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Banks Derail CBN’s N1tr Battle to Boost Economy



Godwin Emefiele CBN - Investors King

Lenders prefer traders to manufacturers, farmers

MPC retains tight monetary measures

Highlights of MPC meeting

•Monetary Policy Rate (MPR) 14%
•Cash Reserve Ration (CRR) 22.5%
•Liquidity Ratio 30%
•Asymmentric Window +200 -500

ADVOCATES of lower interest rates lost their battle yesterday.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) failed to bring down rates, but tightened measures because banks:

  • have refused to lend to the agriculture and manufacturing sectors, despite the injection of N1trillion into the economy;
  • are lending to traders who pump the cash into foreign exchange trading, thereby increasing the unusual pressure on the naira, which exchanged for N325 and N425 to the dollar in the official and parrallel markets yesterday; and
  • attempts to inject more cash without corresponding increase in industrial capacity will worsen inflation.

The MPC of the Central Bank of Nigeria (CBN) shocked pundits by retaining all the monetary policy instruments at their current levels.

Addressing journalists at the end of the MPC meeting in Abuja, CBN Governor Godwin Emefiele said “the Committee assessed the relevant risks and concluded that the economy continues to face elevated risks on both price and output fronts”.

Emefiele said: “Given its primary mandate and considering the limitations of its instruments with respect to output and conscious of the need to allow this and other measures, like the foreign exchange market reforms, to work through fully, the Committee decided to retain the MPR at 14.00 per cent; the  CRR at 22.5 per cent; the Liquidity Ratio at 30.00 per cent; and the Asymmetric Window at +200 and -500 basis points around the MPR.”

Defending the MPC’s decision, Emefiele said it decided to tighten measures because banks were not lending money to agriculture and manufacturing, but instead were funneling credit to traders who used the money to demand for foreign exchange.

Emefiele said: “There was a time when the MPC took a decision not only to reduce the monetary rate but also the cash reserve. These were intended to lower rates and encourage spending by the private sector. After we did that, because we did not see the impact on the private sector, we further reduced the CRR from 30.5% to 25%; N1 trillion was injected into the economy through the banks to loan this money but rather than loan this money those credits went to traders who used them to demand for foreign exchange, thereby putting pressure on the foreign exchange market.”

The CBN governor went on: “Thereafter, we reduced CRR to its current 22.5%, that is about N300billion to N500 billion but we said we were not going to allow the banks to have the cash until they send proposals to the CBN for primary agric projects, real manufacturing projects and other types of projects that will support industrial capacity and manufacturing output. I must confess that the proposals that we received were mainly for the purpose of refinancing the liquidity of the banks and thought that that was not what we wanted. That is the reason we have been circumspect about releasing some of those liquidity.”

Very few banks, he said, “have submitted proposals for agric and new manufacturing projects that we will be considering in due course.”

Emefiele explained that “if we lower interest rate, what that will do is make it possible for the fiscal authorities to borrow at a lower rate. If they borrow at a lower rate to stimulate the spending, yes it will stimulate the demand for goods. When you stimulate spending by proving cash or money without taking action to boost industrial capacity, what will happen is that there will be too much money chasing too few goods, which will worsen the current inflationary situation we are in right now.”

The option the apex bank wants to adopt “is that while the fiscal is going ahead to spend, what we want to do is to say, ‘maintain the rates where they are’, since we want to maintain a fairly tight situation and since the tightening, we have seen inflow of FX of above $1 billion between July and now.

“These were used to procure raw materials. This will lead to price of goods moderating and growth of industrial and manufacturing capacity. We want to match the demand so that it does not lead to further inflationary pressure,” Emefiele said.

On the efforts of both fiscal and monetary authorities to synchronise their actions, Emefiele said: “We are working together to achieve what we want to achieve so that we don’t hurt the economy.”

The CBN governor added that “the Committee acknowledged the weak macroeconomic performance and the challenges confronting the economy, but noted that the MPC had consistently called attention to the implications of the absence of robust fiscal policy to complement monetary policy in the past. The Committee also recognised that monetary policy had been substantially burdened since 2009 and had been stretched.”

