The Monetary Policy Committee (MPC) held its first statutory meeting for the year 2021 on the 25th and 26th January on the backdrop of dampened optimism for improvement in global output recovery, associated with the resurgence of the COVID-19 pandemic and mil…

Tuesday, January 26, 2021 06:30 PM / Central Bank
of Nigeria/ Header Image Credit: Channels TV
The
Monetary Policy Committee (MPC) held its first statutory meeting for the year
2021 on the 25th and 26th January on the backdrop of
dampened optimism for improvement in global output recovery, associated with
the resurgence of the COVID-19 pandemic and mild success with vaccinations
across several countries. On the domestic front, recovery is expected to
progress reasonably, following the mild contraction recorded during the third
quarter of 2020 and with fourth quarter output growth figures expected to show
further improvement. The Committee reviewed the developments in the global and
domestic economic and financial environments in 2020 and the outlook for 2021
as well as the risks to this outlook. 
Ten
(10) members of the Committee were in attendance.
Global Economic Developments
The Committee
noted a better-than-expected recovery in most economies towards the end of
2020, leading to moderation in the contraction of global output. It, however,
observed that the rapid spread of the new variant of the Coronavirus, seemingly
associated spike in fatalities and the recent re-introduction of containment
measures across several economies, may dampen the recovery in 2021. In the
Advanced Economies, headwinds largely associated with the COVID-19 pandemic
such as vaccination-related   challenges, weak aggregate demand
associated with less than full employment in labour markets, partially
functioning supply chain networks, the rapid spread of the new variant of the
Coronavirus and a high infection rate dampened the initial rebound in economic
recovery towards the end of 2020.
Output growth
in the Emerging Market and Developing Economies (EMDEs) remained uneven across
countries. In China, output slowed marginally in the third and fourth quarters
of 2020, following a faster-than-expected rebound in the second quarter of
2020. Following the lull in the second quarter, India’s economy grew
sharply in the third quarter, reflecting welcome adjustment to the stimulus
measures. Accordingly, the International Monetary Fund (IMF) estimated global
growth in 2020 as a contraction of 4.4 per cent and forecast growth in 2021 to
improve to 5.2 per cent. This forecast is however, hinged on the successful
vaccination of a significant number of people to create the much-desired herd
immunity.
On price
developments, the MPC noted that inflation, in most Advanced Economies, is
likely to remain subdued in the short to medium term as the recent rise in
COVID-19 infection and mortality rates have resulted in sub-optimal employment
and weakened labour markets, which dampened aggregate demand across these
economies. In the EMDEs, however, inflation remains relatively high compared
with the Advanced Economies, with some economies confronted with stronger
upside risks than others, as a result of weak accretion to reserves, persisting
exchange rate pressures, poor inflow of capital as well as longstanding
structural issues. 
The MPC noted
the steady build-up of systemic liquidity across the global economy, arising
from the support by fiscal authorities and central banks to bolster the
recovery and return confidence to the financial markets. It noted that the
response to the pandemic has heightened the risk of debt accumulation, raising
concerns of debt sustainability and vulnerability of the global economy to
financial crisis once central banks commence normalization of monetary policy.
Domestic Economic Developments
Real Gross
Domestic Product (GDP), according to the National Bureau of Statistics (NBS),
contracted by 3.62 per cent in Q3 2020, compared with 6.10 per cent in Q2 2020
and a growth of 2.28 per cent in the corresponding period of 2019. The real GDP
contraction in Q3 2020 was largely driven by the decline of 13.89 per cent in
the oil sector from 6.63 per cent in Q2 2020. The non-oil sector also
contracted by 2.51 per cent in Q3 2020, compared with 6.05 per cent in Q2 2020.
The weak performance observed in both the oil and non-oil sectors was largely
attributed to the lag effects of the lockdown, persisting weak global demand
for crude oil and security challenges across the country.
