CBN Funding Interventions Support GDP Figures
… Ready to face stagflation
By Emeka Anaeto, Business Writer
The Central Bank of Nigeria, CBN, is expected to support positive developments in Nigerian economic growth amid threats of stagflation.
CBN Governor Godwin Emefiele, who gave the hint at the last meeting of the umbrella bank’s Monetary Policy Committee, MPC, earlier this week, also said his pro-growth policy strategy would be sustained despite inflationary pressures.
The apex bank’s pro-growth strategy involved an expansionary monetary policy that encouraged the supply of capital to the economy, especially the real sector.
The umbrella bank had, in the aftermath of the COVID-19 pandemic, set up a battery of financial intervention facilities to stimulate economic activities against the negative impact of the pandemic which had forced the Nigerian economy into recession in the third quarter of 2020 after two consecutive quarters of negative growth.
The economy made a surprise rebound, emerging from the recession faster than expected, with modest growth of 0.1 percent in the fourth quarter of 2020, Q4’20.
Moreover, the first quarter of 2021, Q1’21, gross domestic product, GDP, figures released by the National Bureau of Statistics, NBS, earlier this week, showed a sustained recovery at 0.51%.
What is most heartwarming is that the non-oil sector is at the top of the GDP recovery profile despite the sustained downward effect of non-economic factors, mainly the insecurity that hangs over the whole country.
The positive development, although still lukewarm, suggests a positive result of the CBN’s economic intervention programs over the past year.
But the umbrella bank is also facing the downward implication of its pro-growth strategy which has mainly resonated in the inflation figures, thus leading to a state of stagflation.
In economics, stagflation or recession-inflation is a situation in which the rate of inflation is high, the rate of economic growth slows down, and unemployment remains consistently high. It poses a dilemma for economic policy, as actions to reduce inflation can stagnate growth while exacerbating unemployment.
It is in this context that the monetary policy committee of the CBN, MPC, decided yesterday to maintain the monetary policy rate (MPR) at 11.5%, as well as all other parameters with the asymmetric corridor at +100. / -700 basis points around the MPR; Cash reserve ratio (CRR) at 27.5%; and the liquidity ratio at 30 percent.
Taking this position after the MPC’s meeting in Abuja yesterday, Emefiele however said his team was determined to make a meaningful change through the various interventions of the umbrella bank.
His words: “Nigeria is a country which finds itself in an extraordinary situation. Out of the ordinary because we find Nigeria to be a country facing stagflation. Stagflation is a situation where inflation is high, prices are high and at the same time the growth of output, in this case GDP, contracts and if you understand how it works you would know that as a MPC, your primary responsibility is to contain inflation by ensuring that you meet the mandate of price stability and monetary stability.
“On the other hand, the economy is faced with shrinking production, where growth is negative. The normal way to recover from a shrinking economy is to relax and inject liquidity into the economy to stimulate consumption and investment and increase public spending.
“We are in a situation where objectives or goals are moving in opposite directions. What are we doing? We will remain pro-growth as much as possible, but at the same time we will keep our eyes on anything that can be done to contain inflation. “
According to him, the result indicated the success of the various interventions of the bank and the tax authorities.
He said about 856 billion naira had been distributed to manufacturers of the N1 trillion real sector facility, in addition to targeted facilities for households and small and medium-sized businesses which were increased by 100 billion N1. naira to 300 billion naira, as a result of the COVID-19 pandemic.
Reacting to the negative impact of insecurity on the various interventions of the CBN to stimulate production growth, the governor said that the MPC is very concerned about the insecurity in the food production areas of the country, which resulted in a food shortage. the offer with its high food prices.
He expressed optimism, however, that with the federal government’s efforts to tackle insecurity across the country, the situation would soon improve.
Generating economic growth remains at the forefront of MPC considerations, after recognizing that output growth has remained fragile and needs sustained support. The Committee also welcomed the progress made with the CBN’s targeted credit facilities, which the umbrella bank continues to deploy to support households, agriculture and manufacturing sectors.
