The Central Bank Monetary Policy Committee cut MPR from 13% to 11% in a move that surprised analysts. They also cut the cash reserve requirement for banks from 25% to 20%. The committee voted 8 to 10 to reduce the MPR and 7 to 10 to reduce CRR. The CBN is hoping that these twin cuts will stimulate the economy and help the country avoid a further slide in GDP.
According to the communique released on the website of the CBN has cited the “weakening fundamentals of the economy, particularly the low output growth, rising unemployment and the uncertainty of the global economic environment” as its reason for the cuts.
The National Bureau of Statistics in its latest GDP report revealed that Nigeria’s GDP had grown by just 2.8% in the third quarter of 2015, compared with 2.35% in the second quarter. However, economic growth in Q3 was lower than the 3.96 and 6.23 % in the first quarter of 2015 and the corresponding period of 2014, respectively. The low GDP figures for Nigeria is symptomatic of the harsh economic realities facing the public and private sectors of the economy. With oil prices remaining bearish Government revenue has dwindled massively causing a huge shock in the economy. Government is perhaps the biggest spender in the economy and relies heavily on oil sales to fund its spending. With funding essentially drying up the Private sector has been reeling with huge debts, meager cash flows and dwindling sales.
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The National Bureau of Statistics also reported that unemployment rate in Nigeria had risen to about 9.9% per annum with 7.5 million people currently out of jobs. With the GDP remaining stubbornly low,it is unlikely that private sector will expect to create jobs at a pace that should help stimulate the economy. Further increase in unemployment means consumers will have fewer disposable income which in turns affects businesses who rely on sale of products and service to individuals to survive. The CBN believes channeling funds to towards Agriculture, infrastructural development, solid minerals and industry will help drastically reduce unemployment rates. Out of the 41, 672 jobs created last quarter 4,409 jobs were created from the Agric sector.
The World Economy
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The global economy is also struggling with slowing growth and threat of a recession. Japan has already entered yet another recession and China is struggling. The US FED is also expected to raise rates in December, a move many believe will suck out more money from emerging markets including Nigeria. The world is also littered with conflicts, war and terrorism that threatens economic peace and stability. Commodity prices including Oil are also likely to remain bearish in the current to near indicating that we may need to start looking inwards if we are to rescue the economy.
Boost Government Lending
The CBN MPR did not however mention that the Federal Government is in dire need of not just cash but at a cheaper rate. Government bond yields have dropped significantly in the last few weeks and may continue to remain low as long as the CBN sustains in quasi quantitative easing. By cutting MPR and CRR simultaneously the CBN is also providing the Government an opportunity to borrow at cheaper and more affordable rates. Whilst the CBN did confirm the MPR was aimed at boosting lending to the real sector, it also mentioned that the reduction in CRR will only be allowed when they are sure that only banks who decided to lend to sectors that create jobs will get the cut.