Tag Archives: MPC

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.


New Lease of Life for Commercial Paper Market




Globally, the private sector is critical to economic growth and poverty reduction in any economy.

It is the engine of growth for any economy as successful businesses create jobs and pay the taxes which in turn enables governments to carry out its developmental role.

However, in Nigeria, the flow of banking sector credit to this critical segment of the economy has continued to dwindle.

In fact, figures from the Central Bank of Nigeria (CBN) showed that credit to the private sector fell in May 2018, to N22.207 trillion year-on-year as against the N22.254 trillion it was in April.

The CBN report had shown that industry gross credit recorded a 3.63 per cent decrease in April 2018, the lowest since January 2017.

Therefore, desirous of ensuring that it boost lending to the real sector of the economy, the CBN at the end of its Tuesday’s monetary policy committee (MPC) meeting, announced incentives to encourage commercial banks lend to sector.

CBN Governor, Mr. Godwin Emefiele, also said the new approach, which would be tied to the Cash Reserve Ratio (CRR) mechanism.

According to him, lending to the real sector had declined in recent times, prompting an innovative approach to encourage banks boost credit to the sector.

He disclosed that the new arrangement that would make loans available at single digit with a minimum tenor of seven years and two years moratorium was considered.

He said: “The first approach, where we said, in order to achieve the objective of lowering interest rate particularly to those priority sectors– manufacturing sector, agric sector– that we will encourage large corporates to issue commercial papers (CPs) to the market and there will be a memorandum that will detail explanations of what they are going to do with that money.

“In order to complement the effort of the banks, we will expect that these CPs will come at low rate at single-digit of nine per cent or below that, and for long tenor at a period of seven years with a specific purpose for that loan.

“If the central bank sees those kinds of notes in the market, we will complement the effort of the banks through a mechanism to support that bank that lends to that corporate at single digit rate.

“It is not meant to bring competition in the money deposit banks; it is meant to complement their efforts. The most important thing is that we want to see to it that we achieve a single digit rate.”

The second approach, he disclosed, works in such a way that any bank that lends money for new projects and planned expansion that are verifiable (not refinancing), for seven years (inclusive of two years moratorium) at nine per cent interest rate, would compel the CBN to go into that bank’s CRR and release equivalent of that financing from its CRR at zero kobo spread.

Emefiele said: “We feel this is novel; it is something that we should give a chance. In the past, we had reduced CRR and released liquidity into the market, but the liquidity was not channelled properly to the high impact corporations – we mean employment-generating sectors or output-improving sectors of the economy.

“So, we decided we should approach it through this note. We believe this will work because rather than the banks keeping the money in the reserves, they can key into this and promote these transactions as long as they meet the terms and conditions.

“More details on this will be provided soon for the banks and everybody to know.”

The development is expected to strengthen activities on the Commercial Paper segment of the market, where transactions had risen to N1.06 trillion from zero level in 2013.

The FMDQ OTC Securities Exchange has done a lot in reviving the CP market.

CPs are unsecured promissory notes with a fixed maturity of less than one year, issued by companies to raise money to meet short term finance obligations. The notes are backed by the promise of the issuers to repay based on certain agreed terms.

Since 2017, several companies which included Rand Merchant Bank, FSDH Merchant Bank and recently, Dangote Cement and Stanbic IBTC, have issued commercial paper.

To analysts, following banks’ reluctance to lend, CPs have become an increasingly attractive source of funding for corporates with short-term obligations to meet.

CP issuance isn’t for everyone, but corporates with the right credentials could do worse than to sell short-dated paper, a report by Treasury Today stated.

“The issuance of CP has to be put within the context of a mix of funding options that are available to corporates. Short-term funding is traditionally cheaper than long-term funding. In addition to size you also need credit quality,” the report quoted Managing Director of Capital Market Daily, Pieter van Dyck, to have said.

Moreover, corporates with active CP programmes are often better able to negotiate with their banks and can take advantage of the arbitrage opportunities available, Dyck added.

“It is true corporates with CP programmes are able to negotiate better deals with their banks – which in turn drives down the weighted average cost of funds. This is probably the most important reason why corporates issue CP.”

Also, analysts at Afrinvest Securities Limited, noted that the decision to encourage large corporates to issue commercial papers which the central bank would buy, “is a form of Quantitative Easing (QE) in advanced markets, a last-ditch effort to boost growth after the 2009 global recession which recorded mixed impact.”

Afrinvest added, “We believe this is an unlikely avenue for growth in Nigeria, given a largely informal economy which would not benefit directly from the proposed stimulus, probably targeted at large corporates (prime borrowers), and multiple structural factors that currently inhibit credit transmission. “

Commenting also on the proposal to reduce CRR for banks that direct long-term credit at nine per cent, with seven years tenor and two years moratorium, to critical sectors such as manufacturing and agriculture, Afrinvest stated, “We believe banks will not bite as long as structural barriers to accessing credit – such as lack of credit histories, lack of a collateral registry and poor competitiveness and productivity – are not addressed. Indeed, in November 2015, the MPC attempted the selective CRR reduction to mild reception and success.

