Personal Statements by the MPC Members at the 136 MPC Meeting of May 24-25, 2021

purchasing manager

July 09, 2021 / 05:10 PM / Central Bank of Nigeria / Header Image Credit: Ecographics

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Global growth outlook continues to be good, reflecting
largely, activity rebound in the United States and China. The IMF currently
projects global growth at 6.0 percent in 2021. This growth outlook is stronger
than all the previous ones and reflects additional fiscal support and progress
with vaccination particularly in the advanced economies; continued adaptation
of economic activity to the COVID-19 world; and substantial improvement in
trade. Global trade is projected to expand by about 8.0 per cent in 2021 from a
trough of about -5.2 per cent in 2020. The recovery in trade is powered by
pent-up demand for consumables following the restoration of supply chains in
emerging markets and developing economies (EMDEs).


However, the divide between the advanced economies and
others in terms of access to COVID-19 vaccines remains and could worsen on
account of the recent catastrophe in India, Brazil, Turkey and even Japan. The
growth outlook continues to be fragile and uncertain in several countries in
South Asia, Sub-Saharan Africa, Latin America and the Caribbean. Nigeria is now
projected to grow by about 2.5 per cent in 2021, which is below her potential and
obviously not enough to significantly alleviate the unemployment situation.


Globally, economic activity continues to face major
challenges including new coronavirus mutations and heavy human toll in some
countries, divergent pace of recovery across countries and sectors, debt burden
and slow vaccination in poor countries. In addition, financial markets and
commodity prices continue to harbour some risks and prospects of adverse
monetary policy spillovers are getting stronger. A sudden normalization in the
US, for example, could derail or at least slow recovery in the EMDEs. This
possibility needs to be factored into the policy calculations in these


Equally important for policy at this time is the
uneven recovery across sectors. Contact-intensive activities are still
struggling at way below pre- 15 pandemic levels. Travel, the arts,
entertainment, sports, and hospitality are some of those activities. On flip
side, demand is strong for products that support working from home and durable
goods generally. Developing countries do not, generally speaking, produce the
latter but are now forced to consume a lot of those. In fact, they are likely,
owing to the prevailing circumstances, to run current account deficits for a
while. This is one of the major economic fallouts of the COVID-19 pandemic and
may not change any time soon. Nigeria is not immune to this consequence;
indeed, the pressure on the country’s trade balance may be attributed in part
to increased demand for such items. There are indications that the elevated
demand for products that support working from home is likely to endure as the
economy continues to re-open. Meanwhile, sectors that are contact-intensive
could remain depressed for some time unless they receive special policy attention.
Essentially, certain sectors/activities would require a lot more policy and
programmatic support to recover.


As I evaluated the Q1 2021 domestic output data
released by the National Bureau of Statistics (NBS) in May 2021, I could see in
the numbers the global pattern of recovery referred to earlier. Arts,
Entertainment & Recreation posted zero per cent growth in the quarter;
Accommodation and Food Services declined (-0.05%); Transportation and Storage
declined (-0.39); Education (-0.13%) as well as Trade (-0.39%). It is
instructive to note, however, that those sectors in which the Bank had
intervened the most since the pandemic struck – Agriculture, Manufacturing as
well as Human Health and Social services grew by 0.5, 0.33 and 0.03 per cent
respectively, and were largely responsible for the 0.51 per cent overall growth
in Q1 2021. This feedback is important because it reinforces the relevance of
the Bank”s development finance interventions and the administrative measures
aimed at improving credit delivery to the real economy.


To spur all-round economic recovery and brighten the
outlook for overall growth, fiscal actions must be aimed at supporting a wide
range of activities including contact-intensive activities that have been
heavily impacted by the COVID-19 pandemic. This is important because the
overall output horizon continues to be uncertain as both manufacturing and
non-manufacturing Purchasing Manager’s Indexes (PMIs) remained 16 below the 50
index points at 49.0 and 48.3 index points, respectively, in April 2021; and
high unemployment continues to be a key concern.


