Personal Statements by the MPC Members at the 141 MPC Meeting of Mar 21, 2022

Godwin Emefiele, Governor Central Bank of Nigeria (CBN)

May 11, 2022/CBN



Up to Q4 2021, the global economy remained on a steady path of recovery from the coronavirus-induced setbacks despite the mutations, especially the Omicron variant. Most countries had learned growth-friendlier ways of dealing with resurgence. Thanks to progress with vaccination, responses to Omicron generally entailed minimal activity restrictions and lockdowns. Trade continued to be robust and travels were relatively less restricted. Hence, the global economy grew by about 5.9 per cent in 2021 from a contraction of 3.1 per cent in 2020. Recovery was powered by robust consumer demand and trade, both underpinned by unprecedented high levels of policy support and rapid vaccine rollouts. However, a new threat, the war between Russia and Ukraine, surfaced in Q1, 2022. This war is currently the most important risk to the short- to medium-term outlook for global output growth. Its direct consequences including the sanctions imposed on Russia by NATO are several and potentially disruptive of the recovery process. Commodity prices have trended faster upwards, with crude oil price remaining over $100 p/b. Similarly, prices of some agricultural commodities such as wheat, corn, and sunflower oil, have come under severe pressure. The war has intensified uncertainty across financial markets globally. Although the IMF, in its January 2022 World Economic Outlook (WEO) update, envisaged a global growth of about 4.4 per cent in 2022, a downward revision appears likely in the next update on account of increased geo-political uncertainties. 

Globally, the negative spillovers from the war are already being felt. Under the prevailing circumstances of widespread geo-political tensions and the coronavirus pandemic resurgence in parts of the world, there can be no guarantees that the global economy will maintain in 2022 the path and speed of recovery in 2021. Meanwhile, inflation continues to be a key concern for economic policy makers globally. Commodity prices are rising fast as investors embrace gold, and global demand for crude oil appears to outstrip supply, owing to the sanctions on Russia. 11 Classified as Confidential Against this background, it is unclear if the drift towards policy normalization and anti-inflation posturing can be sustained by many central banks. 

For the domestic economy, I see complications from the war unfolding in multiple directions. First, crude oil prices are high and could remain so for some time. Unfortunately, this is neither translating to more revenues for government nor increased accretion to the country’s external reserves. Under this condition, the cost of subsidy on PMS will increase, further limiting the fiscal space for supporting growth. Other downside risks to growth emanating from the war in Ukraine include rising gas prices as well as cost of some intermediate goods. Manufacturing and agriculture could take a hit from these developments. 

In view of these prospects, it appears to me that domestic output recovery is severely threatened. In effect, the CBN cannot at this time relent in supporting growth using monetary policy and development finance interventions which have so far proved to be among the economy’s critical safety nets. I voted, therefore, at the March 2022 meeting of MPC to retain the extant monetary policy setting, while also urging the Bank to sustain its development finance interventions, to insulate domestic output and employment from major adverse spillovers from the war in Ukraine. 

The recently released national accounts statistics for Q4 2021 lend enormous credence to the efficacy of the extant policy strategy of the Bank. Output recovery continued through Q4 from the near shut-down induced by COVID-19 in 2020. Real GDP grew by 3.98 per cent (year-on-year) in the quarter, surpassing expectations. This performance is attributable mainly to sustained policy support. However, oil GDP remained weak due to production shortfalls. The subsector is yet to reflect the recovery in oil prices due mainly to a variety of local impediments to production and theft. This carries important fiscal implication – government is spending more on subsidy as the cost of imported refined petroleum products has risen substantially, but revenue from crude oil sales has not really improved. This situation poses a risk to domestic economic recovery especially as it relates to the implementation of the Economic Sustainability Plan (ESP). 

Real GDP performance so far has been underpinned by credit expansion and declining interest rates, both attributable to development financing by the Bank and the recent monetary policy innovations – Loan-to-Deposit ratio (LDR), Differentiated Cash Reserve Requirements (DCRR) and Global Standing Instruction (GSI). The innovations have significantly transformed the credit landscape and continue to underpin activity rebound in several sectors. Despite the surge in credit, the banking system fundamentals have remained strong. At end-February, all major industry soundness indicators suggested resilience. Tier-one capital (the lossabsorbing component of capital) was significantly high as indicated by its proportion (85.74 per cent); capital adequacy ratio (CAR) remained robust at 14.5 per cent and the ratio of non-performing loans (NPLs) stood below the prudential limit of 5.0 per cent at 4.8 per cent. 

