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Why the MPC should consider a downward review of Monetary Policy Rate (MPR) this January

General sentiments support the need to commence the reversal of the two and a half year’s old monetary policy tightening programme in 2013. The tightening mode was initiated and has been sustained as a result of the high inflation in Nigeria which the monetary authority believed was largely a monetary phenomenon. However key indicators relevant to monetary policy actions supports a reduction in the MPR at the monetary policy committee meeting scheduled for Monday 21, 2013. And that a little reflation of the economy now would show the readiness of the monetary authority to use the monetary policy in an appropriate manner- short term, quick response and sharp on focus.

Global growth prospect expected to improve later in the year but not earlier

The Economic Intelligence Unit (EIU) sees improving fundamentals in many economies, supported in part by a heavy dose of stimulus, mainly from central banks. In this regard, it is worthy of note that the Nigerian monetary authority have pursued the opposite path consistently to fight inflation. Coupled with rising demand in many economies and the slow but steady resolution of banking and debt overhangs from the recession, the outlook for global growth is improving. These gains will, however, take some months to fully materialise, and in any case, will come against the backdrop of several risks early in the year. To sustain this trend in 2013, the combination of monetary easing and buffer building has been advocated by the Word Bank. More importantly, emerging and developing countries must avoid policies that are pro-cyclical at this time.

Nigeria’s monetary policy has been pro-cyclical, arguably compounding growth challenges

Amidst sustained impacts of economic downturn and domestic structural challenges on economic growth in the last two years, the monetary policy stance has been rather pro-cyclical. It may have added to the challenges of the productive sectors’ recovery from the economic downturn by promoting sustained deleveraging, pushing corporate hurdle rates higher and making it less attractive for banks to lend to the private sector, especially reducing the small amount of lending that erstwhile goes to the small and medium scale enterprises (SMEs) and consumers. The implication on the employment of human and material is depressing with unemployment rate for 2012 estimated at 25.6% from 23.9% in 2011. In this regard, the monetary authority agreed there is the need to support the economy with appropriate monetary policy actions as soon as possible.

Inflationary outcomes and threat are expected to be lower in 2013

Although inflation resurged in November 2012 when the year on year headline inflation surged to 12.3% from 11.7% in October, the slowdown to 12% in December 2012 however highlights the argument that the surge was significantly caused by base effect. This is shown by the dynamics of the monthly change in the CPI during the period, in addition to the unpredictably volatile dynamics of the year on year core and food inflation in recent times.

Despite the underlying inflationary tendencies that the dynamics of core inflation rates presents, we agree with the CBN research team, that inflation rate would slow down significantly in the first quarter of 2013 starting from January. This is expected to be caused largely by base effect as the base for 2013 monthly inflation rate estimation shifts to 2012, a year with high CPIs. In this regard, among other factors, the outlook for inflationary pressure in the short term is downward; thus providing substantial reason for the commencement of the reversal of monetary tightening.

Stronger and perhaps sustainable exchange rate has been achieved

The interbank and BDC rates moderated between the last MPC meeting in November and currently from N157.96/US$ and N159.00/US$ to N157.29/US$ and N159.00/US$. The official rate was largely flat at N155.75/US$ on the average during the period. Sales at the weekly wDAS market did not exceed US$300m and averaged only US$142m per sale. The stability of the foreign exchange market is also reflected in the growth of the nation’s foreign exchange reserve to US$44.6 billion on January 10, 2013 compared to US$36.8 billion at the end of June 2012. The outlook for the Naira exchange rate in 2013 is stable, on the back of the institutionalised market actions, import prohibition measures and perhaps positive outlook for FPI.

Systemic liquidity was well managed barring the surge in hot monies inflow

Money market liquidity, which provides a reasonable gauge of the dynamics of the systemic liquidity in lieu of the delayed monetary aggregate data, ended the month of December with a total net outflow of N211.23 billion. Characteristically, the liquidity squeeze was largely driven largely higher outflows through the CBN treasury operation and bond issues than the inflow from maturing bills and bonds. However, the mild moderation in short term interest rate during the month suggests that foreign portfolio inflows (FPI) perhaps sustained systemic liquidity higher than captured by the money market liquidity gauge above. The CBN utilised the OMO tool appreciably well to manage liquidity during the year.

The spate of hot monies is however worrisome

The FPI is ‘hot monies’ whose likely sudden reversal could derail any form of economic stability it may have helped to achieve. According to the CBN External Sector Development report for the third quarter of 2012, FPI inflow accounted for 76.21% of the total US$6.07 billion foreign capital inflow during the quarter; growing by 75.9% in that quarter alone.

Truly, the continued dominance of FPI in aggregate foreign capital inflows suggests the need to put in place measures against capital reversal. Yet, at this point on the Nigerian growth and unemployment scale, reflation will be countercyclical and in favour of the economy in the short to medium term.  On a decision scale, the argument for a mild reflation tilts the balance in favour of, at least, 25 basis points cut in MPR.