Nigeria: Central Bank admits inability of monetary policy to mend economy
November 23, 2016
At its 21–22 November monetary policy meeting, all members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to leave the monetary policy rate and other monetary policy mechanisms unchanged. The decision of the MPC highlights ongoing economic weakness, spiraling inflation and the “limitations of monetary policy in reversing the current stagflationary condition in the economy”, which it attributed to supply and demand shocks.
In its assessment of the domestic economy, the Bank pointed out that economic conditions worsened in Q3. The latest data released by the National Bureau of Statistics confirmed that the contraction in GDP sharpened in the third quarter. Shortage of foreign exchange, low fiscal activity, high prices of energy and delayed salary payments have hampered economic activity. The MPC stressed that these conditions cannot be improved with monetary policy instruments and urged the Federal government to take action and improve liquidity conditions in the economy, particularly in the agriculture and manufacturing sector.
Regarding the latest inflationary trends, the Committee noted that inflation rose from 17.9% in September to 18.3% in October, a multi-year high. Although the rise in month-on-month inflation eased between September and October, structural factors such as high energy and transport costs coupled with imported inflation are fanning inflationary pressures. In the FX market, the Nigerian naira remained broadly stable in the period from 1 September to 27 October.
The CBN noted that the U.S. electoral result of 8 November has compounded growing uncertainty in the global economic outlook. The economic recovery among developed countries remains fragile while volatility in financial markets, still-low prices for commodities and slowing demand are constraining growth in developing economies. A challenging external scenario, coupled with a struggling domestic economy according to the latest indicators, paints a challenging picture for Nigeria. Limited fiscal room for maneuver, owing in part to the Bank’s tightening cycle, is keeping growth prospects subdued.
Against this backdrop, the MPC voted unanimously to leave the monetary policy rate unchanged at 14.00% and the liquidity ratio at 30.00%. The Committee also left the asymmetric corridor of plus 200 and minus 500 basis points around the key rate unchanged and the Cash Reserve Requirements at 22.50%.