My prognosis of the current geo-political uncertainty is not quite favourable. Even if the war in Ukraine is short-lived, sanctions will not immediately go away, and so would be their impact on, and consequences for the domestic economy. Importantly, two subsectors are likely to be most impacted – manufacturing and agriculture. Manufacturing, because prices of intermediate imports would remain elevated due to the disruption in supply. In addition, the sector relies heavily on energy – diesel and gas – both of which are impacted globally by the war. High energy costs directly constrain manufacturing. Agriculture could also take a hit as fertilizers and other inputs are impacted. Russia and Belarus are major players in the global market for potash, urea, and other chemicals required to produce fertilizers. Both countries are on the other side of the war. Given these scenarios, both sectors would require extra policy support to weather the storm ahead. 

While acknowledging the challenge posed by inflation as evidenced by the increase in the core and headline measures of inflation in February 2022, I believe that the surest way to address this is to increase domestic production and ease the bottlenecks to free circulation of goods within the country. In this regard, not only should the flow of credit to the real economy be sustained, government must continue to tackle the problems of insecurity and infrastructure to reduce production and distribution costs. The recently established Infrastructure Corporation of Nigeria (InfraCorp), a dedicated privately managed infrastructure vehicle, offers a unique opportunity for addressing the infrastructure deficit. Governments (State and Federal) can leverage this vehicle, given the constraints on growing public revenue at the present. 

A related policy imperative is the stability of the Naira exchange rate. So far, the administrative measures by the CBN have helped to calm the market. However, as real incomes fall abroad due to inflation, remittances could also decline. And so, those measures including the ‘Naira 4 dollar’ scheme, the deposit money banks’ window for meeting business and personal travel needs, and most recently, the Bankers Committee’s ‘RT200 FX Programme’, should be sustained. 

Overall, I see the need for deeper reflections on the path of monetary policy in 2022 as there might be no easy choices given that risks are spread across both growth and inflation objectives. The extant approach by the Bank which seeks to ensure adequate liquidity in critical sectors has proved to be optimal, even though further innovations may be needed during the year to limit the impacts of the unfavourable external conditions. For now, my policy preference remains retention of all parameters. In effect, I voted to: 

1. Retain the MPR at 11.5 per cent. 

2. Retain the asymmetric corridor at +100/-700 basis points. 

3. Retain the CRR at 27.5 per cent. 

4. Retain the Liquidity Ratio at 30 per cent


International Economic Developments 

The global economy outlook has changed since the January 2022 meeting of the MPC. The Russia Ukraine conflict, which started on February 24, 2022, has added significantly to the uncertainties and risks around the long-run emergence of the global economy from the COVID-19 pandemic. The two countries, Russia and Ukraine are major suppliers of energy and agricultural commodities to not only Europe but the global economy. Since the onset of the war on February 24, energy and agricultural prices have risen by at least 30% on average: crude oil rose by 32%, wheat by 55%, corn by 21%, and sunflower oil by 30%. The sanctions imposed on Russia by the West have also compounded the supply and logistics problems affecting global trade. It also has the potential of raising interest rates on international capital flows. 

The implications of these developments include the following: global output is expected to moderate to 4.4% in 2022 from 5.9% in 2021, global inflation is expected to remain elevated in the short to medium term, and developing countries will also likely face food and energy crises. Inflation in advanced economies is already at record levels, averaging 3.9% in 2022, higher than the 2% inflation target. The crisis is also expected to negatively impact capital flows to developing economies, and slow down global trade recovery. Major financial market indices such as the S&P 500 and FTSE 100 took a major hit as investors migrated to safer assets including gold and silver. This has increased currencies volatility against the dollar. 

Oil prices soared because of the crisis, amidst tight supply shocks. OPEC basket oil climbed to US$104/b as at 16th of March. Crude oil prices in 2022 are estimated to average US$135/b as against U$98/b. The United States and other Advanced Economies have been forced to release millions of barrels of oil from their strategic reserves in coordinated response to calm the oil market. However, this may only provide a short reprieve to the market in the long term. 

Nigeria like many other developing countries is already feeling the impacts of the Russia-Ukraine crisis. This is manifesting in increase in domestic food prices, rising energy costs, and higher budget deficits. Hopefully, the newly opened Dangote Fertilizer company will mitigate the impact of the crisis on fertilizer prices. Ukraine is one of the largest exporters of urea and potash, major ingredients to produce fertilizer. 

Domestic Economic Developments 

Bank Staff report on Economic Developments and Outlook showed that real output grew by 3.98% in 2021Q4 compared with 4.03% in2021Q3. The growth was largely driven by the non-oil sector. The oil sector contracted for the 7th consecutive quarter. Headline inflation also rose to 15.70% in February 2022 from 15.60% in January 2022, driven by increase in core inflation. The manufacturing PMI and non-manufacturing PMI slowed in January 2022 relative to the previous month. This is a reflection of weaker sentiments and a worsening employment 16 Classified as Confidential outlook. The gross external reserves decreased marginally by 0.46% to US$39.44billion as of March 17, 2022, from US$39.62 billion by end-February 2022, due to increased third-party payments and interventions. This decrease occurred at the back of over 30% increase in the world price of crude oil. 