The Committee took note of the continuing security crisis, particularly in the major food-producing regions of the country, and the heavy burden on food supplies and prices. The Committee also noted the slight moderation in inflation due to the CBN’s relentless efforts to support the agricultural sector with the aim of boosting food supply.
In a critical review of NBS’s first quarter of 21 GDP report, the economy of Meristem Securities Limited, a Lagos-based investment house, said: “ The economy has registered another quarter of expansion (the second consecutive quarter) in the first quarter: 2021, consolidate on the fragile exit from recession in Q4: 2020.
Driven in large part by growth in the non-oil sector, the 0.51% year-on-year expansion of real GDP in part indicates positive results from CBN initiatives and budget support against a backdrop of gradual transition to pre-pandemic activity levels.
Although the Purchasing Managers Index, PMI, statistics at 49 points in April suggest that business is still lagging behind the expansion threshold (50 points), it nonetheless shows a significant improvement from the low (48 points) observed in March 2020. ”
Key growth segments of the manufacturing sector include cement, food drinks and tobacco as well as chemicals and pharmaceuticals sub-sectors. This was the sector targeted in CBN’s financial intervention programs over the past year.
Meanwhile, the manufacturing sector rebounded from a recession with 3.40% yoy (vs. -1.51% yoy in Q4: 2020) for the first time since Q2: 2020. Improvements in cement (+ 11.20% over one year) as well as in the food, beverages and tobacco sub-sectors (+ 7.11% over one year) were the main drivers, while the food sub-sector oil refining contracted 57.05% year on year. In addition, agricultural production increased by 2.28% year-on-year, supported by growth in all sub-sectors (crop production, forestry, fisheries and livestock).
Meristem economists concluded: “In our view, improving demand and the umbrella bank’s effort to provide credit were the main positive winds. In reaching its decision, the Committee noted the downside risk posed by current security concerns, but expressed optimism about the growth potential of a coordinated public-private partnership. Therefore, we expect the suspension decision to have a moderate impact on the level of real output in the sector.
Growth in the manufacturing and agricultural sectors in the quarter was driven by the easing of foreclosure restrictions and sustained real sector intervention by the CBN through better access to low-cost credit and forbearance loans by the banking sector. While access to foreign exchange and heightened insecurity continue to challenge the real sector, the outlook for both sectors is positive.
“The PMI data show an increase from 44.90 points in January 2021 to 49.02 points in April 2021. Likewise, the employment index rose slightly to 46.50% against 45.60% during the same period.
GDP and the challenges
Insecurity undermines the recovery of the non-oil economy. The slower year-on-year growth of Nigeria’s non-oil economy to 0.8% in Q1’21, from 1.7% in the previous quarter, suggests a fragile recovery. This is worrying as the non-oil sector represents over 90% of the economy, implying that its performance has significant implications for GDP growth.
The recovery of the non-oil economy is being held back by the wholesale and retail sector – Nigeria’s second largest economic sector – which fell 2.4% year-on-year in Q1’21.
What drives growth? The sectors driving Nigeria’s recovery, although weak, are telecommunications, crop production, food and beverage manufacturing, real estate, cement production and construction.
The annual growth of telecommunications companies and agricultural production may have slowed to 7.7% and 2.3%, respectively, from 9.7% and 2.4% a year earlier, but they are having a pronounced impact on GDP growth as they are two of Nigeria’s three largest economic sectors.
The recovery in the manufacturing sector was led by accelerating year-on-year growth in its largest subsector, food and beverages, to 7.1% in Q1’21, from 1.1% a year earlier .
Another manufacturing sub-sector, cement production, saw annual growth jump to 11% in Q1’21, from 2% a year earlier. This may indicate a sharp increase in demand for building materials, but it has yet to be reflected in construction, which was up 1.4% year-on-year in Q1’21, a moderation from 1.0. 7% year-on-year a year earlier.
Vanguard News Nigeria