The Central Bank of Nigeria (CBN) on October 27 released Communiqué’ No., 103 of the Monetary Policy Committee (MPC) meeting of Monday and Tuesday, September 21 and 22, 2015.
At Nairametrics we like to scan these minutes (it’s a tough job but somebody has to do it), to see what economic troubles are keeping these eggheads up at night. From what we have just read, these are indeed worrying signs for Nigerian banks.
Below are major excerpts from each MPC member… (scroll down for the full transcripts)
1. ADELABU, ADEBAYO
Monetary policy needs to take a cautious approach to avert the danger of time inconsistency. With respect to the headline inflation, the medium term upside risks include the likelihood of commencement of hike in interest rate by the Federal Reserve with the attendant strengthening of dollar which could rapidly impact on domestic price level from exchange rate pass through effect.
Current macroeconomic conditions pose threat to the banking sector from both the asset and liabilities sides. From the asset side, apart from the provisioning that could emanate from exposure to oil and gas sector, current data shows that the stock market fell by about 11 per cent by end-August.
This would adversely impact on the balance sheet of firms because it implies a reduction in the net worth of firms and companies quoted on the stock exchange by about 11 per cent. In view of the existence of strong information asymmetry in Nigeria’s credit markets, a lower net worth leads to a more severe adverse selection and moral hazard in lending to those firms.
In other words, lower net worth implies a lower collateral for the loans extended to those firms, therefore banks would be constrained to reduce their exposure to these firms with dire consequence for future growth and employment. This issue needs to be brought to the front burner in the light of negative growth in the manufacturing sector in the last two quarters.
2. ALADE, SARAH O
Care must be taken to navigate the precarious global environment and its impact on Nigeria.
Given the divergent monetary policies on the global scene, rising inflation, declining growth and lack of fiscal buffers in the domestic environment, a hold on policy rate is needed in the short term. In addition, the adoption of TSA would have impact on liquidity in the banking sector and an increase in policy rate could be detrimental to the system at this time.
3. BALAMI, DAHIRU HASSAN
In my opinion, the CBN, FMF and DMO have taken the right decision by protecting access to foreign exchange.
The non-execution of many capital projects in Nigeria in 2015 implies series of future problems for the economy.
In my judgment, to promote inclusive growth, job creation and development in the economy, there is need for the rehabilitation of the infrastructure in the North-east region in particular and Nigeria in general; and further liberalize trade and commerce by executing various development projects and opening up the routes that were closed as a result of the activities of the terrorists.
The ability of the policy makers to stabilize the exchange rate at the official window for the past seven months is commendable and should be encouraged.
4. BARAU, SULEIMAN
My assessment of current macroeconomic conditions reveals rising imbalances in virtually all sectors of the economy. In the external sector, sustained negative term of trade shock via the slump in oil price is driving the balance of payment to a disequilibrium level, the first time in over ten years. Furthermore, imbalances continued in the foreign exchange market with demand pressure outstripping supply, culminating in negative accretion to external reserves between July and early September.
The imbalance in the banking sector is becoming clearly discernible with deterioration in asset quality due to the effect of falling oil price on exposure to oil and gas sector, which constitutes a reasonable component of banking sector assets.
5. GARBA, ABDUL-GANIYU
A key consequence is the emergence two twin traps – a low interest rate and quantitative easing trap (large economies) and high interest rate and tightening trap (small and ‘’emerging’’ economies). In addition, the balance of power in the policy game has shifted in favour of the ‘’market’’ such that if policy makers fail to understand the new policy environment, they would be prone to short-sighted and catastrophic policy choices.
To safeguard the medium and long term health of economies, policy makers must avoid short memories, lack of depth, scope and foresight in the very difficult policy environment of the new epoch.
Emerging and some small economies including Nigeria imprudently walked themselves into a high interest rate trap in their scramble to attract portfolio flows despite the short term trade trade-offs (job, efficiency and growth) and medium to long term trade-offs (jobs, efficiency, growth and macroeconomic and financial market instability).
The danger was most acute for economies committed to exchange rate stability and free capital flows because the monetary policy was easily trapped into a high interest rate regime: the fear being that easing will trigger devaluation pressures on the exchange rate as Nigeria is currently experiencing.
There is the unresolved profit puzzle: rising profits of banks while growth in credit, assets and deposits are slowing and inefficiencies are rising (interest rate spreads, operating costs and forex arbitrage opportunities).