Index of electricity production, electricity generation and electricity consumption rose in February 2022 relative to January 2022. The increase in generation and consumption was attributed to the continuous metering of households under the National Mass Metering Programme, and the upgrade and maintenance of various transmission and distribution networks across the country. 

The monetary base grew by 0.20% by end-February 2022, Monetary base stood at N13,635.91 billion at end of February, but 9.66% below the 2022 provisional benchmark of N15,094,69 billion. Net claims on government grew by 11.92% at end-February 2022. M3 growth in February was 2.12% annualized 12.72% was below the 2022 benchmarks of 15.21%. Domestic claims rose by 6.82% in February or annualized 40.92% against the provisional benchmark of 16.23%. Claims of other sectors annualized 29.28% against 18.05%, benchmark, and on the central government by annualized 71,52% as against 11.42%. 

The OBB rate rose from 6.10% on 22-February to 11.49% on 18 March 2022, reflecting tight liquidity in the banking system. Trade balance and current account balance also showed improvements following the sustained rise in commodity prices, particularly crude oil, in the international market. 

Government fiscal operation showed that fiscal deficit stood at N7.6 trillion from January to December 2021. The deficit was higher than FGN’s retained revenue which stood at N4.8 trillion. The deficit was 57.3% above budget. Government expenditure rose from N951.14 billion in January 2022 to N952.60 billion in February 2022. However, FG retained revenue declined from N405.51 billion to N371.67 billion over the same period, leading to increase in budget deficit and public debt. The decline in revenue was attributed to decline in collections from PPT& Royalties and corporate taxes. 

The Report on Banking System Stability showed that the banking system remains robust, stable, and resilient. All metrics of Financial System Stability including Capital Adequacy Ratio, Non-performing loans ratio, liquidity ratio, and returns on assets and returns on equity are in line with the prudential guidelines. Moreover, measures of bank size, gross assets, gross deposits, and gross credit continued their upward trajectories. There is rising costs of credit as interest bands narrowed. The Other Financial Institutions continue to provide significant amount of credit to households and small enterprises in the economy. 

My Concern 

Bank Staff forecast that real GDP will rise by 3.24% in 2022 at an assumed oil price of US$80/b. The World Bank and the IMF projected 2.50% and 2.70% respectively. The Federal Ministry of Finance, Budget and National Planning forecasted growth of 4.20% for 2022. Due to the ongoing Russia Ukraine crisis, the Bank Staff forecast that inflation will continue to rise in the medium term to 16.84% by May 2022. 

There is no doubt that current recovery is fragile. Projected real GDP growth is not strong enough to support poverty reduction and reduce unemployment rates in the economy. The uncertainty and downside risks to the economy are also quite high. This is compounded by the huge insecurity across the country. 

However, I do not believe that we can totally take our eyes away from the rising and persistent inflation build-up in the economy. While I agree that the current inflation is largely supply-driven, we need to deal with inflation expectations, which if not properly anchored, will compromise long-term investment and economic growth. Headline Inflation has risen consistently since November 2021. The February inflation figure is the fourth straight month of rise in the average price level. There is a build-up of inflation expectations in the economy. This will be compounded by the increased spending associated with electioneering in Nigeria. The CBN, being the only institution vested with the responsibility to maintain price stability, must address this inflationary tendency. 

The global economy is also changing rapidly, and countries are positioning themselves for the emerging new order. Since 2020, over 40% of central banks across the world have increased their policy rates. Some of our comparator countries in Africa have also increased their policy rates. This will impact on relative yields between Nigeria and those countries and affect portfolio investment flows. The speed of normalisations indicated by the Federal Reserves and other central banks in advanced economies also means that we cannot realistically keep interest rates at the present level in the face of rising domestic prices. 

I am also concerned about the rising share of government in total credit to the domestic economy. Credit to the government in February when annualized is far above the provisional benchmark for 2022. The rise in public debt is a constraint on future income and economic growth. I believe that we must signal to the government the costs of deficit financing and continue to prod the government to explore alternative financing mechanisms for infrastructural spending. 

The transmission of the imported food prices to Nigeria confirmed the importance of maintaining food security in the country. CBN interventions in critical agricultural products like wheat should be sustained. Food security should be a national priority with partnerships of researchers, government, and the private sector working together to deepen the agriculture value chain. More farmers should be able to access the intervention funds across the country. Intervention should extend to the procurement of inputs, storage, and protection of farmers against price volatility. 

As I indicated in my January 2022 Statement, the costs of fuel subsidy and its general impacts on investments in the downstream petroleum sector need to be addressed. Also is the massive loss of oil output to theft, vandalism, and other criminality that has threatened fiscal flows from crude oil, as well as investment in onshore production. This is not just going to affect current revenue from oil, but if not urgently addressed would have massive impacts on investments and future revenue flow from oil.

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