ABUJA, MAY 28, 2018 – The decision by the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) to hold rates steady at 14 percent has pitched economists against one another on whether the move is the right call against falling inflation and slow growth.
Inflation dropped for the fifteenth consecutive month in April to 12.48 percent from slower rises in prices of food and non-alcoholic beverages, housing and utilities while first quarter GDP slowed to 1.9 percent year-on-year, easing from an upwardly revised 2.1 percent growth in the previous period. The movements in price level and growth were not convincing enough for the MPC to alter the benchmark rate, which it has held steady since raising it by 200 basis points in July 2016.
In holding rates, the MPC merely resorted to “a speculative exercise” says Bongo Adi, Economics lecturer at the Lagos Business School (LBS) of the Pan African University. The monetary body failed to look at economic data. He draws attention to the negative correlation between growth and the macroeconomic rates in the last decade, saying that “When MPR and CRR were relatively low, Nigeria registered historical growth levels. But when these rates were high, growth seems to have been penalised”.
Dr. Adi says that “taking financial depth as a measure we see that the Nigerian financial system has become shallower than a decade ago”. He doesn’t see much sense in tightening monetary rates while expanding budget on the other hand.
But Ayo Teriba, Chief Executive Officer of Economic Associates, thinks the MPC made the right call because cutting rates now “can reverse the gains that we’ve made” in reducing inflation, GDP growth and exchange rate management. “I don’t think the central bank will ease until inflation is in single digits”, he says.
Teriba who was a Faculty member at the Lagos Business School said growth is actually accelerating year-on-year to 3 percent and that the first quarter is usually the dullest and should not be compared with the fourth quarter of the previous year because of seasonal factors. As far as exchange rate management is concerned, “as long as that gap (between the official and parallel market) is there I don’t think the Central bank will want to ease”.
The CBN is playing safe which is good to see”, says Charlie Robertson, Global Chief Economist and head of macro strategy at Renaissance Capital when contacted via linkedin ‘inmail’.
The rate announcement came days after the National Bureau of Statistics (NBS) announced slower GDP growth. According to the NBS, the non oil sector grew by 0.76 per cent in real terms during the quarter, higher by 0.04 per cent point compared to the rate recorded same quarter of 2017 and 0.70 per cent point lower than the fourth quarter of 2017.
As to how sluggish non oil sector growth will affect overall GDP going forward, John Ashbourne of Capital Economics said it “is a very bad sign”. “There are serious problems that need to be addressed”, he said via email.
But this is not a problem, according to Teriba, “the fact that the oil sector continues to grow means that non oil sector would grow better next quarter, keeping in mind the fact that oil sector growth impacts the economy with a two months lag”. He said that oil accounts for Nigeria’s economic growth and liquidity.
“Higher oil prices will have provided a big boost to incomes in Q2. This should support higher consumer and increase government spending”, says Capital Economics in an emailed note.
“I am confident (Nigeria’s) growth will accelerate to at least 3-4pc over the year”, says Robertson who is also author of Fastest Billion: The Story behind Africa’s Economic Revolution.
Oil prices had jumped to $80 on the US exit from the Iran deal and escalation of the Venezuela crisis but slowed to $67.88 on Friday 25th on OPEC and Russia’s plans to increase production. $60 dollar oil is above Nigeria’s revised oil benchmark of $5. AFP reports that President Nicolas Maduro of Venezuela plans on boosting oil production by 1 million barrels from the current 1.5 million.
