Single-digit Financing, Boost to Economic Growth

The decision by the Monetary Policy Committee (MPC) to hold monetary policy rate at 14 per cent has generated reactions from economic and financial analysts. Specifically, the experts applauded the MPC’s decision to permit banks to increase lending to key sectors of the economy to further drive growth…




Holding the Monetary Policy Rate (MPR), which is the base lending rate, by the Monetary Policy Committee (MPC), chaired by the Governor of the Central Bank of Nigeria (CBN), did not come as a surprise to most economic experts as many of them predicted a ‘hold’ status ahead of the meeting. What, however, came as a surprise was the decision of the MPC to come up with a creative way to ease the challenge of sourcing adequate funding by the productive sector of the economy to boost growth. The gesture came as a result of the acknowledgement of the MPC that it is practically impossible to create job in an environment with deficit infrastructure.


Heterodox Approach

The MPC rose at the end of its two-day meeting and said it believed, “the bank should continue to encourage deposit money banks (DMBs) to increase the flow of credit to the real economy to consolidate economic recovery.”

In this regard, the committee believed, “a heterodox approach to reform the market in order to strengthen the flow of credit would be appropriate at this time.”

As a result of the resolve of the MPC, credit constrained businesses, particularly the large corporations are encouraged to issue commercial paper to meet their credit needs and the CBN may, if need be, buy those instruments to complement the efforts of the deposit money banks (DMBs) also known as commercial banks.


Cheap, Long-term Credit

Besides easing credit to businesses as proposed by the MPC, a special attention is expected to be given to businesses in the manufacturing and agriculture sectors of the economy.

“In addition, as a way of incentivising deposit money banks to increase lending to the manufacturing and agriculture sectors, a differentiated dynamic cash reserves requirement (CRR) regime would be implemented, to direct cheap long-term bank credit at nine percent, with a minimum tenor of seven years and two years moratorium to employment elastic sectors of the Nigerian economy,” it said.

Emefiele has assured private sector practitioners that details of this framework were being worked out by the Banking Supervision, Monetary Policy and Research Departments of CBN to investors in the domestic economy. In addition, the policy would trigger the re-pricing of financial assets by deposit money banks, thus further constricting credit to the real sector, which would not promote inclusive growth.

In considering the option of loosening, the committee assessed the potential effects of stimulating aggregate demand through lower cost of capital. This could stimulate consumption and aggregate demand. The committee, however, considered its potential relevance, taking into account the expected liquidity injections from the 2018 budget, increased FAAC disbursements and election-related spending ahead of the 2019 general elections. If these crystallise, it would exacerbate inflationary and exchange rate pressures as well as return the real interest rate into negative trajectory. Moreover, lowering the policy rate may not translate to an automatic reduction in market rates due to poor transmission mechanism owing to structural rigidities.

The committee was also of the view that loosening could reverse the gains already made on reduced importation, which has strengthened the current account balance. It would also lower banks risk appetite and possible rise in NPLs which could negatively impact the banking industry stability.

In its discussion for a hold, MPC noted that risks to the macroeconomic and financial environment appear fairly balanced with improvement in output growth and inflation. “Holding policy at the current stance would support growth and further moderate inflation,” it said.

The committee, however, noted the preference of the public for loosening, the concerns that the MPC had held the MPR at 14 per cent since July 2016 and also considering the dynamic nature of the market, the MPR may have lost its signaling effect to the market. The argument in favour of maintaining the current policy stance is to monitor the magnitude of the liquidity impact of the fiscal injections and election-related expenditure ahead of the 2019 general elections.


The Verdict

In consideration of the foregoing, therefore, the committee decided by a vote of seven members to retain the Monetary Policy Rate (MPR) at 14 per cent alongside all other policy parameters. Two members, however, voted to increase the MPR by 50 basis points, while one member voted to increase the MPR by 25 basis points.

Consequently, the MPC voted to retain the MPR at 14 per cent; CRR at 22.5 per cent; Liquidity Ratio at 30.0 per cent; and Asymmetric corridor at +200 and -500 basis points around the MPR.


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