Economist Spots Gap in Policy Intervention, Says It’s Supply-side Inclined
As the monetary authority continues to stimulating economic growth, an economist has noted that some intervention polices are targeted at aggregate supply are not adequate for aggregate demand.
Prof. Adeola Adenikinju, a member of the Monetary Policy Committee (MPC) revealed this in his personal note obtained via the recently published communique.
In his submission, Adenikinju stated that Covid-19 has brought contraction in aggregate demand and supply due to its direct effects on productivity.
Adenikinju however explained that unemployment, income cuts and impacts of lockdown have direct effects on nominal income.
He submitted that rising inflation rate and increase in energy prices have impacted negatively on real incomes. We know that households’ consumption constitutes over 70% of the gross domestic products.
“However, with the loss of jobs, loss of income, salary cuts, etc., as well as shocks to energy prices, food prices etc., there is a need for more stimulus to support aggregate demand and prevent unwanted inventory accumulation”, Adenikinju remarked.
He further provided that the widened output gap provides some legroom to expand aggregate demand without major inflationary push.
“Fall in aggregate supply arising from decline in labour productivity, fall in capacity utilization, restriction on transportation, closure of some businesses, flooding in agricultural producing areas compounded by security challenges in multiple fronts have significantly impacted on aggregate supply and drove up inflation”, Adenikinju explained.
At the meeting, having noted that the global economic remains fragile, Prof. Adenikinju had voted that the benchmark interest rate should be cut.
“We need to do a lot more for the flagging economy and reduce the probability for another recession in Nigeria”, Prof. Adenikinju told members of the Committee.
In his submission according to MPC communique published by the Central Bank of Nigeria, Adenikinju voted that MPR should be reduced by 100 basis points to 11.5%.
Also, he voted that the Committee should retain cash reserve ratio 27.5% while maintaining liquidity ratio at 30% and adjust the asymmetric corridor around the MPR at -700+100 bases points.
In his assessment, the Economist stated that global economic recovery remains fragile, in spite of improving prospects.
He explained that fear of second wave of coronavirus is becoming more real with recent upsurge in reported cases, which may reverse or slowdown pace of reopening in seriously infected countries.
“Until there is a vaccine and it is widely deployed, uncertainty will continue to affect confidence in global economic recovery”, Adenikinju explained.
He stated that the monetary policy remains soft in most countries, as global inflation is largely muted.
“The rise in global debt due to rise in public spending as part of stimulus plans and fall in output growth may pose major problems for sustained recovery in the medium term”, prof. Adenikinju added.
He stated that the global trade is projected to remain below pre-pandemic level throughout 2020.
Oil price remains volatile although within a narrow band of upper US$30s to midUS$40s/barrel.
“This volatility will continue as the market tries to balance demand and supply forces”, he explained.
“Development in global oil market is very important to how Nigeria will recover from Covid-19.
“As countries continue to stimulate their economies, many of them now have negative real policy rates.
“Countries with negative real policy rates include Brazil, USA, Japan, Euro Area, India and the UK.
“Many countries have experienced significant currency depreciation against the dollars”, he explained.
He said: “Domestic Economic Performance Presentations by the Staff of the Bank on the “Banking System Stability Review” and the “Economic Report” painted mixed pictures of the domestic economy.
“The Financial Soundness Indicators (FSI) show that the Nigerian financial system remain strong and resilient.
“The NPLs ratio improved slightly from 6.4% in July 2020 to 6.1% in August 2020.
“The Return on Equity (ROE) and Return on Assets (ROA) at 21% and 1.9% continue to outpace those of comparator countries.
“Interest margin to total operating income however declined sharply from 67.6% in July 2020 to 63.2% in August 2020”, Adenikinju stated in the appraisal.
Also, he noted that aggregate banking credit grew since the last meeting of the MPC in July.
“The CBN recorded impressive progress in the disbursement of intervention funds to support the economy during Covid-19”, he added.
The Healthcare Credit Support of N100 billion has been drawn down by N44.47 billion to support 41 Projects in the healthcare sector.
Also, N73.685 billion has been disbursed under the Targeted Credit Facility (TGF) fund of N100 billion to 120,074 beneficiaries.
In addition, over N216.878 billion have been disbursed out of N1 trillion to fund 87 real sector projects in manufacturing, agriculture and services.