Against this background, members, he said, “reemphasized the need to prioritise the use of monetary policy instruments in dealing essentially with stability issues around key prices (consumer prices and exchange rate) as prerequisites for growth”.

Emefiele said that “the MPC noted that stagflation is indeed a very difficult economic condition with no quick fixes: having been imposed by supply shocks as well as fiscal and current account (twin) deficits. Consequently, the policy framework must be reengineered urgently to provide a lever for reversing the negative growth trend. While the imperative for ensuring financial system stability remains, the MPC reiterated the fact that monetary policy alone cannot move the economy out of stagflation.”

Emefiele said: “The MPC considered the numerous analysis and calls for rates reduction but came to the conclusion that the greatest challenge to the economy today remains incomplete fiscal reforms which raise costs, risks and uncertainty”.

“The calls came mainly from the belief that reducing interest rates will spur credit growth, not only in the private sector but also by the public sector, which will help provide liquidity to stimulate consumption and investment spending.”

The Committee, the CBN boss added, “was of the view that in the past, the MPC had cut rates; but found that rather than deploy the available liquidity to provide credit to agriculture and manufacturing sectors, the rate cuts provided opportunities for lending to traders who deployed the same liquidity in putting pressure on the foreign exchange market which had limited supply, thus pushing up the exchange rate.”

On providing opportunity to the public sector to borrow at lower rates to boost consumption and investment spending, the Committee agreed that while it was expected to stimulate growth through aggressive spending, doing so without corresponding efforts to boost industrial output by taking actions to deepen foreign exchange supply for raw materials will not help reduce unemployment nor would it boost industrial capacities.

“The Committee was also of the view that consumer demand for goods, which will be boosted through increased spending, may indeed be chasing too few goods which may further exacerbate the already heightened inflationary conditions. The urgency of a monetary-fiscal policy retreat along with trade and budgetary policy,to design a comprehensive intervention mechanism is long overdue,” he said.

The CBN, Emefiele noted, “has since 2009 expanded its balance sheet to bail out the financial system and support growth initiatives in the economy”. ”While stimulating economic growth and creating a congenial investment climate always is and remains essentially the realm of fiscal policy; monetary policy in all cases only comes in to support sound fiscal policy. Nevertheless, the CBN has and shall continue to deploy its development finance interventions to complement the overall effort of fiscal policy towards reinvigorating the economy. The interest rate decisions of the CBN are, therefore, anchored on sound judgment, fundamentals and compelling arguments for such policy interventions.”

The Committee also feels that there was the need to continue to encourage the inflow of foreign capital into the economy by continuing to put in place incentives to gain the confidence of players in this segment of the foreign exchange market. Consequently, the Committee considers that loosening monetary policy now is not advisable as real interest rates are negative, pressure exists on the foreign exchange market while inflation is trending upwards.

The Committee noted the positive response of the deposit money banks (DMBs) to the CBN’s call for increased credit to the private sector between July and August. As the growth in the monetary aggregates spiked above their provisional benchmarks, headline inflation continued its upward trajectory in August 2016, and now close to twice the size of the upper limit of the policy reference band.

“Supply side factors, including energy and utility prices, transportation and input costs, have continued to add to consumer price pressures. Members emphasised that improved fiscal activities, especially, the active implementation of the 2016 budget, and payment of salaries by states and local governments, will go a long way in contributing to economic recovery. In the same direction, the Committee urged the fiscal authorities to consider tax incentives as a stimulus on both supply and demand sides of economic activities,” Emefiele said.

On the outlook for the future, the CBN governor stated that “the data available to the Committee and forecasts of key variables suggest that the outlook for inflation in the medium term appears benign. First, month-on-month inflation has since May 2016 turned the curve; second, harvests have started to kick-in for most agricultural produce and should contribute to dampening consumer prices in the months ahead; and third, the current stance of monetary policy is expected to continue to help lock-in expectations of inflation which, has started to improve with the gradual return of stability in the foreign exchange market.”

