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FXTM: Nigeria's Economic Recovery Could Become Reality By Year End

Lukman Otunuga

Nigeria’s ongoing mission to diversify away from oil reliance, and a sharp drop in oil which triggered a currency crisis, have encouraged the Central Bank of Nigeria to maintain its key interest rates at 14% in July, Lukman Otunuga, research analyst at ForexTime (FXTM) acknowledged on Wednesday

True to prediction, the Monetary Policy Committee (MPC) on Tuesday retained the Monetary Policy Rate (MPR) at 14 per cent due to uncertainties in the global market.

Mr. Godwin Emefiele, Governor of Central Bank of Nigeria (CBN), disclosed this while briefing journalists on the outcome of the 257th meeting of the MPC in Abuja.

He said: “MPC decided to retain MPR at 14 per cent, retain CRR at 22.5 per cent, retain the liquidity ratio at 30 per cent, retain assymetric corridor at +200 and -500 bases point around the monetary policy rate.’’

He said the MPR was not eased at this time because it would signal the committees’ sensitivity to growth and employment concern by encouraging the flow of credit to the real economy.

Emefiele added: “The MPC noted the liquidity suffering in the banking system and continuous weakness in financial intermediation.

“It agreed on the need to support growth without jeopardising price stability or offsetting other recovering macroeconomic indicators, particularly the relative stability in the Foreign Exchange (Forex) market

“The MPC thinks that easing at this point would signal the committee’s sensitivity to growth and employment concern by encouraging the flow of credit to the real economy.

“It observed that easing at this time would reduce the cost of debt service which is actually crowding out government’s expenditure.

“Also, the risk to easing would further pull the real interest rate down into negative territory.”

Emefiele said the argument for holding was to ensure workability of the past policies in the economy.

He said the MPC factored that the high banking system liquidity level, the need to continue to attract foreign investment inflow to support the forex market and economic activity would cause a jump in the system liquidity.

According to him, the expansive outlook for fiscal policy in the rest of the year and the prospective election related spending will also cause a jump in the system liquidity among other things.

He said the committee expressed concern over the increasing fiscal deficit estimated at N2.51 trillion in the first half of 2017 and the crowding out effect of high government borrowing.

Analyzing the MPC's decision, Otunuga said, "although the nation still remains exposed to external risks, there has been optimism over the economic landscape stabilizing, with the improving macro fundamentals fueling speculations of a potential economic rebound by the end of 2017.

"Inflation has cooled for the fifth consecutive month in June at 16.1%, further illustrating signs of price stability, while manufacturing and non-manufacturing activities have both moved in a positive trajectory. Although CBN’s repeated intervention has played a significant role in the Naira’s recovery against the Dollar on the parallel exchange, confidence over Nigeria’s economic recovery continues to play a leading role.

"As we head deeper into the third quarter of 2017, there is likely to be an increasing focus on domestic data in order to measure the nation’s health and assess if an economic recovery could become a reality by the end of the year. A potential economic rebound by year end and further signs of stability at home may prompt the Central Bank of Nigeria to cut interest rates in the medium to longer term".