However, Adenikinju stated that while the Deposit Money Banks (DMBs) are doing relatively well, it is important to continue to provide strong oversight on the Other Financial Institutions (OFIs).
“They should be used as important channels to disburse some of the Bank’s intervention funds especially to households and small businesses”, Adenikinju advised.
In his submission, he noted the fact that the real GDP declined by -6.1% in Q2, 2020.
“This is not unexpected given the impacts of the lockdown and Covid-19 on the economy.
“However, there were mixed impacts on the sectors of the economy”, he added.
He explained that some sectors like agriculture, telecommunication, broadcasting, financial institutions, motor vehicles and assembly, coal mining, chemicals and pharmaceuticals, wastes, supply, sewage and waste management reported positive growth rates in Q2, 2020.
However, more sectors of the economy recorded negative growth rates.
Sectors that recorded over 10% decline in Q2, 2020 included oil refining, textiles, apparel and footwear, pulp, paper and paper products, wood and wood products, nonmetallic products, construction, accommodation and food services, transportation, publishing, insurance, real estates, and education.
Meanwhile, all measures of inflation rose in August. Headline inflation rose 13.22% year on year in August 2020 up from 12.82 in July 2020.
Core inflation rose to 10.52% in August 2020 from 10.10% in July 2020. Also, food inflation rose to 16.00% up from 15.48%.
Drivers of inflation rate are; increase in good and non-alcoholic beverages, transport, processed food and farm produce, clothing and footwear, housing, education, water, gas and other fuel, restaurant, hotel and other miscellaneous goods and services.
He said, “As the economy emerges from the effects of the lockdown, some of these elements of costs are likely to trend downwards”.
Unemployment rate rose to 27.1% in Q2, 2020 up from 23.1% recorded in Q3, 2018.
Similarly, underemployment rate rose to 28.6% in Q2, 2020 from 20.1% in Q3, 2018. Both unemployment and underemployment rates were highest among the youths.
He however recognised that the equity market recorded positive development.
The Nigerian All-Share Index gained 5.5% between July 21, 2020 and September 18, 2020, signifying renewing investors’ confidence in the economy.
Between July 2020 and September 2020, Naira appreciated in the I&E window but depreciated in the BDC window.
“The fiscal system continues to pose significant challenges arising from current underperformance of government revenue, unrestraint growth in government recurrent expenditure, underperformance of capital expenditure and rising debt service ratio”, he explained.
Debt service rate rose to 84.1% of government revenue between January and August 2020 compared to 51.5% in January to August of 2019.
Negative output gap expands from -2.81% in Q1, 2020 to -9.1% in Q2, 2020.
“I do not think excess aggregate nominal demand is the fundamental cause of current inflationary pressure in Nigeria.
“The Nigerian economy is still in a very bad shape with negative growth of -6.1% in Q2 2020 and fear of negative growth in Q3 2020.
“The probability of a recession in 2020 is quite high.
“While the Purchasing Manager Index (PMI) and employment PMIs are trending upwards, the economy still needs further support”, he said.
He stated that fiscal authorities should frontload some of the key intervention funds under the Economic Sustainability Plan to support households and businesses at this very critical moment.
“The DMBs can do a lot more to pass on the low costs of funds to retail lenders in form of lowering of lending rates and to also boost consumer credits.
“The gap between savings rate of 2.78% and maximum lending rate of 29.51% in August 2020, is very high and should be significantly narrowed.
“We need to diversify foreign exchange supply to the economy”, he explained.
Adenikinju stated that while measures to curb speculative, and even precautionary demand for foreign exchange is important, a more beneficial long term goal should be to expand the number of domestic projects and economic activities that generate more foreign exchange or that are import substituting.
Adenikinju recognised that there are currently very limited investible options for domestic economic agents.
“Banks need to create more products that will utilize the liquidity in the economy.
“CBN is currently involved in a number of intervention programmes to address the current fundamentals of inflation in Nigeria”, he said.
This include Agricultural intervention to boost agricultural output and reduce foodstuff prices.
There is also Energy interventions to support solar companies, electricity distribution companies and support for refineries for domestic markets and improved stability in the foreign exchange markets.
However, Adenikinju stated that there is need to complement these various initiatives to boost domestic aggregate supply and aggregate demand.
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Economist Spots Gap in Policy Intervention, Says It’s Supply Side Inclined