The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) left the monetary policy parameters unchanged at its March meeting. This was expected, as there is very little monetary policy can do to abate the impact of the COVID-19 pandemic and the plunge in oil prices on the economy. The economy has to rely on recently introduced palliative measures to cushion the impact of the dual shocks while health practitioners work to curtail the spread of the pandemic. Consequently, the ten members of the committee in attendance unanimously voted to hold the monetary policy parameters constant i.e. retain the MPR at 13.5%, CRR at 27.5%, Liquidity Ratio at 30% and the Asymmetric corridor around the MPR at +200/-500 basis points.
Recovery could stall as downside risks intensify
The Monetary Policy Committee (MPC) noted that risks to the global economy have intensified since the last meeting following the spread of COVID-19 outside China and the oil-price war between Saudi Arabia and Russia. The combined demand and supply shocks to the global economy have triggered reversals of foreign capital, resulting in increased vulnerabilities across financial markets and threatening price and financial stability. Consequently, global output growth is expected to underperform previous estimates and the increased likelihood of a global recession has led global central banks to intervene through co-ordinated fiscal stimulus packages, in order to restore normalcy to the global economy.
On the domestic front, the MPC highlighted the further expansion of the economy in Q4’19 by 2.55% y/y – the strongest growth rate recorded post-recession. The committee, however, noted that real GDP in H1’20 will slow due to the pandemic-induced fall in aggregate demand. This is captured in the reading of February’s Purchasing Managers Indices (PMIs) that reflects a slower pace of economic activity. The downbeat outlook for H1’20 could dampen the overall growth expectation for the year. To mitigate this, the bank introduced some business-centric policy measures to forestall a coronavirus-induced recession. The MPC expects that through its various interventions, about ₦3.5 trillion will be created as a stimulus to support the Nigerian economy during this trying time.
Price and financial stability under threat
The MPC noted the upward trend in headline inflation, despite the contraction in broad money for the second consecutive month (-2.29% YTD). The contraction in broad money supply reflected the decline in both net foreign assets and net domestic assets, in spite of the ₦2.35 trillion (Feb’20: +1.34% m/m) increase in net-aggregate credit to the economy. The continued rise in inflation was led by the pressure from food prices, on the back of renewed insurgency in major food-producing areas as well as the continued deficit in critical infrastructure. The committee also highlighted the abysmal performance of the stock market that has been due largely to the global risk-off sentiment occasioned by the spread of COVID-19 and its subduing impact.
COVID-19 response in the spotlight
In view of the increased uncertainty in both the global and domestic economies that is likely to weigh on economic output, the committee expressed confidence in the ability of recent monetary and fiscal measures (such as adjustment of the 2020 budget, sustained CBN interventions in select sectors, enhanced flow of credit to the real sector through the bank’s LDR policy and the adjustment of the exchange rate to reflect the change in macroeconomic fundamentals) to cushion the adverse impact on the domestic economy by alleviating production shortfalls, reducing unemployment, boosting aggregate demand and restoring confidence in the Nigerian economy.
It is evident that traditional monetary policy tools are likely to remain subdued in achieving macroeconomic stability given the projected impact of COVID-19 on the Nigerian economy. In the absence of strict public health measures to identify, test and isolate infected persons while also protecting non-infected persons, Nigerian economic activity will have to slowdown in the short-medium term to weather the COVID-19 storm. As a result, we do not see the MPC changing their stance at the next meeting in May. In addition, specific estimates for expected inflation and GDP growth were not included in the communique. This makes it tricky to ascertain what monetary policy objective the MPC will throw its weight behind, should macroeconomic fundamentals deteriorate further. We are of the opinion that, if push comes to shove, the MPC will maintain a pro-growth stance and desist from further tightening at the expense of inflation.