“As we have noted in our prior reports, the key to unlocking strong and sustained growth lies in resolving the challenges that hinder productivity and competitiveness in Nigeria. While the MPC retained all policy rates and stayed the course as we anticipated, there were welcome surprises.

“We observed increased leaning towards a hawkish sentiment as three members voted for a rate hike, up from a member in the May meeting. Generally, risks of foreign capital flows reversal arising from increasing US treasury yields and near-term risk factors to inflation continue to influence the decision making of committee members.

“We expect market reaction to the MPC decision to be neutral, in part, because this has been priced in, and mainly due to the extended disharmony between current market yields and the MPR. The CBN has abandoned rate setting through the MPR in favour of its money market operations which are more indicative of its intentions, and we expect this to continue for the rest of the year.

“Equities continue to suffer from foreign capital outflows and in the absence of a positive trigger in the domestic market, we expect investors to continue to trade cautiously. Political risk and uncertainties ahead of the 2019 General Election are factors that could worsen foreign capital flight,” it added.

Similarly, an analyst at Ecobank Nigeria, Mr. Kunle Ezun, who welcomed the initiative by the MPC, said the move would support the growth of the Nigerian economy.

“The idea is that for you to drive growth, you need the banks to lend. Most of the banks today are exposed to foreign currency loans and as such they have huge non-performing loans that is constraining them to give out credit to corporates.

“So, the idea is to encourage corporates not only to get liquidity, but get it at a very cheap rate. Today, a lot of the corporates are not comfortable with the rates at which the commercial banks give out their loans. That is where the CBN comes in to bridge the gap.

“Most importantly, what the Commercial Paper would do for a lot of corporates is to provide access to fund for expansion,” he said.

On his part, the chief executive of Nova Merchant Bank Limited, Mr. Chinedu Ikwudinma, who welcomed the move by the CBN, explained that, “commercial paper offers corporates a wider pool of funding.”

To analysts at Cowry Asset Management Limited, the proposed special interventions by CBN to directly buy CPs issued by corporates and its encouragement of the deposit money banks to do same via a differentiated dynamic cash reserves requirement regime, would be a catalyst for the much-needed economic growth.

Exchange rate unification not happening soon, say analysts


The possibility of having a single exchange rate for the naira is not likely to be achieved any time soon, analysts at FBN Quest, the research arm of FBN Holdings have said.

Nigeria has at least, four exchange rates, which include one for Muslim pilgrims going to Saudi Arabia, another for oil marketers, rate for foreign travel and school fees, in addition to the official market rate.

The International Monetary Fund (IMF) has continually insisted that to ensure further stability in the foreign exchange market, Nigeria needed to unify her exchange rates. Nigeria had battled a currency crisis brought about by low oil prices, which tipped her economy into recession and created chronic dollar shortages.

According to a report released ahead of the Monetary Policy Committee (MPC) July meeting slated for next week, FBN Quest analysts said although one member of the committee called for the apex bank to pursue exchange rate convergence at different market segments, the possibility of realising the goal is slim.

“On the naira exchange rate, one member called for the CBN to pursue the convergence of the different segments of the market. Such a trend is not evident on NAFEX or from the CBN’s rate for preferential transactions (N305) although it could be discerned from the rates at the CBN’s wholesale auctions. We still do not see the unification of rates anytime soon,” they said.

The report titled: ‘A restatement of Caution’, analysed the personal statements of MPC members released last week by the apex bank and gave their verdict.

“The CBN last week released the personal statements arising from the last meeting of the monetary policy committee (MPC) in late May. Eight members of the committee voted for no change, and one for a hike in the policy rate of 50 basis points. We would have welcomed the start of easing but accept that the latest statements suggest otherwise. Their main concerns are that the macro-economy will be distorted by fiscal challenges and that the offshore portfolio community will rush for the door marked exit en masse,” the report stated.

On inflation, one member acknowledged that the policy rate was finally positive in real terms. Another noted that staff forecasts pointed to single-digit core inflation year-on-year in June.

“Those same forecasts see upward trending pressures in second half of 2018, which the committee explains in the context of fiscal developments: the late passage of the 2018 budget (signed off since the committee met), the expansionary nature of the N9.12 trillion budget, and the determination of the Federal Government of Nigeria to disburse undrawn capital releases from the 2017 budget before moving onto those projected for 2018. This is the single largest risk identified in the statements. Additionally, several members made the point that politicians generally inject cash into the economy ahead of Nigerian elections.

“In our view the MPC’s fears are overstated because projected FGN spending in 2018 is no more than eight per cent of forecast Gross Domestic Product, and, based on precedent and the late passage of the budget, is most unlikely to be released in full.As a broader point, we have examined the data for the run-up to the 2011 and 2015 elections, and have not found macro turmoil in the series for money supply, inflation and the public finances.”

One member was of the view that contractors should see the settlement of 40 per cent to 70 per cent of their arrears within the 2018 budget.

“Our expectation is that because of its stated concerns, the MPC will again make no change when it meets next week. Almost out of hope, however, we still see a rate cut by end-2018 and point to the statement in the communique that it would be prudent to analyse the national accounts for second in detail and assess the Federal Government of Nigeria’s fiscal stance once the 2018 budget had been approved before revising its own stance,”the report added.