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Nigeria Needs Strong Fiscal, Monetary Policies to Exit Recession – CBN

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CBN
  • Nigeria Needs Strong Fiscal, Monetary Policies to Exit Recession

The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday warned that the economy might relapse into protracted recession if bold monetary and fiscal policies were not activated immediately to sustain the programmes of the Federal Government.

The committee stated that available forecasts of key macroeconomic indicators pointed to a fragile economic recovery in the second quarter of the year.

Data from the National Bureau of Statistics showed that the contraction in the economy moderated to 0.52 per cent in the first quarter.

The MPC identified the downside risks to economic outlook to include weak financial intermediation, poorly targeted fiscal stimulus and absence of structural programme implementation.

The CBN Governor, Mr. Godwin Emefiele, while reading the communique after the end of the committee’s two-day meeting, called for more fiscal measures to stimulate the economy.

He said there was a need for improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries.

He also said the expected fiscal stimulus, non-oil federal receipts and other measures that were expected to drive the growth impetus for the rest of the year must be pursued relentlessly.

Emefiele stated, “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 into a more protracted recession if strong and bold monetary and fiscal policies are not activated immediately to sustain it.

“Thus, the expected fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries, all expected to drive the growth impetus for the rest of the year, must be pursued relentlessly.”

He added, “The committee expects that timely implementation of the 2017 budget, improved management of foreign exchange, as well as security gains across the country, especially in the Niger Delta and north-eastern axis, should be firmly anchored to enhance confidence and sustainability of economic recovery.

“The committee identified the downside risks to this outlook to include weak financial intermediation, poorly targeted fiscal stimulus and absence of structural programme implementation.”

Emefiele also said the committee expressed concern over the N2.51tn fiscal deficit of the Federal Government in the first half of this year, adding that it was stifling the growth of the private sector.

He welcomed the move by the fiscal authorities to engage the services of asset tracing experts to investigate the tax payment status of 150 firms and individuals in an effort to close some of the loopholes in tax collection and improve government revenue.

However, the governor said the committee expressed concern about the slow implementation of the 2017 budget and called on the relevant authorities to ensure timely implementation, especially, of the capital portion, in order to realise the objectives of the Economic Recovery and Growth Plan.

He added, “The MPC expressed concern over the increasing fiscal deficit estimated at N2.51tn in the first half of 2017 and the crowding out effect of high government borrowing.

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

“The committee, however, advised the management of the bank (CBN) to monitor the release process of the promissory notes to avoid an excessive injection of liquidity into the system, thereby offsetting the gains so far achieved in inflation and exchange rate stability.”

On the outlook for financial system stability, the CBN governor said the MPC noted that in spite of the resilience of the banking sector, the prolonged weak macroeconomic environment had continued to impact negatively on the sector’s stability.

He noted that the committee reiterated its call on the apex bank to sustain its intensive surveillance of Deposit Money Banks’ activities for the purpose of promptly identifying and addressing vulnerabilities.

The committee, according to Emefiele, also called on the DMBs to support economic recovery and growth by extending reasonably-priced credit to the private sector.

On the Monetary Policy Rate, the governor said the committee voted to leave the rate unchanged at 14 per cent.

He explained that the six members of the committee agreed to maintain the current monetary policy stance.

He, however, added that two members voted to ease the Monetary Policy Rate.

The governor said apart from the MPR, which was retained at 14 per cent, the committee also retained the Cash Reserves Ratio at 22.5 per cent.

Also retained were the Liquidity Ratio at 30 per cent; and the Asymmetric Window at +200 and -500 basis points around the MPR.

Explaining the reason for holding the rates despite calls by the Minister of Finance, Mrs. Kemi Adeosun, and the Senate President, Bukola Saraki, for a reduction, Emefiele said that inflation rate, expected to fall by August, still had a strong base effect on the monetary policy stance.

According to him, the MPC believes that at this point, developments in the macro economy suggest the options of either to hold or to ease the monetary policy stance.

He said the committee was not unmindful of the high cost of capital and its implications on the ailing economy, but noted the liquidity surfeit in the banking system and the continuous weakness in financial intermediation.

