September 10, 2021/Proshare
By FBNQuest Research
In July the monetary policy committee (MPC) voted unanimously to leave its policy rate of 11.50% and other parameters unchanged. The personal statements written subsequently by the nine members present highlight their common ground. They tend to open with the global backdrop, derived mostly from the IMF’s latest World Economic Outlook. The Fund’s core message is that the rebound from the COVID-19 pandemic is uneven because the distribution and use of vaccines is uneven, one member notes that just 0.7% of the Nigerian population has access to vaccines. (The figure for most advanced economies is +/- 70%.) This underpins the view of another member that “the direction of economic developments is satisfactory, but the pace is less-than-desired”. The next committee meeting has been brought forward to 16 and 17 September. At this late stage, our hunch is that we will again have an unchanged stance.
Members are confident that the battle against inflation is being won. We see that the CBN’s in-house forecast for the headline rate at end-2021 is 14.0% y/y (and read today that the local media quote the federal finance minister as anticipating a rate in single digits in 2023).
One member terms the recent rise “transitory” and sees a steady decrease ahead on the basis of base effects, seasonality, and the success of the CBN’s sterilization measures and credit interventions in the sector. Another opines that the farmer/herder clashes are now declining. A third, standing perhaps on firmer ground, provides some welcome detail in his listing of challenges the authorities face in confronting food price inflation, including: the multiple taxation of interstate food transportation by the three tiers of government, the payment of herders/bandits by farmers to buy peace and settlements with security personnel during the transportation of farm produce.
We detect less confidence about growth in the statements. There are fears about the impact of a third wave of the virus, given the low vaccination rate in Nigeria. The negative output gap remains sizeable although one member notes a decline to -2.0% in Q1 from -2.3% in Q4 ’20.
Members rightly laud the continuing growth in credit extension. Quoting what we take to be the CBN’s series on lending by deposit money banks (DMBs), we read that the total has increased to NGN22.04trn in June 2021 from NGN18.90trn one year. The principal driver appears to have been the CBN’s development finance operations, which accelerated from NGN234bn in April this year to NGN326bn in June.
The dilemma facing the committee is set out clearly by one member. A rate hike could encourage foreign portfolio investment and dampen pressures in the fx market but could also raise the cost of credit and weaken demand. A rate cut could trim the cost of credit yet also fuel monetary expansion and inflation.
Committee members favour monetary intervention to support the recovery but have in mind the CBN’s credit facilities and regulation of DMBs’ lending rather than rate changes.
We are told sometimes that we devote too much attention to the personal statements. This line of argument, besides being intellectually lazy, overlooks the reality that the members set the policy on a majority vote. We might disagree with the MPC’s decisions and may well feel that their impact on the real economy is limited. Yet the members’ statements give valuable insights into their thinking (as well as occasional data and colour that is new material).