In the just concluded week, the Central Bank of Nigeria (CBN) on Monday, March 16, 2020, published some policy measures to combat the adverse impacts of the coronavirus disease (COVID-19) on the economy.
The apex bank’s expansionary policy initiatives include: extension of the moratorium on all intervention loans currently under a moratorium for an additional period of one year; reduction of interest rate on all CBN intervention facilities to 5% from 9% per annum, effective from March 1, 2020; creation of an N50 billion targeted credit facility for households and micro, small & medium enterprises (MSMEs) that have been hard hit by COVID-19; provision of credit support for the healthcare industry, including pharmaceutical companies intending to open their drug manufacturing plants in Nigeria; the strengthening of its loan to deposit ratio policy; and granting of all deposit money banks leave to consider temporary and time-limited restructuring of the tenor and loan terms to customers. The lender of last resort, amid possible financial difficulty by the Federal Government, hinted on its readiness to provide liquidity backstop as it announced an N1.1 trillion intervention fund to support critical sectors of the economy.
Out of the N1.1 trillion, N100 billion would be used to support the health authorities to ensure laboratories, researchers and innovators work with global scientists to patent and produce vaccines and test kits in Nigeria. As part of measures to respond to COVID-19, the fiscal authority slashed 2020 budget by N1.5 trillion (N457 billion to be gotten from PMS under-recovery) and reduced the crude oil benchmark to USD30 per barrel. It also reduced the price of petrol to N125 from N145 as crude oil price dwindled. In another development, the National Bureau of Statistics (NBS) reported a 12.20% rise in annual inflation rate for the month of February; higher than 12.13% recorded in January in line with our expectations.
The increase in the inflation rate was caused by an increase in average imported food prices. The imported food index rose by 16.40% (higher than 16.10% in January) amid depreciation of the Naira against the USD at the interbank window were two months moving average foreign exchange rate rose y-o-y by 0.28% to N358.51/USD in February 2020. Similarly, food inflation rose by 14.90% (higher than 14.85% in January); while the core inflation rate also increased by 9.43% (from 9.35% in January). The rise in food inflation was caused by increases in prices of bread & cereals, meat, fish and vegetables among other things. On the other hand, core inflation was driven by increases in prices of pharmaceutical products, passenger transport by air, hospital services and vehicle spare parts. On a monthly basis, annual inflation rate softens to 0.79% in February (from 0.87% in January), amid moderation in both food and core inflation to 0.87% and 0.73% (from 0.99% and 0.82% in January) respectively. However, imported food inflation rate was unchanged at 1.26%. Meanwhile, rural and urban inflation rates rose by 11.61% and 12.85% (higher than 11.54% and 12.78%) respectively.
We commend CBN for its proactiveness as the policy measures are expected to stimulate consumer demand and increase production outputs, especially for food items and pharmaceutical products. Nevertheless, we do not rule out the possibility of recession despite the expansionary drive policies which may, in addition to the planting season, further increase inflation rate going forward. Hence, despite the expected rise in inflation figure, increase in FG borrowings and Naira devaluation fears, we expect interest rates to remain low, especially treasury bills rates, as long as CBN keeps to its policy of excluding local corporates and individual from investing in OMO bills.
Meanwhile, investors in the equities space may have found reasons to invest more of their hard-earned funds in banking stocks, especially the tier-1 banks that recorded lower non-performing loans (NPLs) ratios in FY 2019, as regulatory forbearance granted to banks by CBN should ease their provisioning in the year 2020.