- Cancellation of MPC meetings
- 2018 Budget passage delay
- Declining stock market performances
- Economy without direction
Matthew Otoijagha & Kris Obiaje
As Q1 of 2018 closes in about a week, the N8.612tn 2018 budget estimates presented by President Muhammadu Buhari to a joint session of the National Assembly, on November 7, 2018 is yet to be assented into law. As always the case, the Nigerian economy in Q1 2018 is ending without a director as the pilot, which is the budget is not being implemented.
The Monetary Policy Committee, MPC is the highest policy making committee of the Central Bank of Nigeria- CBN with the mandate to reviewing economic and financial conditions in the economy and to determining appropriate stance of policy in the short to medium term, among others. Unfortunately, MPC has also not met since Q3 of 2017 whereas, by its enabling Acts, should meet quarterly, except otherwise, in the event of an emergency. The committee only met last between September 25 – 26, 2017, with summary of decisions taken that included; the retaining of MPR at 14.0%; retention of CRR at 22.5%; keeping the Liquidity Ratio at 30.0%; and the retention of the Asymmetric corridor at +200 and -500 basis points around the MPR.
In 2018, by schedule, MPC was supposed to hold its first meeting between 22 and 23 January, 2018 but this was cancelled because the number of committee members could not form a quorum as stipulated in the CBN Act 2007.
How well can the financial markets run without an active MPC in place? How wrong or right would be decisions made on investment in such an economy? The MPC, being the highest policy making committee with the objective to maintain price stability, support the economic policies of the federal government by formulating monetary and credit policies in line with the policy is also saddled with the core mandate to formulating monetary and credit policy by review economic and financial conditions in the economy. It is to determine appropriate stance of policy in the short to medium term by regularly reviewing CBN’ monetary policy framework and adopt changes when necessary and communicate monetary policy decisions effectively to the public and ensure the credibility of the model of transmission mechanism of monetary policy.
The inability of the Central Bank of Nigeria to hold its first Monetary Policy Committee meeting since the beginning of this year may affect the rate of investment inflows into the economy, finance and economic experts have said.
The MPC meeting has been put on hold following the failure of the Senate to screen the nominated members sent to it since last year by President Muhammad Buhari.
There are 12 members of the committee out of which the tenure of eight had elapsed, leaving only four members on the panel and making it impossible for the committee to form a quorum.
The lawmakers at the National Assembly had maintained that they would not confirm any nominee by the executive until their differences regarding the nomination and non-confirmation of the acting Chairman of the Economic and Financial Crimes Commission Crimes Commission, Mr. Ibrahim Magu, was resolved.
Between the committee’ last meeting in 2017, where seven members were present, some others among them had retired having fulfilled their tenure thus creating the lacuna. In accordance with Section 12 (2d) and (e) of the CBN Act of 2007 (Amended), the MPC is composed of 12 members, including the CBN Governor as Chairman. Other members are the four CBN deputy governors; two members of the board of directors; three appointees by the President, and two by the CBN Governor. In order to form a quorum, the law requires five members of the CBN board to be in attendance. Three of them must be CBN directors other than the governor or the deputy governors.
Nevertheless, for most part of 2017, the committee had met with seven or eight members, excluding the CBN governor, who is the chairman. The exit of the deputy governors in charge of Economic Policy, Sarah Alade, who retired last year March, and the retirement of her Corporate Services counterpart, Suleiman Barau, later in June 2017 left eight vacant positions to fill.
It was consequent upon this development that President Muhammadu Buhari, had in October, nominated four persons and asked the Senate to confirm their appointment in accordance to relevant sections of the CBN Act.
Those nominated were: Aisha Ahmad, a former Retail Banking executive director at Diamond Bank Plc, who was expected to resume immediately after her confirmation to replace Mrs. Alade. There was on the list, Adeola Adenikinju; a Professor of Economics from the University of Ibadan. He is also a Research Professor at the Centre for Econometrics Petroleum, Energy Economics and Allied Research and a Senior Research Fellow, Macroeconomic Study Group, University of Ibadan.
Another nominee is Robert Asogwa, a development economist who was until his appointment the Team Leader of Inclusive Growth Unit at the UN Development Programme, UNDP. A micro-economist\policy analyst and research project expert, he holds a PhD in Economics from the University of Nigeria, Nsukka. To complete the list was Asheikh Maidugu, a former director, Federal Inland Revenue Service, FIRS, and former Chief Operations Officer, Debt Management Office, DMO, 2007-2010. He was a Senior Lecturer in the Economics department, University of Maiduguri.
Meanwhile, Alhaji Suleiman Barau, another deputy governor of the CBN, who was also a member of the committee, retired recently. The president is yet to name a replacement for him.
Nonetheless, it has been four months after their nominations and none of them have been confirmed by the Senate, making it impossible for the MPC to form the mandatory quorum needed to hold the meeting.
