, as well as help to revive palm oil refineries, rice mills, cassava and tomato processing factories, we can only imagine the amount of wealth and jobs that will be created in the country,” he said.

He assured that CBN, under his leadership, will now explore the possibility of leveraging technology to enhance credit to critical sectors of the economy, especially, agriculture and manufacturing.

“Our recently announced policy to refund portions of Cash Reserve Ratio to banks that are financing new projects (or expanding existing ones) in agriculture and manufacturing sectors will be intensified and enriched in the coming years. This, we believe, will bolster job creation while supporting our agenda to correct Nigeria’s imbalances and vulnerabilities,” he said.

Meanwhile the apex bank has vowed to make it difficult for banks, companies and individual operators behind activities aimed at undermining the extant policy on the 41 items banned from accessing foreign exchange at the official window, as it is now declared economic sabotage.

For the apex bank, beside the immediate prosecution, which is being finalised in collaboration with the Economic and Financial Crimes Commission (EFCC), the culprits may not be banked by any financial institution in the country.

It also lamented that a mix of inadequate infrastructure base and time lag needed for investments in capital items to mature, has remained a setback in the quest to raise the nation’s productive capacity, which is expected to reduce the huge import dependence and increase domestic growth.

Besides, the long entrenched attitude of importing virtually everything, despite the assessed capacity to produce locally, has continued to affect the productive base of the country, which currently, is being corrected with several monetary policy decisions.

Urging critics to avoid being hasty in condemnations of policies and conclusions, the Governor of the Central Bank of Nigeria (CBN), said as some policies take time to bear fruits.

According to him, an understanding of the nature of ongoing domestic imbalances showed that the country’s vulnerability to global shocks came from diminished productivity due to a low and inadequate infrastructural base, with over-dependence on imports for both capital goods and consumables.

Just last week CBN made good its threat to increase items in the prohibition list, with the addition of Fertilizer, as a way to raise the level local production of the item and save the foreign exchange expended on its importation.
The policy, according to CBN, is in continuation of efforts to sustain the achievement recorded from the classification of the 41 import items that are “not valid for foreign exchange” in the nation foreign exchange market.

A top source at the apex bank said the new policy was in anticipations of the take off of massive investments and establishment of value chain cottage industries that would see to the production of the item locally and create more employment.

He affirmed that there is ongoing efforts by the fiscal authorities in constructing critical roads networks and rail lines aimed at reducing costs of doing business in Nigeria and opening up new markets for farmers, traders and manufacturers, reiterating that policy sustenance is necessary now, given the successes that have been recorded so far through the implementation of the foreign exchange policy on 41 items.

“The remarkable success that has been achieved in stimulating domestic production of goods such as rice, cassava and maize, as a result of the restrictions placed by the CBN on access to forex for 41 items, the CBN intends to vigorously ensure that this policy remains in place.

“Additional efforts would be made to block any attempts by unscrupulous parties, both individuals and corporates, that intend to find other avenues of accessing forex, in order to import these items into Nigeria,” he said.

The Director of Financial Policy and Regulation Department, Kevin Amugo, has said it is unfortunate that trade information available to CBN indicated the circumvention of “not valid for foreign exchange”, as the restricted items are being dumped in the country.

“CBN views this development with trepidation. The economic intelligence unit of the bank in collaboration with the Economic and Financial Crimes Commission would commence immediate investigations of the account of the corporates and entities engaged in this unwholesome act, with a view to visiting severe sanctions on all the culprits.

“Such sanctions would among others, include blacklisting the corporates and their directors, closure of their bank accounts and restricting them from any bank account in any bank under the CBN remit.

“Banks that provided their platforms for such economic abuses would also be properly sanctioned. Banks are, by this notice, advised on strict compliance with the Know Your Customer and Know Your Customer Business requirements,” he said.

But Emefiele added that the dramatic decline in the country’s import bill and the increase in domestic production of these items attest to the efficacy of this policy, noticeably, the steady declines recorded in monthly food import bill from $665.4 million in January 2015, to $160.4 million as at October 2018.

“This is a cumulative fall of 75.9 percent and an implied savings of over $21 billion on food imports alone over that period. Most evident were the 97.3 per cent cumulative reduction in monthly rice import bills, 99.6 per cent in fish, 81.3 per cent in milk, 63.7 per cent in sugar, and 60.5 per cent in wheat.

“We are glad with the accomplishments recorded so far. Accordingly, this policy is expected to continue with vigor until the underlying imbalances within the Nigerian economy have been fully resolved,” he added.