Some Policies of CBN Could Worsen Macroeconomic Imbalances – Analysts
Chapel Hill Denham’s analyst, Omotola Abimbola, has said in a note that some of the Central Bank of Nigeria’s policies could worsen macroeconomic imbalances.
Chapel Hill Denham’s analyst stated that although the MPC’s decision did not come as a surprise, the level of uncertainty remains high, as key issues regarding FX liquidity and rising inflation are yet to be addressed.
The MPC voted to maintain status quo on all policy parameters, notably, eight out of the 10 members voted to retain the benchmark Monetary Policy Rate (MPR) at 12.5%.
However, two voted for further rate cuts.
Meanwhile, the MPC voted unanimously to retain the asymmetric corridor around the MPR at +200bps/-500bps, Cash Reserve Requirement (CRR) at 27.5%, and liquidity ratio at 30.0%.
The key considerations of the MPC were cautious optimism of a minor real GDP contraction in 2020
Due to outbreak of coronavirus, the International Monetary Fund estimated that the Nigeria’s gross domestic products would drop by 5.4% in 2020.
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Meanwhile, analysts at Chapel Hill Denham expect the GDP to decline 2.5% with strong recovery prospect in 2021.
CBN projection shows a very optimistic 1.03% drop in growth forecast for Q2-2020.
The MPC commended the efforts of the CBN through various intervention funds, aimed at softening the impact of the pandemic on the economy.
Though, the Committee expressed concerns over persistent uptick in inflation, noted that headline inflation rate rose to 12.56% year on year in June from 12.40% in May.
Also, Committee stated that the major drivers are structural factors, including disruptions to key supply chains.
Then, the CBN called for more policies to attract private capital to finance the infrastructure gap, and commended the government for approving the CBN-led Infrastructure Development Company (IDC).
IDC aims to invest N15 trillion over the next five years.
The Committee looked into weak performance of monetary aggregates. Broad money supply (M3) rose at an annualised rate of 1.64% in June from 2.72% in May, also below the indicative target of 13.09%.
More so, net domestic credit (NDC) has fared better, up 5.17% in June, driven by the LDR policy, which has increased gross credit by N3.3 trillion from N15.56 trillion in May 2019 to N18.90tn in June 2020.
Resilient performance of the banking industry. NPL ratio was estimated at 6.4% in June, down from 6.58% in April 2020, and 9.4% in June 2019.
Chapel Hill Denham’s analyst stated that although the MPC’s decision did not come as a surprise, the level of uncertainty remains high, as key issues regarding FX liquidity and rising inflation are yet to be addressed.
Abimbola said the focus of investors has shifted to administrative policies of the Bank, which are usually taken outside of MPC meetings, but with more profound impacts on financial markets.
“Some of these administrative decisions have resulted in an unprecedented level of divergence between market interest rates (NTBs: 2.2%, Bonds: 7.3%) and the benchmark policy rate (12.5%)”, Abimbola stated.
In addition, he explained that the divergence between the regulatory CRR (27.5%) and the actual CRR (estimated at 40% in March 2020) has also widened, due to the CBN’s preference for discretionary CRR debits, in place of OMO auctions, to mop-up liquidity.
By all indications, analysts said the CBN’s policy bias will likely remain pro-growth in the short term, despite rising inflation expectation and increased FX shortages.
“While structural factors and export concentration could be blamed for elevated inflation and FX liquidity challenges, some of the CBN’s policies could further worsen the macroeconomic imbalances.
“Increasing protectionist policies and deficit monetisation by the CBN will likely remain catalysts for inflation”, Abimbola explained.
Chapel Hill Denham stated that the financial repression strategy encouraged by the Bank, as well as lack of FX flexibility, will likely keep private capital inflows subdued, with consequences for the FX market.
“Ultimately, we believe the CBN would have to address some of the contradictions in its policy framework, which would require a repricing of interest rates to a more fundamentally sustainable level over the medium term”, Chapel Hill Denham stated.
Some Policies of CBN Could Worsen Macroeconomic Imbalances – Analysts