When two elephants wrestle… Impact on the Economy
The inability of the MPC to meet might create chaos in the polity. Aside sending wrong signals to the international investors that the country is not in grip of its economic affairs; it may create uncertainty in the minds of the elusive investors from outside our shores that we earnestly court their patronage.
Early in the year, the Director General of the West African Institute for Financial and Economic Management, WAIFEM, Prof. Akpan Ekpo, expressed concern over the development, when he said, “The way it is now, we are in a limbo and if MPC does not meet, it means that there won’t be decisive actions on monetary policy. The MPC is the engine room for monetary policy and so if they cannot meet to deliberate on the economy and relevant issues, you increase uncertainty in the system.
“The central bank’s mandate is price stability and it is very crucial in any economy. We have always argued that such delays would always cause problem for us.’
Many financial market Analysts believe that the inability of the apex bank to hold the meeting might send a wrong signal to the market, It is also assumed that the implication of the inability of the MPC to hold meetings is that investors would adopt a wait-and-see attitude to know the policy direction of the apex bank before they could commit more resources into investment.
Speaking back in January when the first meeting of the year was cancelled, Mr. Chijioke Ekechukwu, Managing Director , BGL Capital, said, “The aborted MPC meeting due to lack of quorum will adversely affect financial decisions of the country and investors generally . This is so because this was to be the first meeting for this fiscal year and therefore, was to chart a course for monetary , credit , and fiscal direction of the country . “Investors are waiting , banks are waiting , the capital market is waiting and other countries are waiting for these monetary policy indicators to be able to take their financial and investment decisions. Investors, both local and foreign, are still going to hold back their investments until these variables become clearer and known.”
Rislanudeen Mohammed, on his part , said since the financial markets relied heavily on sentiments , the delay in holding the MPC meeting was not good for the country’s economy. “Because the markets rely heavily on sentiments, this development is not a good one. It has the tendency of affecting investors’ confidence in our economy and eroding the recent gains.’
On this foregoing, the CBN governor, Godwin Emefiele, has allayed stakeholders fears, saying that there was no cause to worry. He said, “Economic fundamentals remain sound. Key indicators in the economy continue to move in the right direction, with modest recovery in oil prices and a boost in the domestic production activities”. Other positive indicators he identified include continued decline in inflation rate from 15.87 to 15.37 per cent in January; accretion of foreign exchange reserves from about $23 billion in October 2016 to $40.78 billion as at January 18, 2018.
Besides, the CBN Governor said investors’ confidence continues to soar with the recent introduction of Investors’ and Exporters’, I&E, window, which generated over $13 billion within just nine months. “The positive economic outlook and the foreign exchange inflows have also impacted positively on the capital market which boosted the market capitalization by 22.3 per cent from N13.21 trillion on November 30, 2017 to N16.15 trillion as at January 19, 2018,” he submitted.
Some experts believe that the vacuum created in the polity does not change the status quo since MPC last met. They posited that at the end of the meeting of the committee on November 21, 2017, members resolved to retain all the policy fundamentals unchanged. The monetary policy rate, MPR, which is the ruling lending rate in the economy, was left at 14 per cent; cash reserve ratio, CRR, at 22.5 per cent and liquidity ratio at 30 per cent. The Asymmetric corridor was kept at +200 and -500 basis points around the MPR.
Moreover, it is agreed that the CBN has already indicated that it would keep key monetary variables as decided by the last MPC meeting in the absence of the meeting holding.
For Chief Executive Officer of Economic Associates, Ayo Teriba, any impact on the economy of not holding the meeting would depend on how long postponement would take. “Given the fragility of the foreign exchange market, until the rates converge, easing will rock the boat. Further increase in reserves will bring convergence. It is only at that point they should ease,” he said.
Other Analysts who spoke in separate interviews, said the inability of the apex bank to hold the meeting might send a wrong signal to the market, others said it was wrong for the lawmakers to sacrifice the interest of the economy on the altar of politics.
They said the implication of the cancellation of the MPC meeting was that investors would adopt a wait-and-see attitude to know the policy direction of the apex bank before they could commit more resources into investment.
According to Otunba Dele Ajayi-Smith, Council Member, Lagos Chambers of Commerce and Industry (LCCI), “Investors are waiting; banks are waiting to be able to take their financial and investment decisions.”
Speaking further, Ajayi-Smith said, “Although the CBN has retained all the rates by retaining the Monetary Policy Rate at 14 per cent, Cash Reserve Ratio at 22.5 per cent and Liquidity Ratio at 30 per cent, these rates and ratios probably would have changed if the MPC had met. Investors, both local and foreign, are still going to hold back their investments until these variables become clearer and known.”
