The Central Bank of Nigeria (CBN) yesterday resolved to allow its interventions on COVID-19 to permeate the economy and retained the Monetary Policy Rate (MPR), otherwise known as interest rate at 13.5 per cent.

The apex bank also left both the Cash Reserve Ratio (CRR) and Liquidity Ratio unchanged at 27.5 per cent and 30 per cent respectively.
The MPR is the rate at which the CBN lends to commercial banks and often determines the cost of borrowing in the economy.

CBN Governor, Mr. Godwin Emefiele, who read the communique at the end of the two-day meeting of the Monetary Policy Committee (MPC) in Abuja, said the decision to keep all monetary policy tools unchanged was to allow previously announced interventions “time to permeate the economy and allow pandemic to wear out itself.”

The CBN last week had announced its decision to increase its intervention to boost local manufacturing and import substitution with the injection of an additional N1.1 trillion across all critical sectors of the economy.

The move, which was in line with the banking sector regulator’s efforts to cushion the impact of COVID-19 on the economy, came two days after it had unveiled a six-point palliative to ameliorate the continued impact of the global pandemic on the country.
According to Emefiele, not only will the pandemic result in a health crisis, it will unleash a massive economic crisis that may plunge many industrialised countries as well as Nigeria into a recession.

Emefiele noted that the COVID-19 pandemic, which is a public health crisis, would continue to undermine any monetary and fiscal stimulus unless appropriate measures are taken to test, isolate, curtail the spread and treat infected persons while ensuring that migration across the country is prohibited.

He urged the federal government to implement measures to safeguard the population, including a compulsory restriction of movements to curtail the spread of the virus.
Emefiele also tasked the government to embark on close monitoring and install emergency-ready measures to identify and care for infected persons in the country.
The central bank warned about the huge economic costs of the pandemic, which has brought the global economy to its knees.

The CBN governor said available data on the country’s key macroeconomic variables indicated the likelihood of subdued output growth for the economy in 2020.
He stated that based on the current down trend in oil prices, projections indicate that the output in 2020 would be less than earlier envisaged, largely as a result of the continued spread of COVID-19, further decline in crude oil prices and reduction in accretion to external reserves, reduced government revenues linked to weak aggregate demand, declining non-oil receipts as well as infrastructural and security challenges.

However, he said these headwinds could be partly mitigated by the timely and effective response of both the monetary and fiscal authorities in containing the spread of the viral infection, the recalibration and adjustment of the 2020 budget to the revised threshold while pegging expenditure to critical sectors of the economy.

Emefiele called for the adoption of a new fiscal regime to encourage the build-up of fiscal buffers, sustained CBN interventions in selected sectors, enhanced flow of credit to the real sector and deliberate policies to diversify the Nigerian economy.

However, in holding the monetary policy instruments constant, he said the MPC noted the continued rise in domestic prices; the glut in oil supplies and low oil prices in the wake of the current global shocks; exchange rate pressure and other domestic monetary and fiscal responses to the evolving crises.
He said: “On the choices before the committee, the MPC noted the recent actions of the bank, targeted at strengthening the resilience of the financial system and alleviating the initial impact of the crisis.

“In its wisdom, the committee felt that tightening would result in reining in the rising trend in inflation and that it would support reserve accretion.
“However, it would reduce money supply and limit DMBs credit creation capacity, thus resulting in increasing the cost of credit, with adverse impact on output growth.”
He explained that tightening would also result in a reduction in aggregate demand as a fall in disposable income results in output compression; whereas at this time, policy emphasis should be on stimulating aggregate supply and demand, both already weakened by COVID-19.

According to the governor, “With respect to loosening, whereas the committee felt it would stimulate the economy in the short term, and boost aggregate supply and demand, the committee nevertheless, was of the view that there was a need to be cautious in loosening given the fact that it would exacerbate an already worsening inflationary condition, resulting in massive pressure on reserves and the exchange rate.

“Based on the balance of these arguments, the MPC, in taking note of the recent actions already taken by the management of the bank in response to the COVID-19, resolved to allow time for the measures to permeate the economy while allowing the pandemic to wear out its plateau before deciding on further supporting policy measures to boost and strengthen aggregate demand and supply in the recovery phase of the economy. ”
He noted that the choice to hold the rates also factored the subsisting LDR and the DCRR policies, which sterilises excess liquidity in the banking system, hence an increase in the MPR would be counter-productive.

He said the monetary policy stance arrived at the meeting took cognisance of the need to address the unfolding unfavourable macroeconomic developments, rein in inflation, support growth and employment through the extant interventions and recent initiatives, check capital outflows and support external reserves accretion as well as dampen pressure and ensure foreign exchange market stability.

Emefiele said the MPC considered the weakened revenue position of the federal government, arising from the sharp drop in oil prices and reiterated the need for the government to urgently reduce reliance on oil revenue by gradually diversifying the economy and improving tax collection.

The committee noted the speedy response of the federal government to the oil price shock by the revision of the 2020 budget downwards by N1.5 trillion and the oil price benchmark to $30 per barrel as well as urging the National Assembly to fully cooperate with the federal government in coming up with a budget that reflects the new realities.

He stated that the introduction of price modulation measures, resulting in reduction in the pump price of petrol from N145 to N125 per litre had a contributory effect in boosting aggregate demand, lowering inflation and improving the welfare of the ordinary Nigerians.

He said the MPC noted the persistence of inflationary pressures attributed to a combination of monetary and structural factors and urged the federal government to leverage on Public Private Partnership (PPP) to intensify investment in infrastructure to increase output and employment.

According to him: “The committee noted the sustained improvement in the financial soundness indicators, applauding the continued decline in the ratio of non-performing loans, growth in assets of the banking system and profitability of the industry in the light of increasing global uncertainties.

“It also recognised the success of the bank’s loan-to-deposit ratio policy and its potential to alleviate production shortfalls, reduce unemployment and boost aggregate demand, urging the bank to pursue this and other related policies to a conclusive end,” Emefiele added.