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China Cuts Interest Rates

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China

China stepped up monetary easing with its sixth interest-rate cut in a year to combat deflationary pressures and a slowing economy, moving ahead of anticipated fresh stimulus by central banks from Europe to Japan and possible tightening in the U.S.

The one-year lending rate will be cut to 4.35 percent from 4.6 percent effective Saturday the People’s Bank of China said on its website on Friday, while the one-year deposit rate will fall to 1.5 percent from 1.75 percent. Reserve requirements for all banks were lowered by 50 basis points, with an extra 50 basis point reduction for some institutions.

Authorities are seeking to cushion an economy forecast to grow at the slowest annual rate in a quarter century as old growth drivers such as manufacturing and construction falter and new drivers like consumption struggle to compensate. China’s reduction to record-low rates and anticipated stimulus in Europe and Japan add to monetary policy divergence with the U.S., where the Federal Reserve is considering its first rate increase in nine years.

 “The Fed may be considering raising interest rates, but in much of the rest of the world, China included, central banks are facing weak growth and a lack of inflation, and are thus more likely to ease rather than tighten monetary policy,” said Louis Kuijs, head of Asia economics at Oxford Economics Ltd. in Hong Kong.

Stock-index futures jumped in Hong Kong and European stocks extended gains. The Standard & Poor’s 500 Index was 1.1 percent higher at 10 a.m. in New York.

Complicated Outlook

Overall prices at a relatively low level give room for reduced interest rates, the PBOC said in a Q&A statement after the announcement. The domestic and foreign situation remain complicated, and continued downward pressure on economic growth requires the fine tuning of monetary policy, it said.

The PBOC also scrapped a deposit-rate ceiling that limited the rate banks could pay savers, saying the move was made possible by a decline in market-based interest rates. Removing such controls boosts the role of markets in the economy, part of efforts by Premier Li Keqiang to find new engines of growth and to bolster competition in banking.

 The need for new growth engines was underscored by data Monday that showed the economy expanded 6.9 percent in the three months through September from a year earlier. While that beat economists’ estimates for 6.8 percent, the expansion benefited from an out-sized contribution from financial services after a surge in share trading from the year-earlier period. That prop is unlikely to endure, raising challenges to Li’s growth goal of about 7 percent this year.

Factory Deflation

Meantime, consumer inflation at about half the government’s target and a protracted slump in producer prices added room for additional easing.

“Clearly the People’s Bank of China is on a mission to ease policy and has been for a year,” said George Magnus, a senior independent economic adviser to UBS Group AG in London. “With the economy losing momentum, deflation embedded in the corporate sector and rebalancing making limited headway, the central bank is being directed to ease monetary policy further. And of course, this isn’t the end of the road yet.”

China’s leaders are gathering next week to formulate policies for the nation’s next five-year plan, President Xi Jinping’s first such blueprint. They are expected to announce a dismantling of currency controls, lower barriers for foreign non-bank financial firms, emphasize home-grown technologies and prioritize population growth.

Fed Meeting

The Fed meets next week to mull when to raise its benchmark rate from near zero after holding it there since December 2008. Meanwhile, European Central Bank President Mario Draghi signaled this week that fresh stimulus is on the way, and economists anticipation of further support in Japan next week are higher than for any meeting since the central bank unexpectedly added to its easing policy in October 2014.

China’s rate cut has “mixed implications for U.S. monetary policy,” said Bill Adams, an economist at PNC Financial Services Group.

“To the extent that interest rate cuts reduce downside risks for Chinese and global growth, they should increase the Fed’s confidence that the U.S. economy will be able to absorb higher interest rates,” Adams said. However, “if today’s rate cut spurs a new round of depreciation of the Chinese currency, it will make it more difficult for the Fed to raise interest rates before year-end 2015.”

Capital Outflow

The PBOC’s surprise currency depreciation in August roiled global markets and spurred an exit of cash from China. Capital outflows climbed to $194.3 billion in September, exceeding the previous high of $141.7 billion in August, according to a Bloomberg estimate that also takes into account decisions by exporters and direct investment recipients to hold funds in dollars.

Offsetting such a leakage, analysts at Everbright Securities Co. said the RRR reduction would release at least 800 billion yuan ($126 billion) of liquidity.

The PBOC uses the reserve ratio to control the amount of available cash in the economy. In the years of capital inflows, it increased the amount of deposits banks had to lock away to ensure excessive liquidity didn’t spur inflation. This year, with growth slowing and capital flowing out of the nation, the central bank has reversed course to lower the requirement so banks can boost lending and help cushion the slowdown.

“Chinese officials are stepping on the gas,” said Frederic Neumann, co-head of Asia Economics Research at HSBC Holdings Plc in Hong Kong. “The joint move on interest rates and the reserve-requirement ratio shows that Beijing is determined to get the car out of the mud and get things moving again.”

Bloomberg

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Economy

World Bank Calls on Nigeria to Impose Special Taxes on Alcohol and Tobacco

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The World Bank Group has made a call to the Federal Government of Nigeria, urging the government to impose special taxes on alcohol, cigarettes and beverages that are highly sweetened in order to improve primary healthcare conditions in the country.