He said since the financial markets relied heavily on sentiments, the delay in holding the MPC meeting is not good for the country’s economy, because the markets rely heavily on sentiments, this development is not a good one. It has the tendency of affecting investors’ confidence in our economy and eroding the recent gains.
Expressing a slightly divergent opinion, Mr. Paul Urum, of Royal Guaranty & Trust has this to: ‘’For me, almost all the past MPC meetings I have been hearing over the past two years, we’ve not seen any significant change they make on the market.
‘’So the market has gotten used to the fact that MPC have held without any change to the interest rate for so long. It is only when there is any significant changing in the market that we can say that the MPC hold any significant value in the market.
‘‘It is most certain that when inflation rate is nose-diving that monetary policy rate will be adjusted downward may be either by 400 basis point or 200 basis points gradually by the MPC.
‘’Apart from this occasional intervention, investors are not actually expecting much from MPC. And whatever decision they take is not really a significant factor to the market.
‘’The reason why MPC importance was raised to this level is because of inflation, you know at some point the inflation level rose to between 18-19% in Nigeria, but now, inflation rate has come down significantly and as such we expect that the monetary policy rate be reduce significantly from 14% to 13% or 12% or may be even less; to the extent that investors can earn returns on their investments.
‘’Secondly, you know low interest create incentives to borrow, when your return on your borrowing can not out-strip the cost of borrowing, it becomes a problem. Over the past two years or so, most local banks have become favorably disposed to lending to the government rather than taking the risk of lending to the private sector.
‘’And again if you look at result coming from the companies, apart from the banks, the companies have been struggling because their access to credit has been very high in terms of interest rate.
‘’From what I have seen over the past one year, the 14% interest rate has shifted profitability from the manufacturing companies and others to the banks. The banks have been the main beneficiary of the current interest rate regime.
‘’So we expect that as pressure on the federal government for finance diminishes, due to rising crude oil prices, we expect that the need for high interest rate will be reviewed downward. As interest rate begins to drop, I see banks turning their attention to the manufacturing industries.’’
Mr. Aruna Kebira, a stockbroker with Gruene Capital Ltd speaking his mind said, ‘’As far as I’m concerned, the inability of the MPC to carry out interest rate review has actually affected the market.
‘’If you look at it, the market was waiting for the CBN to hold its first meeting in February this year, the stock market was up. But, the moment it was discovered that the MPC will not sit again, coupled with impasse between the law makers and federal government, then the market began to drop.
‘‘Where will on earth can it be explained that in Nigeria the central bank MPC is unable to sit because of lack of a quorum of the MPC members? It means your house is not in order. The foreign investors will look at us and say we are not serious, both the government and citizens inclusive.
‘’These foreign investors will take their money out of the stock market, though not out of the country and will wait till we do things right.
‘’You can see the state of affair in the market right now is like running a house without a budget. The interest rate in the financial market is very critical to market, whether they are going to leave the rate unchanged or not is not the matter, but the inability of MPC to hold that meeting shows un-seriousness.
‘’As far as I’m concerned, this incident impacted the market negatively, which explained why the market kept dropping and dropping until last week, since the beginning of February when the news filtered out.’’
Kola Amzat(FCA,ACS), Qualinvest Capital Ltd said: ‘’The MPC is a potent tool for economic direction. Since the MPC members have not been able to sit for a meeting this year, whether we like it or not, it is sabotaging the economy. Local investors will appreciate the fact that the impasse between the law makers and the Executive arm of government is politics, but the foreign investors will not understand that.
‘’The foreign investors will be saying that they don’t have confidence in the system. What is the key function of the MPC? It is all about the interest rate. It is interest rate that determines the level of investment inflow.
‘’Since January, the current interest rate has stagnated at 14%. Under such condition, it means that investments in the system have also stagnated and to that extent, it has been affecting the economy.
‘’The real sector of the economy has not been having it easy because of the uncertainty created in the financial market. The question that arises under this situation is: Do we borrow or not borrow? If we borrow at 15% today, suppose the CBN meet tomorrow and the new rate is 16%? So, one way or the other, the inability of the CBN to hold MPC meeting has stagnated the economy.’’
However, within the past week, hope was rekindled as senators decided to sheath their sword and made concession by giving the executive soft landing on the MPC’s nominee’s confirmation. The Senate reversed its decision last Tuesday and gave its committee the go-ahead for the screening of the CBN nominees.
At legislative proceedings last week, the committee on Banking and Finance, was given one week to consider the requests of the President as the nominees were led to the screening by the Senior Special Assistant to President Buhari on National Assembly Matters, Senator Ita Enang.
Enang who visibly elated, said he was hopeful that the Senate will consider other nominees pending before the senate. “You can observe that those who are screened now are the two deputy governors, the four nominees of the Monetary Policy Committee. The members of the board are not screened. I know the Senate in its magnanimity will extend that and go ahead to clear other nominees”.