6. NNANNA, O. JOSEPH
Effective demand management policies in the forex market has halted the haemorrhage in reserves albeit temporarily, but sustained accretion to reserves is threatened by softening oil prices and uncertainties about capital inflows, in the wake of J P. Morgan delisting threat.
Given the impact of dwindling private sector credit and declining growth in government and private sector investments, there is need for policy to enhance liquidity in the financial sector.
7. UCHE, CHIBUIKE U
Although the interbank exchange rate for the Naira has remained stable at N197 to the US Dollar for some time now, the margin between this and the BDC rate has continued to widen.
This is a clear indication of the growing pressure on the exchange rate of our currency. The Nigerian Stock Exchange ASI index has, on the average, continued to trend downwards. The recent announcement by JP Morgan to phase out Federal Government of Nigeria Bonds from its Government Bond Index for Emerging Markets by the end of October 2015 has also not helped matters.
The consequence of our overdependence on oil rents is perhaps best illustrated by the recent mandate given to the CBN to bail out state governments so as to enable them to pay salaries.
Bluntly put, states are now borrowing to meet recurrent expenditure.
This in my humble view can only complicate our economic problem. Except the states are forced to restructure their operating and cost structures, they will soon come back for more bailout.
This is especially plausible given the fact that most analysts have ruled out the possibility of a sustained increase in crude oil prices in the near future.
8. YAHAYA, SHEHU
The MPC is confronted with the three challenges of a sharp fall in the GDP growth rate, rising inflation and pressures on the foreign exchange market. Another challenge is the possible effect of the full implementation of the TSA on liquidity in the banking system.
The challenges in the foreign exchange market are being vigorously tackled and stability has been restored there so far. On the TSA, the effects on the banking system have been muted so far. However, rising inflation poses challenges for the economy.
9. ADEDOYIN SALAMI
The consequent loss of funding resulting from TSA implementation would make it difficult for the affected banks to retain assets on their balance sheets. Indeed, ahead of the deadline for compliance with TSA, overnight rates in the interbank market rose from 6.7percent on 14th September to 91 percent by the close of the market on deadline day.
The Bank also sought to promote market conditions that would enable banks to relax the terms of deteriorating loans in sectors directly affected by continuing effects of oil revenue shocks to the economy.
At issue here is the longer duration of finance expected to support credit restructurings increasingly sought by the large borrowers –especially sub-national governments, and borrowers in Energy and Manufacturing sectors.
A concern was also raised about the need to enhance liquidity as we approach the final acts of Nigeria’s exit from the JP Morgan GBI EM.
Detailed review of figures provided by the National Bureau of Bureau (NBS) affords a graphic view of the nature of the slow- down in output growth.
Less than 5 percent of the economy grew faster in Q2- 2015 than in the same period a year ago.
A further 73.5 percent, though still continuing to grow, is growing significantly less rapidly than had been in Q2-2014.
The remaining 21.7percent of the economy are now shrinking.
With unemployment and underemployment rising to 8.2precent and 18.3percent in Q2-2015, it is clear that the effect of slowing economic activity is translating into rising joblessness!
10. EMEFIELE, I. GODWIN
Though reflective of the legacy effects of the uncertainties that pervaded the economy early in 2015, the rising inflationary pressure remained effectively underpinned by both structural and cyclical factors.
In general, given current macroeconomic conditions, I believe that countervailing measures are immediately needed to act as a fillip to the growth.
The weakening economic growth is traceable to the waning aggregate demand following the diminished government expenditure and weak private consumption.
The combination of rising prices and falling expenditure is essentially reflective of an aggregate supply imbalance and critically underscores the exigent need to diversify the economy and ensure that domestic supply capacity is bolstered.
Given the lingering demand pressure in the foreign exchange market and the firm resolve of the CBN to maintain exchange rate stability despite the pressures, it is crucial to ensure that any extra liquidity released into the system is not re-routed to the FX market but channelled to growth generating ventures and enterprises. I therefore call for increased lending to the MSMEs, agriculture and manufacturing sectors as these have the capacity for output enhancement, employment generation, wealth creation and poverty reduction.
I urge the relevant fiscal authorities to direct effort at capital undertakings in power, energy and transportation which could immediately bolster the domestic economy.
Get the full transcripts here