Monetary Policy Overstretched, Fiscal Stimulus Needed to End Stagflation – Analysts

Whatapp News

Spread the love

By Nse Anthony-Uko,

ABUJA (Sundiata Post) – Analysts are of the consensus that the Central Bank of Nigeria (CBN) is overstretched in providing monetary policy solutions to get Nigeria out of the current economic downturn and stagflation.

Stagflation is persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.

The CBN at its Monetary Policy Committee (MPC) meeting failed to yield to pressure from the federal government through the Minister of Finance, Mrs Kemi Adeosun, calling for a cut in the benchmark interest rate in order to reduce the cost of borrowing from the domestic market.

All 10 members voted to retain the Monetary Policy Rate (MPR) at 14 per cent, the Cash Reserve Ratio at 22.5 per cent, liquidity ratio at 30 per cent and retain the Asymmetric Window at +200 and -500 basis points around the MPR.

The Committee however noted that stagflation is indeed a very difficult economic condition with no quick fixes: having been imposed by supply shocks as well as fiscal and current account (twin) deficits and as such monetary policy alone cannot move the economy out of stagflation.

Delivering the committee’s decisions in Abuja on Tuesday, CBN governor, Mr Godwin Emefiele said the apex bank has since 2009 expanded its balance sheet to bail out the financial system and support growth initiatives in the economy even though stimulating economic growth and creating a congenial investment climate is always and remains essentially the realm of fiscal policy and monetary policy in all cases only comes in to support sound fiscal policy.

According to him, while the CBN will continue to deploy its development finance interventions to complement the overall effort of fiscal policy towards reinvigorating the economy, the federal government need to come up with urgent fiscal measures to help the economy get out of the current recession.

“Members emphasized that improved fiscal activities, especially, the active implementation of the 2016 Federal Budget, and payment of salaries by states and local governments, will go a long way in contributing to economic recovery. In the same direction, the Committee urged the fiscal authorities to consider tax incentives as a stimulus on both supply and demand sides of economic activities

“With respect to providing opportunity to the public sector to borrow at lower rates to boost consumption and investment spending, the Committee agreed that while it was expected to stimulate growth through aggressive spending, doing so without corresponding efforts to boost industrial output by taking actions to deepen foreign exchange supply for raw materials will not help reduce unemployment nor would it boost industrial capacities.

“The Committee was also of the view that consumer demand for goods which will be boosted through increased spending may indeed be chasing too few goods which may further exacerbate the already heightened inflationary conditions.   The Committee also feels that there was the need to continue to encourage the inflow of foreign capital into the economy by continuing to put in place incentives to gain the confidence of players in this segment of the foreign exchange market. Consequently the Committee considers that loosening monetary policy now is not advisable as real interest rates are negative, pressure exists on the foreign exchange market while inflation is trending upwards,” Emefiele said.

Reacting to the decision of the MPC in maintaining status quo, analyst said monetary policy has been stretched to its limit and easing would have made the apex bank to lose credibility. According to ‎Head, Research and Investment Advisory at Sterling Capital, Sewa Wusu, CBN is trying to encourage capital inflows and they still believe that foreign portfolio will come.

“The CBN governor, Godwin Emefile said almost $1 billion came in in the last three months. I believe at monetary policy have done enough and waiting for the fiscal side to drive growth.” On the comments of the Minister of Finance, Kemi Adeosun prior to the MPC decision that the apex bank cut rates, Wusu said if the MPC had agreed to the comments of the finance monster, the credibility of the MPC would be at stake “so reversing the decision that it reached at the last meeting was not an option the MPC could have taken.

“Monetary policy has been stretched to its limit and has gotten to its threshold. It is now left to the fiscal side to drive growth and that can be made possible through spending targeted at necessary sectors.”

Analysts at Cowry Assets Management stated that the MPC decision was justified given the above considerations, especially with the limited tools available to CBN. “This should help restrain inflationary pressure and buy time for fiscal authority to begin to complement efforts of the monetary authority.

“We expect the fiscal authority to complement monetary counterpart by improving ease of doing business and provide infrastructure to help boost productivity and hence spur economic growth. Government can also divest public sector assets to help boost external reserves with their dollar proceeds.

“This will reduce forex rate which businesses need for importing machinery and non-locally source raw materials. Eventually, this will reduce cost push inflation and could thus encourage gradual ease of restrictive monetary policy which is needed for economic growth.”


Meanwhile, the Nigerian economy slipped into recession following another contraction in Q2, 2016. The August 2016 data showed domestic output in Q2, 2016 contracted by 2.06 per cent. This represented a decline of 1.70 percentage points  in output from the -0.36 per cent recorded in Q1, and 4.41 percentage points lower than the 2.35 per cent growth in the corresponding period of 2015.  The non-oil sector contracted by 0.38 per cent, compared with the 0.18 per cent contraction in the preceding quarter. Agriculture; Other Services; Education; Arts, Entertainment & Recreation; and Information & Communication, grew by 4.53, 4.32, 2.88, 1.80 and 1.35 per cent, respectively.


According to the MPC, the shocks associated with energy shortages and price hikes, scarcity of foreign exchange and depressed consumer demand, among others, apparently proved to be more damaging than expected.

Recognising that the conditions which precipitated the current economic downturn were not essentially sensitive to monetary policy interventions, the MPC again renewed its call for urgent complementary fiscal policies to resuscitate production and engineer aggregate consumption.

In particular, members underscored the imperatives of diversification of the economy away from oil into agriculture, manufacturing and services as well as more efforts towards payment of salaries and arrears of public sector employees particularly in states and local governments to stimulate aggregate consumption, as part of the overall fiscal policy menu kit. On the supply side, efforts must be intensified at increased capital expenditure to redress infrastructural deficits, improve the business environment and spur growth.

The Committee noted that headline inflation (year-on-year) rose again in August to 17.6 per cent, from 17.1 per cent in July 2016, thus maintaining the upward trend since January 2016.  The increase in headline inflation in August reflected increases in both food and core components of inflation. Core and food inflation have increased from 16.93 and 15.80 per cent in July to 17.2 and 16.43 per cent, respectively, in August 2016.

The Committee nonetheless, noted that the month-on-month evolution of consumer price inflation has been less phenomenal.  The headline inflation index rose by 1.0 per cent in August from 1.3 per cent in July, 1.7 per cent in June; and 2.8 per cent in May 2016.

Similarly, the core index has been increasing at a decreasing rate since May when it rose by 2.7 per cent. It moderated to 0.85 per cent in August from 1.22 per cent in July and 1.83 per cent in June. The same pattern of moderation is seen in the food (month-on-month) index which rose by 1.2 per cent in August from 1.21 per cent in July, 1.4 per cent in June and 2.6 per cent in May.

The MPC further noted that the pressure on consumer prices continues to be associated with reform-related legacy and structural factors including high costs of electricity, transport, production inputs, as well as higher prices of both domestic and imported food products.

The MPC expects that with the onset of the harvest season, the restrictive stance of policy as well as the flexible FX regime, prices will begin to taper in the fourth quarter.

Spread the love

Whatapp News