Oil Prices, 2019 Polls, Delayed Budget, May Stall Economic Recovery- CBN

• MPC Members Seek Strategies To Reduce 14.05% NPL Ratio

Deputy Governor of the Central Bank of Nigeria (CBN) Mrs. Aishah Ahmad, wants Nigerians to prepare for a tough year ahead, even as the fiscal and monetary authorities must “consolidate on the price stability gains on the monetary side by stimulating stronger and more resilient GDP growth.”
In her personal statements during the November 22 and 23 meeting of the CBN Monetary Policy Committee (MPC), released by the apex bank on Wednesday, Mrs. Ahmad suggested a policy stance that achieves price stability conducive to economic growth.
She assured that the CBN’s current policy rate is appropriately placed to achieve this objective, even while the country’s fiscal and monetary authorities to adopt coordinated approaches to resolving key global and domestic challenges that may hamper the nation’s economic growth and developments, especially in the new year.
These challenges, she said, include the slowing global demand and growth projections, oil price volatility, price and monetary stability, uncertainties around next year’s general elections beginning in February, as well as the delay passage of the 2018 budget.
All of these, according to Mrs. Aishah Ahmad, a deputy governor of the CBN and member of the MPC, for example, “have implications for sustained economic recovery and growth.”
The plan to jerk up the country’s minimum wage, she warned has its inflationary effects, which may however be largely benign given existing low aggregate demand.
A critical headwind to watch, Ahmad believes, is the recent downward trend in oil prices, warning that portfolio concentrations in oil and gas, “will require (Nigerian) banks to build robust capital buffers to remain resilient to any shocks.”
There is however a positive side, she said, with “the imminent settlement of Federal government contractual obligations to the private sector and relatively positive domestic GDP growth prospects is expected to further strengthen asset quality, solvency ratios and sustain financial system stability.
“As we approach 2019, new downside risks are emerging as existing risks continue to intensify,” Ahmad stressed.
In his personal statement, giving insights into how he voted at the meeting, Prof Festus Adenikinju, also member, lamented the high retail lending rates that are now shutting out Small and Medium Enterprises from the credit window, besides contributing to the current high level of Non-Performing Loans in a slow growing economy like Nigeria.
He expressed strong concern about the fiscal side of the economy, judging by “the relative under performance of non-oil revenue, the high costs of governance, the slow and overlapping budget operations, high budget deficits, the increasing share of foreign debts in total debt stocks, the share of budget allocated to debt servicing, the high infrastructural deficit that impairs competitiveness and productivities of the economy, lack of fiscal buffers, the uncertain state of the Petroleum Industry Governance Bill (PIGB), the long run impacts of fuel subsidy, the poor power sector performance that unnecessarily increases operational costs of firms and households, have to be addressed urgently as they impact on the long term trend of the economy.
He listed other key concerns at this time to include “the low economic growth rate, the declining foreign reserves, slow credit growth, low tax/GDP ratio, the continuous high fiscal dependence on oil, the high lending deposit interest rate gap, the volatility in the stock market, uncertainty in the release of the capital budget, the uncertain state of the global economy, the fluidity of the global oil market, the uncertainty surrounding the 2019 election, the continuous outflow of portfolio investment, etc, are some of the major issues that will weigh on the economy.”
Dahiru Balami therefore believes that although growth outlook remains weak, Nigeria is unlikely to slide back into recession anytime soon, even as he agreed there are downside risks like “the late passage and implementation of the 2018 budget, security challenges, 2019 election spending, inadequate real sector financing and multiplicity of structural problems may affect growth outcomes.”
With all of these, it has become imperative, he stressed, “to take cognizance of output growth in any policy framework to curtail pervasive high level of unemployment.”
Prof. Mike Obadan, another member lamented the crave for sharing of all monies that accrue at Federation Account Allocation meetings, warning that from January 2019, “the regime of much higher oil prices may not be feasible in the foreseeable period (which now) poses a notable threat to the Nigerian economy whose performance depends delicately on robust prices in the global oil market. If the market for oil continues to show weakness, Nigeria’s growth performance is at risk while the gains in external reserves accumulation, exchange rate and macroeconomic stability will be threatened.”
Government, he stressed, has repeatedly ignored advice to “use oil resources to diversify the economy and build fiscal buffers in periods of high oil prices. It is regrettable that state governments have continued to reject suggestions to save out of high oil earnings.”
For Edward Adamu, another CBN Deputy Governor and MPC member, improving domestic credit remains a key imperative if Nigeria’s economy must grow and jobs created.
He therefore called for marked improvement in credit disbursement by commercial banks to shore up private investment and economic activities which is in need of a marked improvement.
This, he continued, is besides the necessity for a resilient banking system, expressing delight at improvements in key financial soundness indicators (FSIs) of the industry in October 2018.
He listed the FSIs to include the rise in total capital adequacy and a moderation in Non-Performing Loans (NPLs), amongst others, adding that sustaining such improvements “remains a key imperative for policy” and are partly reasons “for a non-hawkish approach to monetary policy at this time even though inflation remains a concern.”
For Adamu also, going by “the weak growth outlook, financial system fragilities and inflation, some kind of policy trade-off is inevitable.
“However, in doing so, I recognize the primacy of the price stability mandate of the (CBN); as such, the decision to hold which implies sustaining the current fairly tight stance of policy is, in my view, consistent with the need to strike a balance between the competing imperatives of keeping inflation in check, while not hurting growth and employment prospects.”
He once more warned that monetary policy cannot mitigate all of the current risks to economic stability, but can only complement sector policies, especially the fiscal, against the backdrop of instability in oil prices.
The fear is especially true as it relates to the potential ramifications of prolonged low crude prices for the entire economy, following which all macroeconomic policy levers must be engaged to forestall a low growth trap
On his own part, Robert Asogwa, a member argued that October NPL ratio at 14.05%, an improvement from 14.7% in August 2018, “is still above the allowed prudential maximum thus requiring comprehensive NPL reduction strategies from the banks and the regulators.
Comparatively, he noted the improvement in financial sector weaknesses that was a key concern at the September MPC meeting, but drew attention to the consistent decline in capital inflows, especially since 2018, at a time outflow have more than doubled, making external financing more challenging in Nigeria.
“There have been sharp declines in inflows especially for portfolio investments and FDI,” he noted, warning that monetary policy forecasts for 2019 in many advanced economies suggests policy rate increases.
Just as Mrs. Ahmad warned, the implication of this for the domestic economy is that “the capital flow position in Nigeria may possibly worsen in the near future… Furthermore, the return of frequent volatility in the oil market is already putting pressure on commodity exporting countries like Nigeria.
“Oil prices which had reached a high of $79. 4 per barrel in October 2018 (which is the highest level since November 2014) from $77.2 per barrel in September 2018 had suddenly dropped to $62.60 in late November. There are still expectations that prices may drop further in the early months of 2019.
“This fall in oil prices contributed to a weakening of the external reserve position which declined from $47.15 billion in June 2018 to $40.61 billion in October,” adding that generally, weaker reserve positions mean less room for the monetary authorities to respond to foreign currency pressures which is a threat to the relative stability in Nigeria’s foreign exchange market.