Shubham Chaudhuri, who is the Country Director for Nigeria in the World Bank Group, said that an improvement in healthcare in Nigeria will come by taxing the things that are “killing us.” He said that the economic rationale for the action is quite strong if lives are to be saved and a healthier Nigeria achieved.

Chaudhuri made the call on Friday, at a special National Council on Health meeting which was organized by the Federal Ministry of Health in Abuja. Chaudhuri stated that placing special taxes on tobacco, sweetened beverages and alcohol would reduce the health risks which come with their consumption and expand the fiscal space for universal health coverage after COVID 19.

The country director also said that investing in stronger health systems for all would make significant contributions to the fight against inequality and the rising poverty situation in the country. He went on to add that increasing health tax would provide an extra advantage of reducing healthcare cost in the future, by hindering the growth of the diseases which are caused by tobacco, alcohol and sugar-sweetened beverages.

The representative of the WHO in Nigeria, Dr Walter Mulombo said that he could confirm the large health needs of Nigerians, as well as the efforts being made to meet those needs. He said this was based on the fact that he had been to over half of Nigeria’s states in less than two years of being in the country.

Mulombo then noted that although the coronavirus exposed weaknesses in the global economy (not excluding health), it could be considered as a unique opportunity for a thorough examination of existing resources and mechanisms to prepare for a more resilient future.

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Economy

Nigeria’s VAT Revenue Falls to N500 Billion in Q3 2021, Manufacturing Sector in the Lead

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Value added tax - Investors King

In the third quarter of 2021, Nigeria generated a total sum of N500.49 billion as value-added tax which represents a 2.3% decline when compared to the N512.25 billion recorded in the second quarter of the year.

This is as seen in the VAT report which was recently released by the National Bureau of Statistics (NBS). The report revealed that the manufacturing sector was in the lead as it remitted a total of N91.2 billion, representing about 30% of the total local non-import value added taxes in that period.

In spite of the quarter-on-quarter decline of VAT collections in the reviewed period, it grew by a further 17.8% when compared to N424.7 billion generated in the same period of the previous year. The report also shows that an amount of N1.5 trillion has been generated from value added taxes from January 2021 to September 2021.

That is 40.2% higher than the N1.08 trillion recorded in the same period of 2020, and 72.3% higher than what was recorded in the same period of 2019.

To break it down, the Value Added Tax collected in the first, second and third quarter of 2021 was recorded at N496.39 billion, N512.25 billion and N500.49 billion respectively. It is higher than the corresponding figures of 2020, which sat at N324.58 billion, N327.20 billion and N424.71 billion for the first, second and third quarters respectively.

In the third quarter of 2021, the Manufacturing activity accounted for the largest share of total revenue collected across sectors, with a huge 30.87% (N91.2 billion) coming from that sector. The Information & Communication sector came in second with 20.05% (N53.9 billion) contributed, while the Mining & Quarrying sector came in third with 9.62% (N28.4 billion).

Nigeria has continued to ramp up its efforts to increase revenue from non-oil sectors by increasing its tax collection rates, which has recorded largely significant growth since the federal government increased the VAT rate from 5% to 7.5% in the 2019 Finance Act, which was signed and made effective in 2020.

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Economy

Nigeria’s Economy to Close 2021 at 2.5% Growth Rate

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Trade - Investors King

The Lagos Chamber of Commerce and Industry (LCCI) has predicted that the Nigerian economy will close its growth rate for the year at 2.5%.

This was said by the President of the LCCI, Toki Mabogunje at the 133rd Annual General Meeting (AGM) of the chamber in Lagos on Thursday, as reported by the News Agency of Nigeria.

The LCCI leader advised that Nigeria’s monetary and fiscal aspects of the economy should encourage policies that enhance growth and build confidence which would invigorate private capital flows to the economy to achieve the growth. She also encouraged a medium-term recovery plan which is anchored on local productivity, attracting private investment, developing physical and soft infrastructure, and ease of business.

Mabogunje disclosed that Nigeria’s inflation would be maintained at its double digit level within the short to medium term, due to food supply shocks, foreign exchange illiquidity, higher energy cost, social unrest in the Northern region, possible removal of fuel subsidy, and insecurity. She stated that these structural factors will keep on mounting pressure on domestic consumer prices.

She also added that in spite of the non-oil economy’s growth by 5.4%, insecurity problems in some areas of the country may lead to shrinking in production and a disruption of the supply chain. She states that the important drivers of the non-oil sector growth were finance and insurance holding 23.2%, transport and storage 20.6%, trade carrying 11.9% and telecommunications 10.9%.

Others include manufacturing, construction, real estate and agriculture with 4.3%, 4.1%, 2.3% and 1.2% respectively throughout the year.

Speaking on the decision of the Central Bank of Nigeria’s Monetary Policy Committee’s decision to retain policy parameters, she mentioned that although the apex bank has been keen to extend credit to the real economy as a way of supporting it, it is a fact that the provision of credit recently has proven ineffective in improving output growth and stabilizing consumer prices.

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