CBN warns of imminent recession, retains interest rates

Nigeria is on the brink of recession. This is due to the low level of economic activities in the country occasioned by the late passage of the Federal Government budget by the current administration which has made the country to suffer two successive negative quarters.

The alarm was raised by the Central Bank of Nigeria (CBN) yesterday as part of the outcome of the apex bank’s Monetary Policy Committee (MPC) meeting headed by the CBN Governor Godwin Emefiele.

Ostensibly as part of a general stimulus package to mitigate the economic pains, the CBN at the meeting maintained all the key interest rates regime at 12 per cent below the inflation rate of 13.72 per cent.

The CBN also announced a plan to commence a flexible management of the foreign exchange (forex) regime in the country. The implication is that the current dispensation which places the naira at a fixed rate against major currencies of the world, including the United States dollar to which it exchanges N200 at the official window and about N320 at the parallel market, is to give way to the forces of demand and supply to determine the true value of the national currency and the exchange rate at both the interbank and the parallel markets.

The development, experts however believe, would see to the convergence of the two market rates which has since widened, thus creating arbitrage for some privileged individuals who get forex allocation at the official window but trade at the parallel end for huge profit.

The MPC observed that the shoddy implementation of budgets in the country as well as other fiscal polices like the high energy tariff were part of measures decelerating growth in the country and recommended a more coordinated synergy between the monetary and fiscal authorities in the country to check the trend.

Disclosing the committee’s conclusion that recession is imminent, the CBN governor said : “ In the first quarter of 2016, the economy suffered from severe shocks related to energy shortages and price hikes, scarcity of foreign exchange and depressed consumer demand, among others. Consequently economic agents could not undertake new investments or procure needed raw materials. Shortage of foreign exchange arising from low crude oil prices manifested in low replacement levels for raw materials, other inputs as well as new investments. In addition, the energy crisis experienced in the first five months of the year, resulted in increased power outages and higher electricity tariffs, as well as fuel shortages; which led to factory closures in some cases.

The prolonged budget impasse denied the economy the timely intervention of complementary fiscal policy to stimulate economic activity in the face of dwindling foreign capital inflows. Aggregate credit to the private sector remained highly tapered while credit to government grew beyond the programmed benchmark for the period. The Committee, however, noted that many of the prevailing conditions in the economy during the review period were outside the direct control of monetary policy, but hopes that the implementation of the 2016 Federal Budget, supported by relevant sectoral policies and easing supply shocks in energy and critical inputs, would provide the needed boost to the economy.

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