The Monetary Policy Commitee meeting in November has come and gone but some critical questions as regards its efficacy in meeting policy goals remains, as well as fresh concerns raised on Fiscal policy effectiveness. Monetary Policy Rate (MPR) was reduced from 13% to 11% as well and the Cash Reserve Ratio (CRR) from 25% to 20%. It also changed the symmetric corridor of 200 basis points around the MPR to an asymmetric corridor of +200 basis points and -700 basis points around the MPR. Ostensibly, it is a sound decision given the trudging growth movements of the economy.
Nigeria’s Gross Domestic Product (GDP) grew by 2.84 per cent (year- on-year) in real terms in the third quarter of 2015. The growth was higher by 0.49% points from the growth recorded in the preceding quarter, yet lower by 1.12% points from Q1 growth figure 3.96% and also lower by 3.38 per cent points from growth recorded in the corresponding quarter of 2014. On a quarter to quarter basis though, RGDP rose by 9.19% which is higher by 6.62% points when compared to the preceding quarter’s Q-on-Q growth figure. However, the average growth rate recorded in the first three quarters of this year and previous shows a negative difference of 3.28%.
Given the country’s huge dependence on oil revenues, this slow growth can be attributed to falling oil prices and increasing oil supply glut among oil producing countries, as the global oil stock inventory has shown increasing glut trends since Q1 2014 and became significantly high from Q4 of last year. The undesirable momentum sustained till present quarter which explains trudging growth movements experienced from the Q1 of this year till present. This has further driven Government revenues down and restrained sufficient fiscal expansion needed to engineer economic growth.
The domino effect of widening oil supply glut has resulted in depleting Forex earnings and has impacted the nominal exchange rates and made it difficult for the apex bank to continue to defend the naira consistently.
Without being deliberately cynical, tougher times could await the oil sector and the Economy at large with the imminent full resumption of Iran in oil production which will inevitably add to the widening oil supply glut experienced in the Global market. This will further drag oil prices, revenues and forex earnings down. Combined with difficulties administering tax collection from unstable parts of the country, an ineffective tax system and a non-diversified economy, we would expect the federal government to stagger in meeting its 8 trillion 2016 budget estimate.
A review of the battle for Price stability that is majorly the business of CBN further shows that that the battle is far from being won. The headline inflation rate has been on a steady rise since January with slight drops in July and October.
Obviously there are reasons to believe that the perennial negative Balance of Payment Position faced on the Nation’s current account has further driven up the inflation rates. Besides, since the country has a massive dependence on imported commodities that is denominated in currencies in which ours is losing value to, high prices will inevitably be ‘imported’.
The gloomy economic story does not end there. It extends to the stock market. Nigerian stock market ended Q3 on a negative note. Market key benchmark indicator, NSE ASI, recorded a -6.69% losses in Q3’15 to close the quarter bearish. Quarterly review of market performance reveals that the index recorded 5.39% gains in Q2 2015 and –8.40% loss in Q1 2015. A review of the monthly market performance further reveals that the highest monthly gain (+9.33%) was recorded in April 2015 while highest loss (-14.70%) was recorded in January 2015 in the build-up to the 2015 general elections while the last month of the quarter closed positive with +5.16% after it recorded four consecutive losses in previous months.
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|YTD Market Perf. Review|
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Source: TheAnalyst, NSE
Overall, it has been a tale of bears and bulls but the net magnitude of the bears is larger under the period under review.
The essence of this review is to show the current state of the economy in order to analyze the logic behind the MPC decisions. The recent Treasury Single Account (TSA) policy implemented by the present administration is also one of the developments that influenced the MPC decisions. An unconfirmed report shows that nearly ₦3 trillion was mopped out of the Economy as a result of the policy. On the other hand, an estimated ₦1.4trillion was swept back in as a result of the reduction in CRR in both September and November. This leaves an estimated net difference of ₦1.6 Trillion mopped out of the Banking sector.
There are Stock and Flow effects of the mop out. The Stock Effect of it is equivalent to the exact amount swept out at that given point in time. If the distribution of these public deposits on each Bank’s total deposit portfolio is further investigated and proper sensitivity analysis done, the real effects of this policy on Individual banks can be known. The Flow Effect however, is the most destructive. This is the perennial loss of regular PSD inflow to banks in the future due to the deposit outflow. Such loss cannot be accurately estimated but it is intuitive to imagine how huge it will be.
Besides, some Banks are more vulnerable than the other as not all has the same market share and asset size. Wiping out all Public sector deposits (PSD) from such vulnerable banks with a high share of their total deposits as PSD is ominous. The waves of the economic downturn has already made some banks parsimonious in their credit policy. Prime lending rates are still over 18% in some banks. Though the reduction of CRR has driven interbank lending rates down drastically to 2.3%, it has not reflected in the commercial lending activities of Banks which of course is a no-brainer. The risk appetite of Banks will shrink after the outflow and make them more parsimonious in their lending transactions.
The Banking sector is key to the growth prospects of the Country as it has strong inter-Sectoral linkages with other sectors of the economy. One would have expected the Government to be more circumspect about the TSA before its full implementation. The reduction of budget misappropriation and corruption is the inherent benefit of the policy. However, filling a hole by digging another is fruitless.
Moreover, the CBN would have further eased the MPR to address the Flow Effect of the mopped out liquidity from the banking sector. Reducing the MPR by just 2% points is not impressive enough after considering the magnitude of decline of growth in economic fundamentals.
There are other ways Government can ensure financial accountability and monitoring without adopting the TSA. After sweeping out all these MDA funds into a CBN central account, the Government should first mandate every Bank to close all MDA accounts with them. Then the new MDA accounts will be linked to a central server that will be managed by both the bank and CBN. The Server will be the database of all transactions done on the accounts. Each commercial Banks can also be mandated by the CBN and Ministry of Finance to submit the account statement of each MDAs to them every month end for regular monitoring and audit. After proper audit, the Ministry of Finance can then make decisions on the idle funds that should be swept back into the CBN central account in cases where the Government has immediate funding needs.
Using this approach, the Government will solve the financial monitoring challenges it had which fed corruption and it will also preserve the buoyancy of the financial system. It becomes a win-win. However, having a single non-interest bearing repository account domiciled in the CBN that reduces the ability of the Banking sector to sufficiently create endogenous money is a detrimental process. It needs to be re-evaluated and modified for the sake of sustainable Economic growth.