The MPC noted
with concern the continuing sluggish recovery in the Manufacturing and
Non-Manufacturing Purchasing Managers’ Indices (PMIs), which remained below the
50-index point benchmark in December 2020, at 49.6 and 45.7 index points,
respectively, compared with 50.2 and 47.6 index points during the previous
month. This weak performance was attributed to the resurgence of the pandemic,
foreign exchange pressures, increased costs of production, general increase in
prices and decline in economic activities.  Similar trend was also
observed in the employment level index component of the manufacturing and
non-manufacturing PMIs, which contracted for the ninth consecutive month in
December 2020 to 46.3 and 45.1 index points, respectively, compared with 50.2
and 46.7 index points in the previous month. The Committee, however, noted that
current growth headwinds would likely moderate in the short to medium term, as
the containment measures and the sustained implementation of economic stimulus
permeate the domestic economy.
The Committee
expressed concerns on the persisting uptick in inflationary pressure for the
sixteenth consecutive month, with headline year-on-year inflation moving
further to 15.75 per cent in December 2020 from 14.89 per cent in November
2020. This uptick was attributed to the increase in both the food and core
components of inflation, which rose to 19.56 and 11.37 per cent in December
2020, respectively, from 18.30 and 11.01 per cent in November 2020. This
continued upsurge in food inflation was attributed to the logistical
bottlenecks, spurred by the increasing security challenges in many parts of the
country, which disrupted food production and supply to the market. Other
factors driving the core inflation, include the recent deregulation of the
downstream sector of the oil industry, which led to hikes in the price of
Premium Motor Spirit (PMS) and the upward adjustment in electricity tariff.
The
Committee, however, noted that as output rebounds, supported by the suites of
stimulus packages by both the Federal Government and the Central Bank,
inflationary pressure would likely begin to moderate in the near term.
On the
performance of monetary aggregates, the Committee noted the further growth in
broad money supply (M3) to 10.97 per cent in December 2020 from 5.02 per cent
in November 2020, driven largely by the growth in Net Foreign Assets. It also
noted the expansion in Net Domestic Assets (NDA) to 4.96 per cent from -0.45
per cent in the previous period. Aggregate domestic credit, also moved further up by
13.40 per cent in December 2020, compared with 9.48 per cent in the previous
month. This was largely attributed to the Bank’s policy on Loan-to-Deposit
Ratio (LDR), complemented by its interventions in various sectors of the
economy.  Consequently, banking sector gross credit as at end-December
2020 stood at N25.02 trillion compared with N24.25 trillion at the end of
November 2020, representing an increase of N774.28 billion.
Under the
Bank’s real sector interventions, under the  Anchor Borrowers Programme
(ABP), N554.63 billion had been disbursed to 2,849,490 beneficiaries since the
inception of the programme, of which N61.02 billion was allocated to 359,370
dry season farmers.
In light of
the on-going synchronized efforts by the monetary and fiscal authorities to
mitigate the impact of the COVID-19 pandemic, the Bank has committed
substantial amount of money towards this objective. Indeed, total disbursements
as at January 2021 amounted to N2.0 trillion. COVID-19 Targeted Credit Facility
(TCF) meant for household and small businesses, wherein we have disbursed
N192.64 billion to 426,016 beneficiaries. We have also disbursed N106.96
billion to 27,956 beneficiaries under the Agri-Business Small and Medium
Enterprises Investment Scheme (AGSMEIS), while in the Health Care Support
Intervention Facility, we have disbursed N72.96 billion to 73 project that comprise
26 pharmaceutical projects and 47 Hospitals and Health Care Services Project in
the country. To support the provision of employment opportunities for the
Nigerian youth, the Central Bank of Nigeria also provided financial support
through the Creative Industry Financing Initiative and Nigerian Youth
Investment Fund amounting to N3.12 billion with 320 beneficiaries and N268
million with 395 beneficiaries, respectively. On enhancing power supply, the
Bank has so far, provided N18.58 billion for the procurement of 347,853
electricity reading meters  to Discos in support of the National Mass
Metering Programme.
The Committee
urged the Bank to sustain its current drive to improve access to credit to the
private sector while exploring other complementary initiatives, in
collaboration with the Federal Government, to improve funding to critical
sectors of the economy.
During the
period under review, money market rates remained low, reflecting the prevailing
liquidity conditions in the banking system. Overall, the monthly weighted
average Open Buy Back (OBB) rates declined further from the 1.13 per cent in
November 2020 to 1.09 per cent in December 2020.
