Stagflation: MPC orders CBN, banks on higher export earning measures
…Recommends higher consumption, investment
…Retains 11.50% MPR, 27.50% CRR
By Uthman Salami
The Monetary Policy Committee (MPC) has directed the Central Bank of Nigeria (CBN) and financial institutions to implement measures that will boost export earnings, increase foreign exchange earnings, increase local output and eliminate stagflation.
Governor, Central Bank of Nigeria (CBN), Mr. Godwin Emefiele announced at the end of the MPC meeting that members urged the Bank and financial institutions to continue to put in place measures that will boost export earnings.
In the Committee’s view, he disclosed that such measures should include boosting consumption and investment, as well as diversifying the base of the economy through FX restrictions for the importation of goods and food products that can be produced in Nigeria.
Nigerian economy according to the CBN Governor is confronted with twin problems that comprise of stagflation, reflected in rising inflation with simultaneous contraction in output, which must be addressed as soon as possible.
Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.
He said the committee members have recognized that the strategies put in place to rein in inflation through the use of series of administrative measures by the Bank to control money supply through liquidity mop up in the banking industry had started to yield results.
According to him, “It also recognized that measures put in place to stimulate output growth through the use of its intervention facilities to inject liquidity into employment generating and output stimulating initiatives like the Anchor Borrower Program, Targeted Credit Facility and Agri-Business Small and Medium Enterprise Investment Scheme (AGSMEIS) had started to yield results.
“In the view of the MPC, although the economy had successfully exited the recession, the recovery was very fragile given that the GDP of 0.51 per cent was still far below population growth rate. Committee therefore was of the view that, there is a strong need for the Monetary Authorities to consolidate on all administrative measures taken not only to rein in inflation, but also on the actions so far taken to grow output.
“On consumption and investment, MPC noted that the intervention facilities under the Anchor Borrowers was N631.4 billion granted to 3,107,949 small holder farmers cultivating 3.8 million of land hectares; for the AGSMEIS, N111.7 billion to 29,026 beneficiaries; and for the Targeted Credit Facility, N253.4 billion to 548,345 beneficiaries – comprising 470,969 households and 77,376 SMEs.
“Notwithstanding that all these have helped in boosting output, the Bank should continue to aggressively increase its interventions in these subsectors, including agricultural processing and manufacturing.
“Under the National Youth Investment Fund, N2.04 billion was disbursed to 7,057 beneficiaries, of which 4,411 were individuals and 2,646 were SMEs.
“Under the Creative Industry Financing Initiative, the CBN has disbursed N3.19 billion to 341 beneficiaries across movie production production, movie distribution, music and software development.
“Under the N1 trillion Real Sector Intervention, N856.3 billion had been disbursed for 233 real sector projects, of which 77 are in light manufacturing, 36 in agro-based industry, 30 in services and 11 in mining.
“Under the N100 billion Healthcare Support Intervention fund, N97.4 billion has been disbursed for 91 health care projects, of which 26 are pharmaceutical and 65 hospital services.
“Also, N232.5 million has been disbursed to 5 beneficiaries under the CBN Health Care Grant for Research on COVID-19 and Lassa Fever.
“Under the National Mass Metering program, N35.9billion was disbursed to 9 DisCos for the acquisition of 656,752 electricity meters. Under the Nigerian Electricity Stabilization Facility 2 (NEMSF-2), N93.8 billion has also been disbursed to 11 DisCos.”
The Monetary Policy Committee (MPC) of the apex bank, at the end of its two-day meeting on Tuesday, retained all policy parameters.
However, committee retained the Monetary Policy Rate (MPR) – benchmark interest rate – at 11.50 per cent, while asymmetric corridor remained at to +100/-700 bps around the MPR
It also retained the cash reserve ratio at 27.50 per cent, and the liquidity ratio at 30.00 per cent.
The Association of Capital Market Academics of Nigeria (ACMAN) says retention of all policy parameters by the CBN is in line with expectations, due to stagflation.
Reacting to the development, ACMAN President, Prof. Uche Uwaleke, said the status quo was expected.
Uwaleke said a hold position was the most expedient decision to take, given the prevailing economic condition of the country.
“As long as stagflation continues to challenge the economy, the CBN’s monetary policy stance will be dictated by the need to strike a balance between tackling inflation and supporting economic growth.
“Against the backdrop of elevated inflation, a reduction in MPR or other policy parameters, though persuasive, will only serve to worsen foreign exchange pressure despite recent attempt to unify exchange rates, and exacerbate inflationary trend.
“On the other hand, given weak economic growth and the need to support an economy still reeling from the impact of COVID-19 pandemic, tightening monetary policy via increase in MPR is capable of rolling back the modest progress being made.
“It’s instructive to note that the non-oil sector GDP actually tanked during the first quarter of 2021.
“So, maintaining the status quo while strengthening the CBN’s intervention initiatives in critical sectors of the economy is a wise decision,” Uwaleke said.
Speaking on the implications to the stock market, he said that it would be insignificant because the MPC outcome was expected.
“Equities market performance has been driven largely by interest rate expectations and this will continue to be the case. Profit taking and portfolio rebalancing in favour of fixed income securities where yields are on a steady rise will continue,” he added.
The Chief Operating Officer, InvestData Ltd., Mr Ambrose Omordion, said the outcome was anticipated following the stagflation state of the economy and the weak economic growth of 0.51 per cent, despite the seeming slide in inflation.
Omordion said that the outcome was in line with the global MPC trend to sustain economic recovery and drive.
He said the stock market would breathe out as investors’ position for March year-end audited results, half-year interim dividend and second quarter earnings season.
According to him, the market is currently witnessing a divergence between strong or rising earnings and weak or falling stock prices.
This, he said, revealed strong potential in equity space, as window to hedge against inflation in 2021.
“Investors should target companies with strong earnings ahead of half year earnings season, knowing that every investment or trade is against expectations,” Omordion said.
