The Central Bank of Nigeria (CBN) yesterday said that the nation’s external reserves have risen to $34.9 billion, the highest in 30 months, driven by increased investor confidence in the Nigerian economy.
Reflecting the rising confidence in the Nigerian economy, foreign investors injected $18.7 billion through the Investors and Exporters (I&E) window in seven months while the $3 billion Eurobond issued on Monday was oversubscribed by $11 billion.
Meanwhile the CBN at the end of its Monetary Policy Committee (MPC) meeting yesterday decided to retain the Monetary Policy Rate (MPR) at 14 percent. It also retained the Cash Reserve Ratio and Liquidity Ratio at 22.5 percent and 30 percent respectively. This represents the eight consecutive times the MPC will retain all its policy rates.
CBN Governor, Mr. Godwin Emefiele disclosed these yesterday in Abuja while briefing the press on the outcome of the Monetary Policy Committee (MPC) meeting.
Rising investors’ confidence
Speaking on the impact of the increased foreign investors’ confidence on the Nigerian economy, Emefiele said: “The Committee noted the continuing improvement in the level of external reserves and the equities segment of the capital market. External reserves grew to $34.9 billion at the close of business on November 16, 2017.
“Similarly, the All-Share Index (ASI) rose by 3.38 per cent from 35,504.62 on August 31, 2017 to 36,703.58 on November 17, 2017. Market Capitalization (MC) improved by 4.35 per cent to N12.77 trillion from N12.24 trillion during the same period. Relative to end-December 2016, capital market indices rose by 36.57 and 38.10 per cent, respectively, indicating rising investor confidence, due to improvements in foreign exchange supply.
“Similarly, the Committee viewed with satisfaction, the growing patronage at the Investors’ and Exporters’ (I&E) window of the foreign exchange market and attributed the development to increased confidence by foreign investors and the preference of Nigerian investors’ and exporters’ for the window compared with all other windows. The MPC noted that the I&E window had increased liquidity and boosted confidence in the market with over US$18.70 billion in transactions since its introduction in April 2017.”
He also disclosed that the $3 billion Eurobond introduced to the international capital market last week has been oversubscribed by $11 billion. A development, he said, was an indication of international investors’ confidence in the Nigerian economy.
Why MPC retained MPR at 14%
In arriving at the decision to retain the rate, the CBN boss said that the MPC took note of the gains made so far as a result of its earlier decisions including the stability in the foreign exchange market and the moderate reduction in inflation rate.
He said the MPC was faced with the decision “to hold, to tighten or ease policy stance. He said: “While tightening would strengthen the impact of monetary policy on inflation, with complementary effects on capital flows and exchange rate stability, it would nevertheless also potentially dampen paucity output for growth and financial stability as this would constitute a risk to the productive sector of the economy.
“On the other hand, whereas loosing would stimulate out for growth, by stimulating domestic aggregate demand, through reduced cost of borrowing, it could nevertheless aggravate upward trend in consumer prices and generate exchange rate pressures.
“Loosening could also worsen the current account balance of the country through increased importation.
“On the argument to hold, committee believes that key variables have continued to evolve in line with current stance of economic policy and should be allowed to fully manifest. Members noted that the developments in output and inflation in particular require close monitoring in order to gain clarity on medium term optimal path of the monetary policy.”
Analysts said that the decision of the MPC to retain all the policy rates is in line with expectation.
According to Managing Director, Chief Economist, Africa, Global Research, Standard Chartered Bank, Razia Khan: “Few surprises from the Nigerian MPC, with all interest rates kept unchanged, in line with our expectation. According to the Governor, the Committee deliberated extensively on the merits of tightening or easing, but decided that an unchanged stance was appropriate.
“From yesterday’s weak Q3 GDP print, it is clear that action to boost the economy is needed. What is less clear is the form that the action should take.
While there has been much clamour for lower interest rates, the CBN is correct to point out that utilisation of its incentive scheme for SMME lending is at less than 50%. Merely cutting interest rates will not be sufficient to boost Nigerian growth, nor private sector lending. Concessionary financing is already available, but it is not being used. Other complementary measures are needed to provide much-needed support to the economy.”
Also commenting, analysts at Lagos based Vetiva Capital Management Limited said: “ In our view, the “Hold” decision is a testament to the “wait and see” stance that the MPC has adopted through the year, amidst sticky inflation and a sluggish economic recovery.
“All things considered, we expect the MPC to ease monetary policy in Q1’18, but consider its January meeting an unlikely time given our inflation forecast of 15.4 percent year-on-year for that month. However, with inflation expected to moderate to 14.7 percent y/y by March, and Core inflation (presently 12.1 percent) even lower, the MPC would have leeway for a slight policy shift. Specifically, we expect a 100bps rate cut in March to kick off the easing cycle, as the pace of moderation in inflation is unlikely to permit more aggressive policy action.”