At the Senate hearings for the new Central Bank of Nigeria (CBN) governor, Godwin Emefiele had warned of a “devastating” effect of the devaluation of the naira because of Nigeria’s import binge. He also talked about using the Monetary Policy Committee’s (MPC) decisions to stimulate employment.
Upon resumption of office, the new governor has provided greater clarity to these plans.
Emefiele’s vision for the CBN focuses on development banking in a bid to correct Nigeria’s jobless growth. We view positively, his approach of considering unemployment numbers as one of the key variables at the MPC sessions. Nigeria’s unemployment numbers are out-of-date, the most current being 27.4 percent, which was estimated for 2012.
In our view, this could help focus policy making and planning on job creating initiatives.
Emefiele’s pro-expansionary stance sits well with leading trade associations like the Lagos Chamber of Commerce and Industry (LCCI), which has long advocated for a dovish monetary stance. But voices of dissent have also emerged, especially in the trading rooms of banks. Initial trading sentiments after the speech pushed the naira to a two-month low of 164 .60 per dollar. The tide against the naira was only contained after greater clarity from the CBN governor.
A cut in interest rates in the offing
Fiscal authorities in Nigeria have railed against the unhealthy spreads between the inflation numbers and risk-free rates. The minister of finance and co-ordinating minister of economy is targeting real interest rates of 2 percent. However, real rates have stubbornly hovered around the 3.5 percent – 4 percent range, even with the more benign inflation numbers.
According to the CBN governor, these high real rates “create a perverse incentive for commercial banks to simply buy risk-free government bonds than lend to the real sector.” To stimulate lending in the economy, Emefiele announced a “gradual reduction in interest rates.” Bets against the naira following this statement, meant the CBN governor had to quickly qualify this statement, saying the bank would not consider rate cuts till after the presidential elections in February 2015.
Voting patterns and discussions obtained from the minutes of the MPC sessions in the last three years indicate a largely hawkish monetary stance by the members of the committee. Our studies of these minutes over the last three years indicate just a lone voice in the committee has persistently pushed for a more accommodative monetary stance. A volte-face in voting patterns by MPC members following Emefiele’s submissions could raise arguments about the long-term conviction of members.
What is the fate of Nigeria’s inflation target?
The CBN’s ability to maintain price stability amid a more accommodative monetary stance could stoke inflation in the short term. While defending the price stability mandate of the bank, the governor did not offer any forward guidance on inflation. In its May session, the MPC declared that the long-term goal of the CBN would be to transform Nigeria to a “truly low inflation environment” while keeping inflation within the 6 percent – 9 percent target in the short term. An outlook hinged on interest rate cuts raises genuine concerns about the CBN’s inflation target and a forward guidance on prices in the next July MPC session would offer greater clarity.
Development finance, only a stop-gap
Budget 2014 reflects the Nigerian government’s bullish stance on development finance institutions (DFIs) to correct funding gaps in critical sectors like housing and agriculture. Emefiele’s speech also reflects a strong focus on developmental finance that resonates more with the agenda of the fiscal authorities than the CBN. Overall, we view the strong push on developmental finance by the CBN as an intervention with short-term rewards but long-term limitations.
We anchor Nigeria’s long-term economic prosperity on two major funding platforms. Firstly, expanding credit from the banking system by adjusting the structure of credit supply, increasing access to borrowing and applying long-term reforms that lead to lower borrowing costs over time. Secondly, deepening the capacity of corporates to long-term capital formation through the capital markets.
A more benign yield regime on risk-free assets will eventually attract more corporates to tap into the debt market. The double digit yields on benchmark risk-free assets have led to a dearth of corporate bonds because of pricing. Correcting these will lead to new funding opportunities that will prove more sustainable than developmental finance.