Reducing Lending Rate Will Worsen Economy –CBN
The 10 MPC members yesterday unanimously voted to retain the Monetary Policy Rate (MPR) at 14 per cent, maintain the Cash Reserve Ratio at 22.5 per cent and then keep the Liquidity Ratio at 30 per cent.
Also, the Asymmetric corridor was retained at +200 and -500 basis points around MPR. Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, said reducing the lending rate would further worsen inflationary conditions and undermine the current outlook in foreign exchange market. Besides, he said that a downward cut in lending rate would aggravate demand pressures.
Explaining why CBN would not bow to pressure on reduction of its lending rate, Emefiele, who addressed the media in Abuja at the end of MPC meeting, said: “The committee further noted that inflationary pressures would begin to subside as non-oil output recovers and the naira exchange rate stabilises. “Until then, it stressed, a rate cut would worsen the inflationary conditions, stunt growth and undermine the current outlook for stability in the foreign exchange market.
“The committee also feels that doing so would further aggravate demand pressures while undermining existing income levels in the face of the already expansionary monetary policy and increasing inflationary pressures, which will make the economy unattractive for foreign and domestic investment. “Given these limitations, the committee was reluctant to lower the policy rate on this occasion, but remained committed to doing so when the conditions permit. “The MPC is concerned that the current situation is not amenable to simplistic analyses and quick fixes such as have found expression and increased attention at different fora and the media.”
Commenting on the preferential 60 per cent to 40 per cent forex allocation in favour of manufacturing sector, the CBN governor clarified that players in the power sector were in the category of the 60 per cent forex allotment.
“I will dare say those in power sector also qualify, those importing raw materials, either importing transformers or importing what you call generators or machines. I don’t mean generators that people put in their houses, because that one is a finished product and they will not qualify under the 60 per cent.
What I mean are plants and equipment, raw materials; those supporting agricultural sector that will assist the inputs they need to conduct their agricultural businesses. “The power sector qualifies, but it is also possible that the constraints some of the local and small business face may also be confronting these power assets companies and we use the opportunity to appeal to banks to look into their direction,” he said. The governor described the recent increase in the reserves as a good development, adding that the bank would be very prudent in its management.
He said: “The reserves today is $28.9 billion. It is exciting to see this happen, but is there a need to float the naira? It is important for us to know that, we do not float the naira; we run a manage float.
What that means is that, from time to time, there is need to intervene in the market to ensure that the exchange rate does not go beyond our own expectations. “This intervention would be to moderate the rate as we deem necessary.
The fact that we began to build up reserves does not mean we should be reckless. We will ensure foreign exchange is made available to those who are importing raw materials, those who are importing plants and equipment by supporting agriculture.”
On measures being taken to close the widening forex gap that exists between the official rate and black market, he said: “Naturally, what we try from time to time is to make more foreign exchange available within the limit of our available resources to those sector that we consider priority sectors. We will continue to do that, hoping that as we do that, the urge for people to go to illegal market, hopefully, would reduce and I want to assure that we would increasingly direct forex resources to those very important sectors of the economy.”
Emefiele also used the occasion to fire back at his critics, whom he said had all access to the bank, but rather chose to play to the gallery. He noted: “I think it is important to react to some of the things I have read, heard in the media about some multiple exchange and rest of them. I have heard about parallel market, airline rate, pilgrims’ rate. It is unfortunate that some of those we’ve read discussing this issue are those who have direct access to CBN. “What we would have expected is that they would talk to us, but of course the objectives they are pursuing are best known to them. Budget rates are forecast rates.
The budget rate as a forecast rate has always been there from history and it’s rate that is used in determining the budget. “Like you heard, the budget is a forecast. It is tentative, so I can’t understand why people are using budget as basis to say that there are different exchange rates in the market. The parallel and interbank rate, as far as I am concerned, is moderate. I do not understand the duplicity about the rate. We explained the issue of pilgrimage when it came up and I keep saying you must put yourself in the position of a businessman where you have struck a deal at a rate at which you will do a deal.
But be- cause the conditions are not favourable to you, you now go back and begin to change the conditions.
“That is unfair business practice. I repeat, what happened was that around March last year, the Pilgrims’ Commissions, both Christian and Muslim pilgrim commissions, approached the CBN and that time the rate was N197 to dollar.
The people who were going to go on pilgrimage started making payment at N197 to the dollar, they now want to embark on pilgrimage sometime in August, then somebody says because market has moved, they should pay N300 as the case may be. “That would have on the part of CBN be unfair business practice just like if the rate had gone down, we would have gone to them in the same direction.
It is important for people not to play to the gallery. They know what they are saying, they know what they are doing, but as I said, their motive is best known to them.” He also expressed confidence in the economy, saying it will record its mileage this year just as he harped on policy coordination by fiscal and monetary authorities.
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