Recession: CBN warns as FG records N2.51trn deficit in 6 mths

…Says economy may relapse into another recession
…Retains MPR at 14%

By Babajide Komolafe & Emma Ujah

ABUJA— The Central Bank of Nigeria, CBN, yesterday, warned that the nation’s economy may relapse into another recession, citing the N2.5 trillion budget deficit recorded by the Federal Government in six months and other factors as major threats to a fragile economic recovery.

Meanwhile, Monetary Policy Committee, MPC, of the apex bank ended its two-day meeting, yesterday, retaining the Monetary Policy Rate, MPR, at 14 per cent. The committee also retained the Cash Reserve Ratio, CRR, at 22.5 per cent,  Liquidity Ratio at 30 per cent, as well as the Asymmetric corridor around the MPR at +200 and -500 basis points.

Emefiele CBN Governor

CBN Governor, Mr. Godwin Emefiele, announced the decision of the committee in a communiqué issued at the end of the meeting. He said: “In consideration of the headwinds confronting the domestic economy and the uncertainties in the global environment, the committee decided by a vote of six to two to retain the Monetary Policy Rate, MPR, at 14 per cent alongside all other policy parameters.

Concerns over FG’s N2.51trn deficit in H1 2017

Emefiele said the MPC was seriously worried over the increasing indebtedness of the Federal Government, which resulted into N2.51 trillion deficit in the first half of 2017.

He said: “The MPC noted the widening fiscal deficit of N2.51 trillion in the first half of 2017 and the growing level of government indebtedness and expressed concern about the likely crowding out effect on private sector investment.

“While urging fiscal restraint to check the growing deficit, the Committee welcomed the proposal by government to issue sovereign-backed promissory notes of about N3.4 trillion for the settlement of accumulated local debt and contractors arrears.”

Threat of another economic recession

The MPC also noted that the economy was going through a fragile economic recovery and thus called for bold fiscal and monetary measures to ensure that the economy does not relapse into another recession.

Emefiele said:  “Available forecasts of key macroeconomic indicators point to a fragile economic recovery in the second quarter of the year.

“The committee cautioned that this recovery could relapse in a more protracted recession if strong and bold monetary and fiscal policies are not activated immediately to sustain it.”

Defended retention of MPR at 14%

Defending the decision of the MPC to retain its tight monetary policy stance by retaining the MPR at 14 per cent, Emefiele said: “We understand that a low interest rate will make it easy for people who want to borrow money to borrow money at low rates. We know easing will inject liquidity into the system.

“But we are saying, inflation was over 18 per cent when we started. Even today, with inflation at 16 per cent where we are right now, as at June, is still considered very high in the light of studies that have been conducted.”

Expert reacts

Commenting on the decision of the MPC, Razia Khan of Standard Chartered Bank, London, said: “In our view, the MPC was correct to avoid the temptation to ease policy prematurely. Given the policy choices open to the CBN, reaffirming its commitment to macroeconomic stability is the most pro-growth intervention that the CBN can make.”

“Our base case remains for Nigeria’s policy rate to be kept on hold   at 14 per cent through to the end of 2017, even as year-on-year inflation decelerates further.   This will be necessary in order to support the nascent NAFEX FX regime, especially with the pledge to cap Nigeria’s oil output at 1.8 million barrels per day.   Stabilisation of the economy will require ongoing confidence in the availability of FX.   Given external pressure, the only way to achieve this will be for a modest real tightening of the policy stance.

The post Recession: CBN warns as FG records N2.51trn deficit in 6 mths appeared first on Vanguard News.

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