The Monetary Policy Committee (MPC) met on the 23rd and 24th March 2020, amidst heightened uncertainty in the global macroeconomic environment arising from major disruptions associated with the outbreak of the Coronavirus Disease (COVID-19) and the oil price war between Saudi Arabia and Russia.
As you may know, the MPC (a committee within the CBN) is responsible for formulating monetary and credit policies, attainment of price stability and support the economic policies of the Federal Government. The MPC also monitors internal and external economic conditions in formulating monetary policy directions.
In the light of current internal and external economic realities, please find below highlights of the latest monetary policy communique from the MPC and other policy insights that may affect your business in the days and months ahead as this crisis gathers momentum locally.
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Background:
The committee noted the N3.5 trillion worth combined policy measures put in place as a stimulus to ameliorate the pains arising from the COVID-19 health and economic crisis. The measures include:
- Extension of the moratorium on CBN intervention facilities effective 1st of March, 2020. A significant move by the Bank to ease pressure on loan repayments.
- Reduction of interest rate on all CBN intervention facilities from 9% to 5% over the next one year.
- Creation of a N50 billion targeted credit facility for households and SMEs that have been particularly hit by COVID-19 pandemic.
- N100 billion intervention in healthcare loans to pharmaceutical companies, healthcare practitioners intending to build new hospitals and health facilities or expand existing ones to first-class health centres
- Regulatory forbearance to Banks to restructure terms of facilities in affected sectors
- Strengthening the LDR policy, which is encouraging significant extra lending from Banks.
- Activation of the N1.5 trillion InfraCo Project for building critical infrastructure
- N1 trillion in loans to boost local manufacturing, production across critical sectors and import substitution
The committee also noted the following:
- Uptick in inflation from 12.13% to 12.20% for the 6th consecutive month, driven by shocks to food prices as well as persistent infrastructural challenges.
- Growth in aggregate credit by N2.35 trillion since the inception of the LDR policy, reflecting the potency of the LDR policy
- Dismal performance of the equities market as the All-Share Index and market capitalization dipped by 19% and 12.57% respectively between 31st December 2019 and 24th March 2020.
- Continued resilience of the banking system due to the decline in NPLs while expressing confidence in the regulatory regime.
Outlook
- Increased deterioration in the financial market condition.
- Disruption to the global supply chain as a result of the COVID-19 pandemic.
- Decline in oil prices and non-oil receipts which will lead to a further decline in reserves.
- Subdued growth in 2020.
The Committee noted that these can be mitigated by:
- The effective response of the monetary and fiscal authorities.
- Recalibration of the 2020 budget.
- Sustained CBN interventions in selected sectors.
- Deliberate policies to diversify the economy.
Committee’s considerations
- COVID-19 pandemic resulting in further health and economic crisis.
- Decline in oil price and supply glut in the nearest future.
- Emergence of exchange rate pressure.
- Downward revision of the 2020 budget by N1.5trillion and oil price benchmark to $30/barrel.
Committee’s decisions
At the end of deliberations, the Committee was faced with three options – whether to tighten, hold or loosen.
Tightening will result in reduced inflation rate and support reserve accretion however, it will reduce money supply, credit creation, increase cost of credit and have an adverse effect on growth which has already been weakened by the pandemic.
On loosening, the committee felt that this decision will boost money supply but will not necessarily increase credit creation. It will have an adverse effect on inflation and also lead to exchange rate pressures as money supply rises.
In view of the aforementioned, the Committee decided by a unanimous vote to:
- Retain the policy rate at 13.50%
- Retain the asymmetric corridor of +200/-500 basis points around the MPR
- Retain the CRR at 27.5%
- Retain the Liquidity Ratio at 30%
This decision will offer pathways to appraise the effects of the CRR and LDR policy while also allowing the pandemic to wear off before determining the next course of action.
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