By Nse Anthony-Uko
ABUJA (Sundiata Post) – The Central Bank of Nigeria (CBN) on Tuesday urged the federal government to clear all outstanding debt to domestic in order to stimulate the nation’s economy.
The apex bank also retained all major policy rates unchanged at the end of its Monetary Policy Committee meeting.
Arising from its last MPC meeting for 2016, the CBN retained the Monetary Policy Rate (MPR) was maintained at 14 per cent; Cash Reserve Ratio (CRR) was maintained at 22.5 per cent; Liquidity Ratio was maintained at 30 per cent as well the the asymmetric window of +200 and -500 basis points around the MPC.
CBN Governor, Godwin Emefiele, during his briefing to announce the decisions indicated that monetary policy wad at the limits of its effectiveness in spurring growth, adding that subsequently he would expect fiscal policy to do most of the work of improving Nigeria’s growth performance.
Nigeria’s economy slipped into recession following a second consecutive contraction in Q2, 2016 as domestic output contracted
in the quarter by 2.06 per cent.
The recession worsened in third quarter, 2016 as output contracted further by 2.24 per cent relative to its level in the previous and corresponding quarter of 2015. The non-oil sector grew by 0.03 per cent, driven by Agriculture which grew by 4.54 per cent, following the 0.38 per cent contraction in Q2 2016,.
The MPC urged the Federal Government to urgently assess the extent of its indebtedness to domestic economic agents and develop a framework for securitizing the debts in order to settle its outstanding domestic contractual obligations which cuts across all sectors of the economy.
These accumulated debts, the committee noted, has slowed business activities of economic agents; most of who are indebted to the banking system, thus compromising the integrity of the financial system. It also advised the Bank to commit to greater surveillance and deployment of early warning systems in managing the banking system.
Emefiele also stated that the causes of inflation were largely structural and so the CBN’s current tight monetary policy stance combined with an improved agricultural harvest should limit the growth of inflation.
Analysts believe that the MPC’s decision to keep its major policy rates unchanged was an attempt to walk the tightrope between supporting growth and curbing inflation, and attracting foreign investors without raising domestic borrowing costs.
Chief Executive, Times Economics, Dr Ogho Okiti, in his analysis of the committee’s decisions said “With inflation at 18.3 per cent and the MPR at 14 per cent, the real interest rate was -4.3 per cent. Real interest rates dropping further into negative territory would have made Nigerian assets less attractive to foreign investors. However, raising the MPR would have increased borrowing costs for local borrowers. This presented an additional difficulty for the MPC as it had to balance the conflicting requirements of foreign and local investors,” he said
The MPC noted that the key undercurrents – shortage of foreign exchange, low fiscal activity, high energy prices and the accumulation of salary arrears, especially at the sub-national levels of government – continued in the third quarter of the year.
The MPC reiterated the limitations of monetary policy in reversing the current stagflationary condition in the economy, which it traced to supply and demand shocks. Members stressed the need for a robust and more keenly coordinated macroeconomic policy framework that would restart output growth, stimulate aggregate demand and rein in inflation expectations.
The MPC welcomes efforts at resuscitating planning, noting the progress made in developing the medium term economic recovery plan.
