Recession Inevitable, Recovery Depends On FG, CBN Actions- MPC Members

•Seek Suspension Of Hike In VAT, Import Tariffs, Utility Bills

The Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) says although the nation’s economy would unavoidably slip back into recession, the second time in four years, propelled by the Coronavirus (COVID-19) pandemic now ravaging the global economy, thereby reversing gains of the past year when the economy showed signs of encouraging recovery. This culminated in an average 2.27% growth for the whole year.
The International Monetary Fund (IMF) in its latest edition of its World Economic Outlook released on Tuesday, says Nigeria’s GDP could fall by as much as 3.4% this year, compared to its 2.2% growth in 2019 (READ MORE), a situation the African Development Bank (AfDB) says it hopes to mitigate with a $10bn facility already set aside for member countries (READ MORE).
In their personal statements during the MPC meeting of March 23 and 24, released on Wednesday, members of the committee, variously lamented the situation has left Nigeria with very limited financial capacity by way of the lean Excess Crude Account and Sovereign Wealth Fund, to deal with the social and economic impact of the coronavirus.
They, nonetheless, expressed a belief that the possibility of recession also offers an opportunity for a national economic reset, while applauding actions so far by the CBN to mitigate the impact of the crisis, including ensuring the soundness and stability of the nation’s financial system. They urged the various tiers of governments to complement the efforts by engaging in cost-cutting in the face of dwindling revenues.
Members noted in particular, the various intervention funds already introduced by the CBN amounting to N3.5tr, which seek to provide funding to small and medium scale businesses at 5% interest rate, up from 9% over the next one year, while introducing time-limited regulatory forbearance for Deposit Money Banks to temporarily restructure terms of loans and tenors to businesses and households affected by the COVID-19 pandemic.
In his own personal assessment of the economy, leading to his decision at the meeting,
Aliyu Sanusi, a member of the committee, said for Nigeria at this time, the recession is “unavoidable,” given that “output will contract as firms either require workers to work from home or completely shut down in major cities.
“Because the supply chain is also disrupted, unaffected businesses would suffer rising costs and slower production activities. The stay-at-home measure also implies that household consumption would significantly fall not only because of the implied income losses, but also as many bases for expenditure are unfeasible.”
This, he continued, “suggests that the COVID-19 measures would reduce both aggregate supply as firms produce less, and depress the Aggregate Demand as consumption declines. The effect of this measure on output and inflation, therefore, depends on its relative impact on the Aggregate Demand and Aggregate Supply.”
Moreover, Sanusi continued, before the emergence of COVID-19, inflation in Nigeria was already trending on upward owing to the scarcity that followed the land border closure by the Federal Government, following which the effect would be disproportionally more significant on the aggregate supply. The situation, he believes, would further raise the inflationary pressure amidst contracting output (leading to stagflation), since production would certainly decline.
Dr. Kingsley Obiora, a deputy governor of the CBN and committee member, called for “coordinated and targeted policies… to ensure we do not waste the latent opportunities presented by this pandemic.”
The situation today as suggested by many financial sector indicators, he stressed, suggests “that the industry remains safe and sound, but several downside risks may materialize in the short term, particularly those related to loan exposures.
“This implies that both the Central Bank and Deposit Money Banks (DMBs) must be ready with nimble and effective strategies to contain and/or mitigate these risks,” which is a reason why he supports the recent CBN policies granting regulatory forbearance allowing DMBs to restructure existing loans, among others.
He also noted the provision of direct credit facility to the healthcare sector, while strengthening the LDR policy to ensure a greater flow of credit to other key sectors at this critical time.
“I believe that these measures are already helping to cushion the worst effects of the crisis on the economy,” he stressed further.
But in resetting Nigeria’s economy at this time, Folashodu Shonubi, another CBN deputy governor and committee member, says “actions must take cognizance of our economic fundamentals.
“The speed by which confidence is restored will depend on the effectiveness of policy implementation,” he added.
He encouraged the government “to explore aggressive expenditure rationalisation, including a significant reduction of recurrent expenditure, in the face of persistent revenue shortfall and consider opportunities to use excess liquidity in the banking sector for deficit financing.”
Also, Sanusi, in his review of the Banking System Stability Report, said shows that the Nigerian banking system remains stable and resilient, with industry Non-performing loan (NPLs) ratio dropping from 6.59% in January 2020 to 6.54% in February 2020, compared with 6.1% in December 2019, although still far from the 5% prudential limit.
That notwithstanding, according to Godwin Emefiele, CBN Governor and MPC chairman, it “represents a substantial improvement when compared with 11.3% in February 2019.”
Similarly, the industry average liquidity ratio of 44.2% at end-February 2020 is well above the prudential minimum of 30%, noting “with satisfaction, the positive impacts of the new LDR policy introduced in July 2019 to improve lending to the real sector.
“Total gross credit of the banking system increased by N1.997tr from N15.567tr at end-May 2019 to N17.565tr at end-December 2019 and recorded an additional growth of N353.85bn between end-December 2019 and March 17, 2020.
“The credit growth was mainly recorded in manufacturing, consumer credit, general commerce, information and communication as well as in the agricultural sectors. I continue to emphasize the importance of enhanced credit flows to strategic and high impact private sector ventures through an effective collaboration of all stakeholders,” Emefiele added.
He reiterated that the CBN will continue to propel credits to the private sector, mindful of the risk aversion among “banks to supposedly high-risk real sector ventures.
“In my consideration, I affirm that the objective of price and exchange rate stability remain sacrosanct. I note the emergent pressure in the FX market due to oil price softening and the need to unify the exchange rate across all segments.”
Given the weakened short-term growth outlook arising from the impact of the pandemic, the CBN governor noted “the need to adequately support domestic productivity and buoy aggregate demand.”
This is why he said the CBN has taken measures in recent times “to support critical private sector businesses and earmarked stimulus packages to assist households and Micro, Small and Medium Enterprises (MSMEs).”
Prof. Mike Obadan, another member of the committee, in his own intervention says the CBN has its work perfectly cut out already, given the presence of certain factors in the Nigerian economy at the moment including the sharp drop in government revenue arising from slump in oil price and exports. This, he recalled, resulted to the increased borrowing to finance fiscal deficits, leading to public debt accumulation and an overall Federal Government fiscal deficit of N4.838tr, and net overall deficit of N3.925tr, among others.
The N3.5tr CBN funds, in the words of Prof. Festus Adenikinju, a member of the committee, “more than compensates the expected reduction of N1.5tr in the 2020 Federal Government’s budgetary expenditure,” despite not being enough to cover individuals and families and those largely in the informal sector.
However, for the efforts of the monetary authorities to have the desired impact, he wants the fiscal side to consider putting in place complementary trade and income policies, including the reduction in tariff rates on imported raw materials, intermediate and capital goods.
The biggest impact may however come should the government defer implementation of the 50% increase in Value Added Tax (VAT) from 5% to 7.5%; putting on hold plans to raise utility prices this year; while offering compensation package for vulnerable households and individuals.

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