Credit to Private Sector Rises in Nov. 2020; MPC Decides on Policy Rate in the New Week…

In the just concluded week, data released from the Central Bank of Nigeria (CBN) depository corporations survey showed a 5.21% year to date (YTD) significant rise in Broad Money Supply (M3 money) to N36.59 trillion in November 2020.

This resulted from a 34.78% increase in Net Foreign Assets (NFA) to N7.82 trillion and a 0.72% increase in Net Domestic Asset (NDA) to N28.76 trillion. We witnessed a 10.90% y-t-d rise in Net Domestic Credit (NDC) to N40.12 trillion in November 2020 despite the marginal decline in Net Domestic Asset.

Further breakdown of the NDC showed a 13.73% y-t-d increase in Credit to the Government to N10.79 trillion; also, Credit to the Private sector rose by 9.89% to N29.31 trillion.

On the liabilities side, the significant 5.21% y-t-d increase in M3 Money was chiefly driven by a 26.83% rise in M2 Money to N36.50 trillion but was partly offset by the 98.62% y-t-d decline in treasury bills held by money holding sector to N82.59 billion in November 2020.

The increase in M2 was propelled by a 40.70% rise in Narrow Money (M1) to N14.82 trillion (of which Demand Deposits increased by 47.63% to N12.56 trillion, and currency outside banks rose by 11.54% to N2.26 trillion), as well as a 18.82% increase in Quasi Money (near maturing short term financial instruments) to N21.68 trillion in November 2020.

Reserve Money (Base Money) rose sharply y-t-d by 76.58% to N15.31 trillion as Bank reserves increased y-t-d by 98.06% to N12.33 trillion, even as currency in circulation increased by 8.87% to N2.66 trillion in November 2020.

In another development, the Monetary Policy Committee (MPC) would be concluding its 277th meeting on Tuesday, January 26, 2021, as it decides on the direction of the Monetary Policy Rate (MPR) which was reduced by 100 basis points (bps) to 11.50% in September (from 12.50% printed in August after the previous cut of 100 bps from 13.50% in May) while also adjusting the asymmetric corridor to +100 bps from -700 bps (from +200 bps and -500 bps) around the MPR.

Also, in November 2020, MPC left the MPR unchanged at 11.50%. Other parameters such as Cash Reserve Ratio (CRR) and Liquidity Ratio were also retained at 27.50% and 30% respectively.

The Committee’s decision to hold rate in November 2020 was amid its efforts, in collaboration with the fiscal authority, to lift Nigerian economy out of recession; hence, prioritising economic growth over the rising prices of goods and services.

Meanwhile, the West Texas Intermediate (WTI) crude price fell marginally by 0.82% w-o-w to USD53.13 a barrel even as Brent crude decreased by 0.57% to USD56.10 a barrel as at Thursday, January 21, 2021. This may be against the backdrop of the news on Thursday that compliance amongst OPEC+ producers fell to 99% in December 2020, from 101% compliance level in November.

However, we saw Nigeria’s crude grade (Bonny Light) price increase by 0.24% to USD55.27 a barrel as at Thursday, January 21, 2020.

The 9.89% increase in credit to the private sector over the 11 months period 2020 further reflects the push by CBN to drive increased production output in a joint effort with the fiscal authority.

However, we are beginning to see a backlash of the expansionary policy stance amid rising inflation rate and weakening Naira against other currencies, especially the greenback.

As the monetary authority convenes in the new week for the first MPC meeting in 2021, we expect the Committee to further maintain status quo despite pressure on the exchange rate and general price level given the need to further stimulate Nigeria’s fragile economy out of recession.

However, we note that the direction of interest rates may generally trend northwards at some point further afield in 2021 amid an expected increase in borrowings by the fiscal authority to fund its budget deficit.