At the Monetary Policy Committee meeting held on Tuesday, Nov. 24, the Central Bank of Nigeria (CBN) outlined a new policy framework to tackle the exigencies of COVID-19.
The meeting came at the heels of the news that Nigerian economy has fallen into recession for the second time in five years, according to data from Nigerian Bureau of Statistics (NBS), which reported that the economy contracted by -3.62% in Q3 2020.
The recession was fueled by the global oil crisis which plummeted Nigeria’s oil-based GDP, and the non-oil sector whose growth was stymied by the COVID-19 lockdowns. The oil sector contracted further by -13.89 per cent in Q3 2020 from -6.63 per cent in the previous quarter, while the non-oil sector contracted by -2.51 percent in Q3 2020, compared with -6.05 per cent in the preceding quarter.
It therefore presented an enormous challenge for the Apex bank, which includes stabilizing Nigeria’s forex to tame the 14.3% inflation and meet the goal of 1.4% GDP growth projected by the International Monetary Fund (IMF) that will enable the country to exit recession early next year.
The MPC reported on many measures it has taken to facilitate growth in many sectors of the economy, and consequently trump the strains of the pandemic and exit recession early enough.
The focus of the Committee were on choices bordering basically on whether: to tighten the stance of policy to address rising price levels recognizing its primary mandate of price stability; to ease support output recovery; or to allow existing policy initiatives to permeate the economy.
Obviously, the existing policy initiatives have been overwhelmed by the current events which have resulted in inflation and recession. Therefore, it beckons a new approach and policy framework to address the fault lines that hinge on poverty, which has limited spending to a degree that cannot spur economic growth; and the rising cost of commodities that has made basic living unaffordable.
Contemplating a way out based on the above mentioned choices, the MPC ignored some approaches that would have otherwise appeared sublime.
The Committee noted that, although the appropriate response to rising inflationary pressure would be to tighten the stance of policy in order to moderate upward pressure on prices, it nevertheless, felt that doing this would exert downward pressure on the recovery of output growth.
The Committee also felt that tightening would negate the Bank’s desire to expand credit to the real sector at affordable terms, not only to boost production, but also to increase consumer spending. To the Committee, tightening was therefore not the appropriate response at this time.
With the economy, whereas MPC felt that government spending and the Bank’s expansionary stance would be desirable to support recovery and guide the economy out of recession, it felt loosening would trigger excess liquidity and worsen the inflationary pressure.
MPC also felt that excess liquidity may impact demand pressure and fuel further depreciation of the naira. With respect to a hold position, the Committee was of the view that this will be beneficial as it will allow current policy measures to permeate the economy while observing the trend of developments.
While these options seem rightly ruled out by the MPC, alternative actions to replace them have become imperatively urgent.
The Committee said that “the heterodox policies of the Bank targeted at various sectors are showing positive results that would further engender growth”. But it is not enough to quell the impact of the disruption in the global supply chain, given that many countries outside Africa, including China, the United States and those in Europe, are still taking restrictive safety measures to curb the COVID-19 pandemic.
The Committee’s final decision hangs on key four steps aimed at retaining existing parameters.
- Retain the MPR at 11.5 per cent;
- Retain the asymmetric corridor of +100/-700 basis points around the MPR;
III. Retain the CRR at 27.5 per cent; and
- Retain the Liquidity Ratio at 30 per cent.
Nevertheless, they seem good enough to upset the economic woes if not that the harbingers are rising on the daily nationally. The insecurity in the north which has almost halted farming activities in the region, keeps adding embers to the burning economy, as food inflation has significantly risen to 17.3% in the Q3 as a result.
On the other hand, infrastructure deficiencies and forex scarcity are posing more challenges to local production. Experts believe the situation could be ameliorated through intra-African trade and practical steps toward the implementation of AfCFTA. But the Nigerian government has shut its land borders for months, putting its over $5 billion ECOWAS-based import/export macroeconomy in jeopardy and stymieing its chances to use macroeconomy as a wedge against the pandemic’s economic shocks.
The World Bank has urged African leaders to develop a framework to resolve border issues, as it is a step towards implementing AfCFTA-based integration.
“The AfCFTA will only succeed if member countries make the regional strategy part of their national policy and proactively address the tensions that arise. Countries should find the sweet spot that reinforces national economic goals and ensures maximum gains from increased integration, looking beyond a static assessment of their priorities,” the World Bank said.
Alas, the Monetary Policy Committee and the federal government of Nigeria are yet to agree with the World Bank on the urgent need to open the borders.