March 17, 2023/FBNQuest
In January, the monetary policy committee (MPC) voted to raise the policy rate by 100bps to 17.5% in a bid to curb rising inflationary pressure. Today, we look at the personal statements of MPC members as they appear in the more detailed version of the recently released communique. We see from the statements that, despite the slight moderation in y/y inflation in Dec ’22, most members were of the opinion that the disinflationary process had not yet begun, especially given the rise in month-on-month (m/m) readings for the headline and food measures. This view, which was a major factor in the committee’s decision to raise rates further, has since been vindicated, as shown by the upward trend in inflation readings.
On the global front, members noted the lingering risks to the global economic recovery arising from the Russia-Ukraine war, monetary policy normalisation by central banks, tighter financial conditions, and disruptions to global supply chains.
Emerging and developing economies (EMDE) are expected to deal with the stress of high national debts and rising debt service costs, as well as capital flow reversals. One member asserted that the potential depreciation of EMDE currencies against the US dollar could exacerbate inflationary pressures in those countries.
Another observed that, while inflation in advanced economies is beginning to respond to rate hikes, most central banks are likely to maintain monetary tightening in the medium term to firmly decelerate inflation pressures.
On the domestic front, CBN staff forecast Nigeria’s 2023 GDP growth at 3.0%. This compares with IMF and World Bank projections of 3.2% and 2.9% respectively.
Most members expressed concern about the narrow fiscal space largely attributable to revenue underperformance. Mention was also given to the impact of the fiscal deficit on increasing the debt stock as well as the debt service burden.
The committee noted the weak accretion to the external reserves which stood at USD36.5bn as of Dec ‘22 and fx demand which had continued to put pressure on the exchange rate.
A member noted that while the reserves cover of 8.8 months and 6.2 months for merchandise imports and total imports (including services) appear to be adequate, the cover is insufficient to maintain exchange rate stability.
The MPC agreed that the various financial soundness indicators showed the banking system’s good health. The sector’s capital adequacy ratio and liquidity ratio as at December 2022 were 13.8% and 44.1%, higher than the regulatory minimums of 10% and 30% respectively.
Asset quality also improved with the non-performing loan ratio at 4.2% lower than the regulatory threshold of 5% respectively.
With the failure of Silicon Valley Bank in the United States and concerns about Credit Suisse’s financial stability in Europe, we anticipate that the implications of monetary tightening on the financial soundness of Nigerian banks will be a key focal point of discussion for the MPC.
Finally, members called on the fiscal authorities to complement monetary policy efforts by implementing bold measures such as addressing the rising sovereign debt, restoring crude oil production to pre-pandemic levels, and phasing out fuel subsidies to increase the fiscal space and improve accretion to the gross external reserves.
As we approach the next MPC meeting next week, the statements suggest that most members will likely maintain their hawkish stance.