The Central Bank Governor Godwin Emefiele has announced that the CBN will be retaining its MPR @14% and CRR 22.5% and liquidity ratio at 30%. This follows its Monetary Policy Committee meeting which ended on Tuesday, the 22nd of November 2016.
This follows Monday’s publication by the National Bureau of Statistics that the economy recorded another contraction of 2.24% in the third quarter of 2016. This also follows last weeks announcement that Nigeria’s inflation has risen to as high as 18.3%, the highest in over 11 years.
The CBN has pursued policy flip flops that has failed to avoid but sustain a recession, reduce the inflation rate or curb a currency crisis. From taking too long to float the Naira, the CBN eventually floated the currency but has since pursued a surreptitious policy that has ensured the market is broken and manipulated from within. Insiders inform Nairametrics that on some occasions, forex dealers have to call the CBN to approve rates for selling or buying forex.
In the policy communique read by the CBN, he alluded to the rise of protectionist policies around the world referring to the election of Donald Trump and Brexit as examples. This suggest the CBN will continue to pursue monetary policies to negate imports thus stifling thousands of businesses who engage in buying and selling. The latest GDP report by the NBS already buttresses this view, with Trade Sector formally falling into a recession.
The implication of the MPC decision is quite unclear for the stock market. Already, November is gearing up to be on of the worst months this year as the sell-offs continue. The stock market has dropped for the 8th straight day on Tuesday as investors lost all hopes that foreign investors will be coming back any time soon. The latest GDP report, Inflation rate and the MPC decision surely confirms that no foreign portfolio investor will be returning anytime soon. The US equity markets have been bullish for days (since the Trump election) on the back of speculations that the FED will raise rates paving the way for stronger GDP growth. Thus most foreign investors could focus less on emerging markets such as Nigeria, especially with the foreign crisis still hanging over the economy.
The fixed income market could also continue to attract significant inflows as investors channel funds from the stock market to high yielding risk free government securities. The downside of this will be a significant drop in the extension of credit to the private sector. Banks are already moving billions of their short term deposits into government securities.
Looking forward, Nigeria is likely to report a 4th quarter GDP contraction and a further rise in the inflation rate. The CBN by this communique has clearly exhausted all its options and has now moved to a more hawkish un-orthodox approach to monetary policy, supporting the activities of the DSS in arresting parallel market traders. This all bodes badly for the economy as the ensuing chaos and uncertainty is bound to spike fear in the minds of local businesses and retail investors. Businesses are likely to start raising prices and cutting inventories just to adjust to the reality on ground. More jobs will be lost as will be reflected (based on our projections) in the much expected job report.
This do nothing approach of the CBN now leaves ordinary Nigerians with no choice but to look up to an equally complicit Federal Government who have had nothing to offer on the fiscal policy front. Unfortunately, the government has shown itself to be bereft of ideas leaving Nigerians to hope for a slower path to an inevitable depression. It is likely that more Nigerians will now look up to ponzi schemes and other high risk yielding investment scheme as a way out of a harsh economy. We also expect to see a rise in gambling and other get money quick activities considering that the reward of a positive bet far outweighs the risk of doing nothing.
The CBN Governor did not address issues relating to its alleged interference in the forex market. However, he chose to attack activities of parallel market operators (whom he once claimed were inconsequential) supporting the activities of the DSS in their arrests. The market is likely to remain fragmented with different exchange rates catering for all sorts of needs. Nigerians are likely to remain used to using their debit cards for local transactions only ratcheting up the applications for foreign domiciliary account induced debit cards.
This year’s MPC is the last for 2016 and the fifth for the year. History will probably remember this years communiques as one of the worst reactions we have seen to an economic crisis.