From the Central Bank of Nigeria (CBN) yesterday came a warning shot on the economy: Nigeria risks sliding into recession next year.
The apex bank also hinted that the implementation of the Treasury Single Account (TSA) might affect the country’s economic growth.
Speaking yesterday at the end of the Monetary Policy Committee (MPC) meeting in Abuja , CBN Governor Godwin Emefiele lamented that with “two consecutive quarters of slow growth, the economy could slip into recession in 2016 if proactive steps are not taken to revive growth in key sectors of the economy.”
Emefiele added: “The overall economic environment remains fragile. The economy further slowed in the second quarter of the year, making it the second consecutive quarterly less-than-expected performance.”
In the face of the prevailing circumstances, the MPC advocated that a “synergy between monetary and fiscal policies remains the most potent option to sustainable growth.”
The committee specifically “noted that liquidity withdrawals from the implementation of the TSA, elongation of the tenure of state government loans as well as loans to the oil and gas sectors could aggravate the liquidity conditions in the banks and impair their financial intermediation roles, thus affecting the economic growth, unless some actions are immediately taken to ease liquidity conditions in the market.”
Emefiele added that despite the TSA, “banking system liquidity ratio remains moderate, consequently committee advised on the urgent imperative for banks to aggressively support the efforts of government at job creation by channeling available liquidity into target growth enhancing sectors of the economy such as agriculture and manufacturing, this is with a view to promoting employment creation through conscious efforts aimed at directing lending to the growth enhancing sectors of the economy.”
The Committee considered that “the Bank (CBN) and Deposit Money Banks (DMBs) must strive to reverse the slowing GDP trajectory by actively staking up their efforts at catalyzing economy with substantial new loans to the target sectors earlier highlighted.”
The committee also expressed concerns “that growth had come under sever strains arising from private and public expenditure in particular. It noted the impact of non-payment of salaries at the state and local government levels as a key dampening factor on domestic demands.”
The CBN governor said year on year headline inflation continued to trend upward while month on month measures moderated.
According to him, despite demand, the foreign exchange market “remains significant as oil prices continue to decline. Arising from this development there were indications that some of the banking sector performance indicators could be stressed if conditions worsen further.”
The committee observed that the impact of the persistent decline in global crude oil prices on the fiscal position of government continues to reflect in rising credit to government.
Emefiele said the committee also noted that the initial market reaction to the decision by JP Morgan to exclude the country from its government bond index for emerging markets “has largely dissipated as yields soon adjusted to their pre-announcement levels” but warned that “there may be second round effects over the next two months as the economy adjusts to that decision.”
The committee reiterated its unwavering commitment to the Naira and exchange rate stability despite the pressures stressing that it is “mindful of the possibility of diversion of any extra liquidity to the foreign exchange market.”
As a result of this development, the CBN was urged to “closely monitor the nature and sources of demand pressure in the foreign exchange market to ensure that funds are not diverted to demands for foreign exchange but applied to specific growth enhancing asset creation and lending by the banks.”
It further noted that sectors like agriculture, MSMEs are sectors for rapid generation of productive employment and wealth creation as a result these sectors “must therefore be painstakingly encouraged.”
The CBN governor stated that gross official reserves decreased modestly from US$31.20 billion at end-July 2015 to $30.63 billion on September 17, 2015. Based on this, the Committee underscored the imperative of growing and protecting the country’s foreign reserves and building fiscal buffers in the process of strengthening confidence in the economy which is essential for promoting growth and stability.
Overall the MPC expressed optimism that business confidence will continue to be improved upon as the government continues to unfold its economic plans noting that “in addition, some of the reassuring measures of the administration including efforts aimed at resolving fiscal challenges at the sub-national levels and the fight against corruption and improved business environment will unlock investments.”
At the end of the MPC meeting and after considering what it called “the underlying fundamentals of the economy, particularly the declining output growth, rising unemployment, evolving international economic environment as well as the need to properly position the economy on a sustainable growth path”, the MPC decided to reduce the Cash Reserve Requirement (CRR) from 31 per cent to 25 per cent.
By a unanimous vote, the MPC voted to retain the lending rate or Monetary Policy Rate (MPR) at 13 per cent; retain the symmetric corridor of 200 basis points around the MPR; and retain the Liquidity Ratio at 30 per cent.