Nigeria MPC’s pro-growth agenda in Covid-19 era

By Moses Obajemu

After 14 months of retaining the monetary policy rate (MPR) at 13.5 per cent, the Monetary Policy Committee last week reduced the MPR to 12.5 percent in what is a dovish move aimed at facilitating more money for productive economic activities, Godwin Emefiele, the of the Central Bank of Nigeria (CBN) disclosed while announcing the decision of the MPC at its meeting in Abuja.

He said the committee also decided to retain the cash reserve ratio at 22.7 per cent and the liquidity ratio at 30 per cent. The central bank had held the MPR at 13.5 per cent since March 26, 2019 when it was reduced from 14 per cent. The MPR is used to determine bank lending rates and the cost of credit for borrowers.

The reduction of the MPR to 12.5 percent is, to put it mildly, a prayer answered for the manufacturing community and other business owners who have been complaining of high interest rates in the country.

Other eminent Nigerians and economists have also lent their voices to the growing call for moderate and business friendly interest rates to fuel the countyry’s rapid economic transformation. However, in the face of growing inflation in the last 10 months occasioned by the closure of Nigeria’s land borders, this has been a tough decision for the apex bank to take.

Emefiele told reporters after the MPC meeting that Nigeria faced the bleak prospect of negative gross domestic product growth for the country in the second quarter of 2020 owing to the COVID-19 pandemic that had affected the economy. Emefiele explained the basis of his prediction to the global economic shutdown.

He said with this development, he was almost certain that growth in the second quarter would be negative. According to him, the situation has affected the U.S, Europe, and China economies as well as developing countries.

“Luckily and pleasantly surprised, Nigeria first-quarter growth in 2020 came down from 2.5 per cent from fourth-quarter 2019 to 1.87 per cent.

“Understandably, by virtue of the fact, we began to really lock down our economy in the month of March because we were already seeing some interesting growth trajectory in the month of January and February, following the recovery that we have made in 2019.” Emefiele explained.

In response to this development, some financial analysts have applauded the MPC’s policy decision saying it would expand the level of output in the economy and address inflation to some extent.
Boniface Chizea, the managing director, BIC Consultancy Services, said the reduction would increase the amount of money and credit in circulation. The reduction is uncommonly steep by an unusual 100 basis points. A reduction from 13.5% to 12.5%, the lowest rate in four years. The committee advanced the reason as the need to reflate the economy.

“What the unfolding scenario portends is that citizens should brace up for a spike in the rate of inflation which had already been on the uptick as substantial liquidity is being injected into the economy as a result of the quantitative easing.

“The gradual unlocking of the economy to resume activities might result in the anticipated contraction of the economy not being as steep as feared.

“By this move it is clear that focus on the rate of exchange particularly with regard to the attractiveness of investments to foreign investors is for once not a major thrust of policy.

“Well, at least we now have some movement in the critical indices as opposed to the fact that they have remained sticky for a long time now,’’ Chizea said.

In the same vein, Johnson Chukwu. managing director, Cowry Assets Management Limited, said the reduced rate would allow credit flow into the economy.

“The key thing the MPC did is to send a message to the economy that it is ready to adopt a bit of accommodative policy. That is, it is the intention of the CBN that credit should flow to the economy at the same pace.

“That is the primary motivation of reducing the MPR from 13.50 per cent to 12.50 per cent.

“To send a message to economic operators that the intention of the CBN is to have an interest rate environment where customers can borrow at lower rates,” he said.

A former CBN director, Titus Okunrounmu, commended the central bank for reducing the interest rate.
Okunrounmu, who was director, budgetary department at the CBN, made the commendation in an interview with the News Agency of Nigeria (NAN) in Ota, Ogun.
According to him, the downward review of interest rate to 12.5 per cent by the apex bank will encourage private investment to boost the nation’s economy.
He said the apex bank was trying to induce those who are critically in need of loan facilities, to come and invest.
He said that the CBN decision to reduce the interest rate was an attempt to further encourage people to take credit and loans as the nation’s economic activities had slowed under the lockdown situation.

“With COVID-19 pandemic associated with lockdown, no investor will be willing to invest money in the country until the environment is conducive for investment,’’ Okunrounmu said.
Similarly, the Nigeria Employers’ Consultative Association hailed the decision.
Its director-general, Timothy Olawale, said the development signalled a pro-growth response.
Olawale said such a move could lead to a reduction in the cost of credit, increase investment and impact positively on output growth to address the current global challenges.

“With the negative effects of COVID-19, the twin challenges of the global oil prices and over-exposure of our economy to external shocks, this decision is a welcomed development by the monetary authority to protect the economy.

“We applaud the current decision of the MPC, which aligned perfectly with the association’s earlier recommendation,” he said in a statement.

The director-general, however, called for synergy between the fiscal and monetary policies in order to move the economy forward. He called for more robust and coordinated stimulus packages for the sectors that were worst hit by the COVID-19 pandemic.

“Also, opening up the non-oil economy for more productivity, to reduce the shock expected from falling global oil prices, will be a welcome development in pulling the economy from nose-diving into recession,” Olawale said.