In this light, the MPC believes that as inflows improve, the naira exchange rate should further stabilise. Overall, the major pressure points remain the challenges in the oil sector (production and prices), output contraction, and other financial system vulnerabilities as well as foreign exchange shortage.

Reacting to the MPC ‘s decision, analysts have conflicting views on the development. Dr Ogho Okiti President/CEO of Time Economics Limited noted that “cutting the MPR could do more to erode the credibility of the CBN with regards to the conduct of monetary policy. Such action, in our opinion will help worsen the already growing negative real interest rate and could further discourage the return of foreign investors – something the CBN has worked so hard to avoid. Moreover, the pursuit of an expansionary monetary policy in order to support growth, in the face of rising inflation and currency depreciations could prove to be counter-productive, particularly in the absence of complementary fiscal policy reforms.”

Mr Basil Odilim Enwegbara, an Abuja development economist, aligned with the fiscal authorities by arguing that “a country deep in recession caused mostly by high cost of doing business with one of highest MPRs and CRR among peer economies, has its MPC members behaving as if the economic is in high growth mode,  calls for sober reflection. What it tells us is that the 2007 CBN Act forced on the country’s President is a great fraud that should be stopped. I strongly believe that we have come to the point in our monetary policy stance when the amendment of the CBN Act of 2007 is now urgent. The goal of the amendment is for the Commander-in-Chief of Nigeria’s economy, President Buhari who was elected by millions of Nigerians to better the lives and improve the overall economy should be the one to have the final say about the country’s MPR, CRR and forex policy.  Mr President should call members of MPC to a close door meeting and demand their immediate resignation. In the meantime he should appoint an acting team to be working directly with him until a new team is put in place.”

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

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UNGA 2021: The World has the Resources to End Hunger, African Development Bank Head tells UN Food Systems Summit



Akinwumi Adesina - Investors King

“The world has the resources to end hunger,” African Development Bank President Dr. Akinwumi A. Adesina said in a message on the first day of the United Nations Food Systems Summit.

Convened by UN Secretary General António Guterres, the event is billed by its organisers as “a historic opportunity to empower all people to leverage the power of food systems to drive our recovery from the COVID-19 pandemic and get us back on track to achieve all 17 Sustainable Development Goals (SDGs) by 2030.”

The summit brings together thousands of youths, food producers, members of civil society, researchers, the private sector, women and indigenous people, all of whom are participating both physically and virtually in the summit. It is taking place on the sidelines of the 76th UN General Assembly in New York.

In his opening address, Guterres said the participants represented “energy, ideas and the willingness to create new partnerships,” and was a time to celebrate the dignity of those who produce and create the world’s food.

Decrying the 246 million people in Africa who go to bed daily without food and the continent’s 59 million stunted children as “morally and socially unacceptable,” Adesina said that delivering food security for Africa at greater scale called for prioritising technologies, climate and financing.

“The $33 billion per year required to free the world of hunger, is just 0.12% of $27 trillion that the world has deployed as stimulus to address the Covid-19 pandemic. I am confident that zero hunger can be achieved in Africa by 2030,“ Adesina said.

The African Development Bank’s Feed Africa Strategy, through its Technologies for African Agricultural Transformation program – widely known as TAAT – has provided 11 million farmers across 29 African countries with proven agricultural technologies for food security. Food production has expanded by 12 million metric tons while saving $814 million worth of food imports.

“We are well on our way to achieving our target of reaching 40 million farmers with modern and climate-resilient technologies in the next five years,” the African Development Bank chief added.

At a meeting on food security in Africa organized by the Bank and the International Fund for Agricultural Development (IFAD) earlier this year, 19 African heads of state called for the establishment of a facility for financing food security and nutrition in Africa.

“The Facility for Financing Food Security and Nutrition in Africa should be capitalized with at least $ 1 billion per year,” Adesina said.

The welfare of the 70% of Africa’s population working in agriculture and agribusiness is a barometer of the state of the continent’s health.  “If they aren’t doing well, then Africa isn’t doing well,” Rwandan president Paul Kagame said in a message at the official opening.

