The Lagos Chamber of Commerce (LCCI) notes the outcome of the Central Bank of Nigeria [CBN] Monetary Policy Committee (MPC) meeting of Friday, January 24, 2020. The Chamber welcomes and aligns itself with the concerns expressed by the MPC on the following:
- Rising debt profile and the associated sustainability concerns.
- The use of Debt-to-GDP ratio as a measure of debt sustainability.
- Vulnerability of the economy to external shocks and the imperatives of building buffers.
- Risk of excess liquidity from maturing OMO bills.
- The need to rationalize fiscal expenditure and reduce cost of governance.
- The need for government to address structural and security issues to strengthen domestic productivity.
However, the tightening position which resulted in the upward review of the Cash Reserve Requirement [CRR] from 22.5% to 27.5% will impact the economy in the following ways:
- Reversal of the current downward trend in interest rate. This is a trend which was beginning to impact positively on the economy, especially the real sector.
- It could have adverse effect on deposit mobilization which could impact negatively on the financial intermediation role of Deposit Money Banks.
- A high interest trajectory [which the tightening policy portends] will impact negatively on investment growth especially in the real economy. The prospects for increased job creation may be further dimmed.
- The recent rebound in the stock market would suffer a reversal as interest rate increases and money market instruments become more attractive to investors.
We believe that what the economy needs at this time are policy actions aimed at stimulating investment to boost output, create jobs and ultimately moderate inflation. Monetary policy tightening will negate the realization of these objectives.
It is pertinent for us to prioritize domestic investment growth and foreign direct investment (FDIs) over foreign portfolio investment (FPIs). Persistent focus on portfolio flows would continue to propel the Central Bank of Nigeria to keep interest rates high. This is inimical to investment growth and job creation endeavours.
On the argument that the recent hike in CRR will help moderate inflation, we contend that food inflation is the bigger issue that needs to be dealt with in the inflation equation. Over the past few years. Food inflation has stubbornly remained in double-digit territory since June 2015 while core inflation trends in single digit.
We believe that food inflation is not driven by liquidity nor is it a monetary phenomenon. The continuous uptrend in inflation is driven largely by cost-push factors rather than demand-pull factors. Against this backdrop, the way forward lies in fixing the structural problems fuelling inflationary pressure as monetary policy instruments will have almost no impact in moderating inflation.
We note that the acceleration in food inflation to 14.67% in December 2019, the highest in the last twenty months. In our view, food inflation is driven by cost of production, transportation cost, processing costs, very low productivity in agricultural activities at the primary level, security issues, seasonality and climate change. These are more important issues to address and beyond what monetary policy actions can resolve.
A high interest rate trajectory at this time will hurt the economy. It will become increasingly difficult to unlock investment and jobs in real estate, manufacturing, agriculture, mining, infrastructural deficit, if the economy is taken back to the path of high interest rate regime.
This scenario will equally result in high inflows of portfolio funds which are volatile and undependable. Even in some advanced economies, conscious efforts are being made to keep interest rate low and, in some cases, negative. Currently, policy rate in United States range between 1.5% and 1.75%; 0.75% in United Kingdom and -0.1% in Japan. December 2019 inflation number printed at 2.3%, 1.3% and 0.8% in these countries respectively.
Additionally, we recommend that the implementation of the CRR should be within a framework that allows for automatic adjustment that reflects the dynamics of bank deposits. The failure to have this could result in a situation where the CRR of some banks will shoot up to as high as 40%, or more which poses a risk to the stability of the financial system. As deposits level changes (rises/falls), cash reserves in the custody of the Central Bank should be automatically adjusted.
DR MUDA YUSUF
LAGOS CHAMBER OF COMMERCE AND INDUSTRY
27TH JANUARY 2020