On the
equities market, the Committee noted the positive performance, particularly the
sustained patronage by domestic investors largely driven by the prevailing low
yields in the money market. The All-Share Index (ASI) increased by 1.82 per
cent to 41,001.99 points as at 22nd January, 2021 from 40,270.72 points on 31st December, 2020.
Similarly, Market Capitalization (MC) grew by 1.80 per cent to N21.44 trillion
from N21.06 trillion over the same period. This improved performance was
largely attributed to gains recorded in medium and large capitalized companies,
notably in consumer goods, banking, insurance and oil and gas sectors.
The Monetary
Policy Committee (MPC), however, noted the marginal increase in the
Non-Performing Loans (NPLs) ratio which rose to 6.01 per cent at end-December
2020 from 5.88 per cent at end-November 2020 and above the prudential maximum
threshold of 5.0 per cent. While noting that this development is not unexpected
under the prevailing circumstances, it urged the Bank to strengthen its
macroprudential framework to bring NPLs below the prescribed benchmark.
On the
external reserves position, the Committee noted the increase in the level of
external reserves, which stood at US$36.23 billion as at 21st January, 2021
compared with US$34.94 billion at the end of November 2020. This reflected
improvements in crude oil prices, partial global economic recovery amid by most developed economies.
Outlook
Overall, the
medium-term outlook for both the domestic and global economies continued to
show improved prospects of recovery, supported by the recent moderate uptick in
crude prices and increased optimism over the procurement and distribution of
COVID-19 vaccines.
Available
data and forecasts for key macroeconomic variables for the Nigerian economy
suggest further improvement in output growth in the first quarter of 2021. This
would be supported by the coordinated and sustained interventions of the , including the broad-based
stimulus and liquidity injections. Inflationary pressure is also expected to
commence moderation as the economy’s negative output gap closes. However,
underlying uncertainties in the oil market and current uptick in the second
wave COVID-19 infection rate may pose some downside risks to this forecast.
The Committee’s Considerations
The Committee
noted the moderation in output contraction in the third quarter of 2020,
associated with news of the discovery of COVID-19 vaccines and rising oil
prices. The outlook for the recovery, however, appears to be dampened by the
second wave of the pandemic considering its intensity. 
In the
Committee’s consideration, it noted that the COVID-19 pandemic  and the
necessary measures put in place by the Government to forestall its public
health impact, such as the lockdown and other associated restrictions,
contributed to the Nigerian economy going into recession, much like almost
every other country in the world. Members thus agreed that the Committee’s
current priority remains to quicken the pace of the recovery through sustained
and targeted spending by the fiscal authority supported by the Bank’s
interventions. In this light, it was thought necessary to increase
collaboration with the fiscal authority by providing complementary spending to
finance productive ventures in a bid to improve aggregate supply and reduce
prices. This is in addition to effectively collaborating with the Presidential
Task Force on COVID-19 through the existing private sector Coalition against
COVID-19 (CACOVID) to procure and distribute vaccines to fast-track the pick-up
of business activities and economic recovery.
Members
reiterated the adverse impact of insecurity on food production, stressing that
the current uptick in inflationary pressure could not be solely associated to
monetary factors, but due mainly to legacy structural factors across the
economy, including major supply bottlenecks across the country. The Committee,
thus called on the Government to redouble efforts at strengthening
infrastructural efficiency and address the emerging security challenges in the
country. In addition to this, the Committee called on the Government to explore
the option of effective partnership with the private sector to improve funding
sources necessary to address the huge infrastructural financing deficit. The
Committee expressed concern over the rising public debt stock, as recurrent
expenditure remained relatively high, compared with capital expenditure, thus,
signalling future debt servicing challenges.
To improve
Government revenue sources and investment in capital, the Committee called on
the Government to take advantage of the take-off of the African Continental
Free Trade Area (AfCFTA), which could boost domestic production and generate
sizeable revenues for Government, as well as improve domestic productivity and
competitiveness.
The Committee
commended the Bank’s effort of improving liquidity in the foreign exchange
market, but noted the need to continue to explore avenues to improve inflow
from sources such as the International Money Transfer Operators (IMTO),
diaspora remittances and non-oil export promotion, given the current trajectory
of crude oil prices. These sources, in the view of the Committee, would boost
foreign exchange supply and ease the current exchange rate pressure.
