The Monetary Policy Committee (MPC) met on 10th and 11th May, 2010 to review domestic economic conditions during the first four months of 2010 and the challenges facing the Nigerian economy against the backdrop of developments in the international economic and financial environments in order to reassess the course for monetary policy for the remainder of the year.
According to a communiqué from the CBN, the Committee noted that the recovery in global economic activity, which started in the second half of 2009, has evolved better than expected although large fiscal deficits continue to pose a threat.
The recovery, which was driven largely by the unprecedented fiscal and monetary policy stimuli undertaken in both the developed and emerging market economies in response to the global economic slowdown, was progressing at varying degrees across the different regions.
“Across the globe, real and financial activities have been mutually supportive in their recovery. Although the money markets have stabilized, and corporate bond and equity markets have rebounded, access to credit remained difficult for some sectors, especially small firms and households that lack access to the capital markets. Although, the tightening of bank lending standards and the credit crisis appear to be bottoming out, the
resumption of credit growth in many emerging and developing countries has been weak.”
The MPC observed that the domestic financial markets have recovered remarkably faster than expected, though still fragile, and urged greater efforts in accelerating the reforms in the different segment of the financial system to promote financial sector stability which is critical to economic growth. In particular, deep and liquid capital markets and strong and effective insurance companies, pension funds and other institutional investors are critical for establishing the balance required for the attainment of financial system stability.
While noting that financial market inefficiencies and supervisory and regulatory failures were at the root of the current crisis, it welcomed the relative stability that has been achieved in most segments of the market in response to the various measures taken by the regulatory authorities and emphasized the need for its sustenance.
The MPC also noted the continuing rebound in commodity prices, particularly crude oil prices, which is helping to support growth in commodity producing regions, including Nigeria. However, the inflation risk of the rebound in energy prices appears to be mitigated by the subsisting low levels of capacity utilization, weak private demand and well-anchored inflation expectations.
The MPC noted with satisfaction that, overall, the bank has achieved its mandate of price and financial stability, as reflected in relatively stable exchange rates, interest rates and moderating inflation. By the time the AMCON Bill is harmonized and finally passed by the National Assembly and implemented, the repair of banks’ balance sheets would unlock the flow of credits to the real economy.
In this regard, the MPC enjoins other stakeholders to undertake complementary measures to enable economic agents translate the stable macroeconomic environment into economic growth and development.
The Committee observed that the robust output growth recorded in 2009 continued in 2010. Provisional data from the National Bureau of Statistics (NBS) indicates that real Gross Domestic Product (GDP) grew by 6.68 per cent in the first quarter of 2010, down from 7.44 per cent in the fourth quarter of 2009, but up from the 4.50 per cent recorded in the first quarter of 2009. NBS also projected that the GDP is expected to grow by 7.24, 7.36 and 8.51 per cent in the second, third and fourth quarters of 2010, respectively.
Overall GDP growth for 2010 was projected at 7.53 per cent which is higher than the revised estimate of 6.66 per cent recorded in 2009. The non-oil sector is expected to remain the main driver of overall growth, with agriculture, wholesale and retail trade, and services contributing 2.61, 2.09 and 2.14 per cent, respectively. The Committee noted that the impressive growth forecasts reflect prospects for moderate rainfall in 2010, which is expected to support the production of major crops across the country, and the sustained peace in the Niger-Delta, which would boost crude oil and natural gas production. The MPC, however, noted that at a mere 4 percent share of GDP, the manufacturing sector needed revamping to enhance its role in boosting growth and employment generation. In this context, it called for appropriate sector-specific policies to drive growth.
The Committee also realized that there is a need to maintain and extend the focus on stability and avoid decision that may cause disruption. In view of the inflation outlook in the short-term it was felt that the reversal of accommodative monetary stance at this time is premature. The Committee however, noted that in the next quarter monetary expansion may be driven by increased government spending, the purchase of toxic assets by the AMCON and recapitalization of distressed banks. These expansions may translate into the risk of higher inflation, asset price bubbles or pressure on exchange rate and foreign reserves.
The Committee identified key concerns for policy in this era of global recovery as ensuring that the growing risk of fiscal deficit accumulated in the wake of the abating global financial and economic crises does not endanger the stability of financial markets; monitoring imbalances in capital flows across industrial and emerging markets resulting in different rates of recovery. This is to ensure that inflows of capital into the country are sustainable and avoid formation of asset price bubbles and continuing global credit crunch despite unprecedented measures taken by central banks to inject liquidity in troubled financial institutions/markets. This underscores the need for focus on both supply side (monetary) and demand side (fiscal factor) in unlocking the credit markets.
At the end of the day, the MPC decided to leave the MPR unchanged at 6.0 per cent, retain the asymmetric corridor of interest rates at 200 basis points above the MPR and 500 basis points below the MPR for the Standing Lending Facility and Standing Deposit Facility, respectively.
The committee also decided to extend the CBN guarantee for all interbank transactions and foreign credit lines as well as pension funds’ placements with banks up till June 30, 2011, to provide ample time for the conclusion of the banking sector resolution and the publication of audited accounts for the period up to December 2010. It is expected that by June 2011 all creditors and investors will have sufficient information to take an independent view of the risk of individual counterparties.