CBN: Election Spending Threatens Naira Stability

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The Central Bank of Nigeria (CBN) has warned that the economy faces inflation and financial stability risks over the short-to medium-term if expected huge election spending is not checked.

CBN Deputy Governor (Corporate Services) Adamu Edward Lamtek explained in his personal statement at the last Monetary Policy  Committee  (MPC)  meeting released yesterday by the CBN that  if excess liquidity was allowed to build up, the demand for foreign exchange could shoot up in the second half of 2018 and throw the naira exchange rate out of equilibrium.

Lamtek said: “Such an adverse scenario must be prevented through a proactive monetary  policy.  This  is  justified  by  the  reality  that  exchange  rate  stability  is critical   to the current recovery in   economic growth and the   gradual disinflation.  Added  to  this  is  that a stable exchange rate  should, in the minimum, prevent further deterioration of  foreign currency denominated assets of the banking system and improve the resilience of the industry”.

He said these  concerns surely  called  for  a  forward-looking  and  cautious  approach  to policy. “I see the need for greater coordination of monetary and fiscal policies and     continued     engagement of critical stakeholders     to     address misinformation and  better anchor expectations,” he said.

“In addition, I reckoned that  some of the supportive  administrative  measures  put  in  place since last year by the Bank need more time to work their way fully through the economy.  I  am  equally  persuaded  by  the  commitment of the Federal Government to the Economic Recovery and Growth Plan (ERGP), especially in the area of infrastructure development, which continues to be relevant to sustaining and deepening  growth and development of  the  country in the medium to long-term,” he said.

He insisted that the outlook  for  domestic liquidity, based  on  expected  fiscal actions  and  election spending, is worrisome and that with an impending  Federal Government budget outlay  of over N8 trillion and deficit  of  about N2 trillion for 2018, the  short-term fiscal outlook appears expansive. “The delay in the passage of the budget could result in substantial injections in the second half of fiscal 2018 in an   attempt to meet planned commitments. The immediate effect of this, combined with the repayment of local debt by the government and election  spending  would be  a  surge  in  banking  system liquidity,” he said.

He said Nigeria’s stock of external reserves continues to grow on account of reduced imports,  improved  inflows  from  more favourable oil  prices,  and  increased autonomous inflows through the Investors’ and Exporters’ Foreign  Exchange (I&E) Window.

He said that confidence in the economy is building as the naira exchange rate continues to be   stable and the premium between the bureau de change  and interbank market segments  narrows.

“The parallel market premium continues to shrink as legitimate  foreign exchange  transactions  migrate  to  the  formal market.   It does  therefore appear that the bold reforms of the Central Bank on forex  policy  and in the  foreign  exchange  market  in  2016  and  2017  are paying  off.  It  is  gratifying  that  the  benefits  of  these  reforms  have  stretched beyond the stability of the naira exchange rate,” he said.

Continuing, he said some manufacturing outfits have  resorted  to  using  locally  available  alternatives  as  raw  materials,  just  as interest in domestic production of certain classes of food like rice and tomato products is growing. Likewise, capital market indicators have trended upward partly in response  to positive market sentiments occasioned by the gradual improvement in the macro-economy.

“Monetary  policy  cannot,  at  the  same  time,  be  expansionary.  At 14.33 per  cent  in  February  2018,  inflation  is  still  significantly  higher  than  the Monetary Policy Committee’s preferred range of 6 –9 per cent. Second,  the  economic  recovery  we  have  seen  so  far  has  benefitted  partly from  improved  investment  inflows.  As  a  direct consequence, the country’s external  reserves’ position  has  relatively  improved, just  as  confidence  in  the economy,” he said.

According to him, rising  yields  in  advanced  economies,  following  the  drift  towards policy  normalization  as  global  inflation  picks  up,  poses  a  significant  risk  to  in-bound  investments.  This  threat  is  mitigated  by  a  stable  naira  exchange  rate and competitive yields locally. For this purpose, we will need positive interest rates,  as  do most emerging markets  and developing economies.

“This means that inflation needs to moderate further. Third,  there  is  still  work  to  be  done  to  fully  contain  banking  system  fragilities which increased in the wake of the stagflation in 2015 through 2016. The non-performing loans ratio  continues  to  be  in  excess  of  the  bank’s  desired  level”.

“Among  other challenges,    banks    have    had    difficulty    with    their    foreign    currency denominated liabilities (loans)   as   the   exchange   rate   moved   against borrowers  as  from  2015.  Therefore,  from  a  financial  stability  standpoint,  any threat  to  the  naira  exchange  rate  stability must  be  viewed  seriously  and promptly addressed to forestall another exchange rate shock,” he advised.

Source:The Nation


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