The many other heads of state and government who spoke on Thursday included, Prime Minister Mario Draghi of Italy, President Felix Antoine Tshisekedi of the Democratic Republic of Congo, Prime Minister Sheikh Hasina of Bangladesh and Prime Minister Jacinda Arden of New Zealand.

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AfCFTA: Nigeria-South Africa Chamber Advocate Single Africa Passport, Free Visa



African Continental Free Trade Area (AfCFTA)- Investors King

The Nigeria-South Africa Chamber of Commerce (NSACC) has called for a single Africa passport and a free visa to ensure the success of the Africa Continental Free Trade Area (AfCFTA) agreement.

Speaking on Thursday in Lagos during the chamber’s September Breakfast Forum, with the theme: `Perspectives on the Africa Continental Free Trade Area in Relation to Nigeria’, its President, Mr. Osayande Giwa-Osagie noted that AfCFTA would boost intra-African trade by 22 percent, adding that its implementation would impact positively on the Nigerian economy.

AfCFTA is a single continental market that adopts free flow of goods, services, and capital, supported by the free movement of persons across Africa.

Giwa-Osagie however said Nigeria must diversify its economy in order to harness the gains of the agreement.

“Current intra-African trade rated at 15 to 17 percent is low and the AfCFTA is expected to boost intra-African by 22 percent. Challenges to its implementation are lack of infrastructure, political instability and lack of economic diversification.

“This gives rise to the need for Nigeria to diversify its economy to harness the gains of the agreement. Given the importance of the free movement of people, there is a need for a free visa for Africa and a single Africa passport.

“While the implementation would help boost the Nigerian economy, the impact would be limited if there are no free movement of people,” he said.

Mr Jesuseun Fatoyinbo, Head, Trade and Transactional Services, Stanbic IBTC Bank, said the business community needed more clarification on tariff reduction or elimination under the agreement.

According to him, the little information available to corporate organisations with regards to tariffs may lead to holding back on investments.

“We have noted increased interests from global multinationals and other corporates in setting up facilities in Africa aimed at serving the continent and exporting abroad.

“So more transparency around tariff reductions both in terms of timelines and details of goods could prompt companies to act,” he said.

Fatoyinbo also called for more attention to the digitisation of trade processes across the continent. “Currently, trade in Africa is largely reliant on physical documentation and this is a major impediment. Policymakers need to prioritize regulatory amendments that allow for the digital signatures, a digital certificate of origin, digital bills of lading, and other documentation,” he added.

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Nigeria Borrows $4 Billion Through Eurobonds as Order Book Peaked at $12.2 Billion



Eurobonds - Investorsking

The Federal Government of Nigeria has raised a fresh $4 billion through Eurobonds, according to the latest statement from the Debt Management Office (DMO).

Nigeria had set out to raise $3 billion but investors oversubscription peaked at $12.2 billion, enabling the Federal Government to raise $1 billion more than the $3 billion it announced.

DMO said “This exceptional performance has been described as, “one of the biggest financial trades to come out of Africa in 2021” and “an excellent outcome”.

Bids were received from investors in Europe, America, Asia and several local investors. The statement noted that the quality of investors and the size of the Order Book demonstrated confidence in Nigeria.

The Eurobonds were issued in three tranches, details, namely seven years–,$1.25 billion at 6.125 per cent per annum; 12 years -$1.5 billion at 7.375 per cent per annum as well as 30 years -$1.25 billion at 8.25 per annum.

The DMO explained that the long tenors of the Eurobonds and the spread across different maturities are well aligned with Nigeria’s Debt Management Strategy, 2020 –2023.

The Eurobonds were issued as part of the New External Borrowing stipulated in the 2021 Appropriation Act. DMO noted that the $4 billion will help finance projects state in the 2021 budget.

Nigeria’s total debt stood at $87.239 billion as at March 31, 2021. However, with the $4 billion new borrowing, the nation’s debt is now $91.239 billion. A serious concern for most Nigerians given the nation’s weak foreign revenue generation and rising cost of servicing the debt.

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