Op-Ed: Nigeria’s MPC shifts gears to neutral

Nigeria's MPC expressed its concern about weak growth expectations and mounting uncertainty in global financial markets.

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By Cobus de Hart, Chief Economist West and North Africa, NKC African Economics

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) concluded its most recent meeting on Thursday and decided to keep all policy instruments unchanged, with the Monetary Policy Rate (MPR) at 14%.

In assessing the risks to the inflation outlook, the committee expressed its concern about weak growth expectations and mounting uncertainty in global financial markets. On the domestic front, the economy is forecast to expand by 1.8% in 2018 (in line with our projection), but the CBN highlights that the economic rebound remains especially fragile.

The MPC reiterated its call for the CBN to take the necessary actions to encourage banks to step up lending to the private sector, with a focus on employment-intensive industries. They also urged the apex bank to broaden the scope of the Anchor Borrowers Programme to industries such as fishing and palm oil production “by introducing more stringent measures to curb access to foreign exchange for products that can be produced within Nigeria”.

In terms of the monetary environment, the slight moderation in inflation during October was welcomed. Also, while price pressures are seen mounting somewhat towards year-end, the MPC believes that upside risks to the outlook are largely contained.

The apex bank argues that the proposed increase in the minimum wage would stimulate output growth and will have a negligible impact on inflation given that monetary aggregates have underperformed thus far in 2018. Exchange rate stability, meanwhile, would “continue to moderate pressures on the domestic price level”.

Finally, the MPC acknowledged that it has kept the policy stance stable for some time now but noted that “a hold position is an expression of confidence in the policy regime, given the gradual improvements in both output growth and price stability”.

The decision to hold all policy instruments stable for now was expected. It seems as if the pendulum has now swung away from tightening the policy stance – all 11 MPC members voted for a hold this time around, whereas only seven members voted this way in September with the remainder preferring a tightening of policy.

Unfortunately, the outlook for the monetary environment is very uncertain. Inflationary pressures seem to be contained for now, but fiscal slippage ahead of the election poses some upside risk – as does the proposed minimum wage.

The MPC’s comment that the central bank should apply stricter measures to curb access to FX for goods that can be produced locally suggests that the bank remains committed to using foreign exchange as a tool to drive diversification – economists do not deem this to be a particularly sound strategy as it serves to discourage foreign direct investment and risks the creation of globally uncompetitive industries. The aforementioned comment also suggests that the central bank will continue to utilise reserves in an attempt to keep the exchange rate stable. However, foreign reserves have trended broadly lower in recent months and, apart from external debt accumulation providing temporary reprieve, the pressure on the foreign currency buffer could intensify if domestic demand starts to gain more traction.

The recent slide in global oil prices also represents a risk in this regard.

To cloud the outlook even further, the outcome of the election early next year may also hold significant implications for monetary policy, with the opposition People’s Democratic Party (PDP) candidate, Atiku Abubakar, recently stating that he would prefer a more market-determined exchange rate approach.

Mr Abubakar believes this, along with the implementation of other business-friendly policies, would bolster much needed foreign investment. However, even if Mr Abubakar were to become president, there is no certainty that campaign promises would be followed through with.

All of this said, it now looks as though the monetary policy stance will remain unchanged well into next year.

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