Equally concerning is inflation which however
moderated to 18.12 per cent in April 2021 from 18.17 per cent in March. In
particular, food inflation continues to be major challenge for monetary policy,
even as the impetuses are not all amenable to monetary remedy. To the extent
that supply and distribution bottlenecks are involved, supply-side actions are
needed. By ensuring optimal liquidity in the money market, the monetary element
in the inflationary process is curtailed. In this regard, the routine
sterilization actions of the Bank have proved effective. Owing to those
actions, banking system liquidity appears to have moderated significantly in
recent weeks – in fact, the flagship rate in the inter-bank money market, the
open buy back (OBB) rate has trended upwards lately. I believe, this
development would partially address the monetary side of the prevailing
inflationary pressure without harming economic activity.


As I have argued previously, monetary policy at this
time must be anchored on a balanced view of the diverse pressures on the
economy. While remaining committed to the primacy of price stability, the
choice of instrument must be carefully judged to avoid undermining the fragile
economic recovery gains. Essentially, this consideration informed my decision
to vote for a hold position at the May 2021 Monetary Policy Committee (MPC)
meeting. Though headline inflation remained unacceptably high in April 2021,
the prognosis point to a gradual deceleration given the current liquidity path
and expected impact of harvest as from the third quarter of the year.


In the short term, therefore, the policy priority
continues to be how to firm up economic recovery. The PMIs are still below 50
points and the virus mutations underlining the 3rd wave of COVID-19 ravaging
India, Brazil and Japan, suggest that economic activity still runs a credible
risk globally. To strengthen the domestic growth outlook, the Bank must ensure,
among others, sustained flow of credit to the real sector of the economy. The
opportunity to do so exist with extant policies like the minimum loan-todeposit
ratio (LDR), development finance interventions and the innovations around the
implementation of the cash reserves requirement (CRR). I have no doubt that the
recovery in real output since Q4 2020 has been underpinned by a robust banking
system credit to the real sector of the economy. I believe we have not reached
the limits of the impact of these policies.


The banking industry remains resilient with relatively
good fundamentals. In April 2021, industry non-performing loans (NPLs) ratio
moderated to 5.9 per cent and capital adequacy ratio (CAR) rose to 15.8 per
cent. Likewise, industry earnings have remained strong despite the
macroeconomic shock arising from COVID-19. In effect, the capacity of the
banking system to create credit is high. From a regulatory angle, what is
needed is a mechanism that ensures that growth/employment-elastic activities
receive adequate funding from the banking system. This is essentially what most
of the extant policies including the global standing instruction (GSI) are
designed to achieve. These policies should be allowed to run their full course.
I therefore voted to:

Retain the MPR at 11.5 per

Retain the asymmetric
corridor at +100/-700 basis points around the MPR;

Retain the CRR at 27.5 per
cent; and

Retain the Liquidity Ratio
at 30 per cent.  

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International Market Development

The global economy is recovering fast from the 2020
pandemic. While there are several downside risks, the global economy is
projected to grow at 6% in 2021 compared to -3.3% in 2020. Vaccination is
progressing well in the developed countries, but at a relatively snail speed in
developing countries. Commodity prices are climbing up including the price of
oil. Global inflation, though rising in many parts of the world, is still not a
major concerning issue. A sharp rebound in global trade because of pent-up
demand and resumption of supply chains is expected. However, global capital
flows, including remittances are yet to recover to pre-pandemic level.
Developed countries need to support the developing countries in access to vaccines.
This is necessary to ensure that all countries of the world can overcome the
gripping effects of COVID-19. There is also a need for a coordinated exit from
economic stimuli to protect global recovery.


Domestic Economic Development

According to the Economic Report prepared by Staff of
the Bank, the economy grew by 0.51% in Q1, 2021, up from 0.11% in Q4, 2020. The
sectors largely accounting for the growth were information and communication,
manufacturing, and agricultural sector. The economy also benefitted from
relatively high oil prices, which hovers in the high $60s/per barrel, and is
significantly higher than the 2021 FGN budget benchmark price. The growth in
manufacturing sector at 3.2% is particularly impressive, given the…

Read More:Personal Statements by the MPC Members at the 136 MPC Meeting of May 24-25, 2021