The Committee
noted the continued improvement in the equities market as a lead indicator of
medium-term macroeconomic recovery, thus, urging the Bank to maintain its
collaboration with the fiscal authority to improve the investment climate
towards attracting sustainable Foreign Direct Investment (FDI).
The Committee
commended the Bank for maintaining a sound regulatory surveillance over the
banking system by ensuring a reasonably low level of non-performing loans
(NPLs), even with the aggressive credit expansion programme during this crisis
period.  Though, NPLs remained slightly above the prudential benchmark,
members noted that the banking system remained stable, strong and resilient.
Given the success recorded under the LDR policy, it thus urged the Bank to
sustain its risk surveillance approach and ensure the continued soundness of
the banking system.
In the
Committee’s consideration, it noted the broad-based global stimulus packages,
including expanded credit lines, asset purchase programme, corporate bond
purchase, additional funding facilities for financial system, commercial paper
purchases, special central bank lending, increase in the Ways and Means limits
introduced by the central banks of different countries to support economic
recovery in their various economies and to prevent further distortions to the
economy caused by the devastating impact of the pandemic.
The Committee
noted the large stimulus packages deployed by many countries to fast-track
growth recovery and restore livelihoods across the world. For instance, Japan
provided stimulus package valued at 66.9 per cent of its 2019 GDP; UK, 45.04
per cent; USA, 28.4 per cent;  Brazil, 27.6 per cent;  South Africa,
12.6 per cent; China, 11.5 per cent; India, 10.0 per cent; and Russia 7.1 per
cent compared with Nigeria’s paltry 4.0%.  The MPC, therefore, urged the
Bank to further expand its current stimulus packages to support the fiscal
interventions to reflate and boost recovery in the economy.
 
The Committee’s Decision
At this meeting,
MPC was, as in the last meeting, confronted with a policy dilemma as to whether
to aggressively combat the inflationary pressure or support measures currently
aimed at stimulating growth and reversing the recession.
Although the
economy is currently in a stagflation environment with simultaneous occurrence
of inflationary pressures and contracting output, the MPC resolved to reverse
both developments and continue pursuing price stability in growing the economy.
MPC was of
the view, that whereas there may be wisdom in loosening, given that the impact
of the global Covid-19 pandemic has resulted in constrained activities,
disruption to supply chain and suppress aggregate demand, an
accommodative  stance may be required to stimulate credit expansion and
boost recovery in the short term.
The Committee
was also of the view that an expansionary policy would enable the monetary
authorities convince the financial institutions to reduce loan pricing and
defer interest and principal repayments to critically affected obligors in a
sustainable manner.
On the flip
side, MPC also opined that an aggressive expansionary stance may worsen both
inflation and the negative real interest rate, thereby resulting in negative
consequences on exchange rate.
With regard
to tightening, MPC concluded that this may run contrary to its objectives of
providing affordable credit to households, MSMEs, Agriculture, and other output
growth and employment stimulating sectors of the economy.
MPC was
therefore of the view that it should pursue its current stance of systematic
synchronization of monetary and fiscal policy accommodation through its
developmental finance initiatives, aimed at mitigating the impact of the
COVID-19 pandemic on Nigerians.
While
expressing understanding of the public health dilemma of the recent spike in
infections, MPC encouraged Government not to consider a wholesome lockdown of
the economy so as not to reverse the current gains of the stimulus earlier
provided in 2020. It also encouraged the Central Bank of Nigeria Management to
intensify its efforts in the targeted credit facility to household, SMEs, the
Health Sector, as well as Agric and manufacturing sectors which would not only
boost consumer spending but result in manufacturing output thereby positively
impacting the GDP. On this basis, the MPC agreed to hold all policy parameters
constant.
The Committee
thus decided by a unanimous vote to retain the Monetary Policy Rate (MPR) at
11.5 per cent.
In summary,
the MPC voted to:
I. Retain the
MPR at 11.5 per cent;
II. Retain
the asymmetric corridor of +100/-700 basis points around the MPR;
III. Retain
the CRR at 27.5 per cent; and
IV. Retain
the Liquidity Ratio at 30 per cent.
Thank you.
Godwin I.
Emefiele
Governor,
Central Bank of Nigeria
26th January 2021
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