While easing at this point will signal the committee’s sensitivity to growth and employment concerns by encouraging the flow of credit to the real economy, he stated that the rate of inflation, currently at 16.1 per cent, was capable of retarding growth.

He added that any reduction in interest rate at this time would reduce the cost of debt servicing, which was actually crowding out government expenditure.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Nigeria’s Growth Forecast Lowered to 3% for 2025, Higher than Most Emerging Markets

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IMF global - Investors King

The International Monetary Fund (IMF) has projected a 3% growth rate for Nigeria in 2025, slightly down from the 3.1% forecasted for 2024.

Despite this slight decline, Nigeria’s projected growth remains higher than that of many emerging markets as detailed in the IMF’s latest World Economic Outlook released on Tuesday.

In comparison, South Africa’s economy is expected to grow by 1.2% in 2025, up from 0.9% this year. Brazil’s growth is projected at 2.4% from 2.1% in 2024, and Mexico’s growth forecast stands at 1.6% for 2025, down from 2.2% in 2024.

However, India is anticipated to see a robust growth of 6.5% in 2025, although this is slightly lower than the 7% forecast for 2024.

The IMF’s projections come as Nigeria undertakes significant monetary reforms. The Central Bank of Nigeria has been working on clearing the foreign exchange backlog, and the federal government recently removed petrol subsidies.

These reforms aim to stabilize the economy, but the country continues to grapple with high inflation and increasing poverty levels, which pose challenges to sustained economic growth.

Sub-Saharan Africa as a whole is expected to see an improvement in growth, with projections of 4.1% in 2025, up from 3.7% in 2024. This regional outlook indicates a modest recovery as economies adjust to global economic conditions.

The IMF report underscores the need for cautious monetary policy. It recommends that central banks in emerging markets avoid easing their monetary stances too early to manage inflation risks and sustain economic growth.

In cases where inflation risks have materialized, central banks are advised to remain open to further tightening of monetary policy.

“Central banks should refrain from easing too early and should be prepared for further tightening if necessary,” the report stated. “Where inflation data encouragingly signal a durable return to price stability, monetary policy easing should proceed gradually to allow for necessary fiscal consolidation.”

The IMF also highlighted the importance of avoiding fiscal slippages, noting that fiscal policies may need to be significantly tighter than previously anticipated in some countries to ensure economic stability.

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Nigeria’s Inflation Rises to 34.19% in June Amid Rising Costs

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Food Inflation - Investors King

Nigeria’s headline inflation rate surged to 34.19% in June 2024, a significant increase from the 33.95% recorded in May.

This rise highlights the continuing pressures on the nation’s economy as the cost of living continues to climb.

On a year-on-year basis, the June 2024 inflation rate was 11.40 percentage points higher than the 22.79% recorded in June 2023.

This substantial increase shows the persistent challenges faced by consumers and businesses alike in coping with escalating prices.

The month-on-month inflation rate for June 2024 was 2.31%, slightly up from 2.14% in May 2024. This indicates that the pace at which prices are rising continues to accelerate, compounding the economic strain on households and enterprises.

A closer examination of the divisional contributions to the inflation index reveals that food and non-alcoholic beverages were the primary drivers, contributing 17.71% to the year-on-year increase.

Housing, water, electricity, gas, and other fuels followed, adding 5.72% to the inflationary pressures.

Other significant contributors included clothing and footwear (2.62%), transport (2.23%), and furnishings, household equipment, and maintenance (1.72%).

Sectors such as education, health, and miscellaneous goods and services also played notable roles, contributing 1.35%, 1.03%, and 0.57% respectively.

The rural and urban inflation rates also exhibited marked increases. Urban inflation reached 36.55% in June 2024, a rise of 12.23 percentage points from the 24.33% recorded in June 2023.

On a month-on-month basis, urban inflation was 2.46% in June, slightly higher than the 2.35% in May 2024. The twelve-month average for urban inflation stood at 32.08%, up 9.70 percentage points from June 2023’s 22.38%.

Rural inflation was similarly impacted, with a year-on-year rate of 32.09% in June 2024, an increase of 10.71 percentage points from June 2023’s 21.37%.

The month-on-month rural inflation rate rose to 2.17% in June, up from 1.94% in May 2024. The twelve-month average for rural inflation reached 28.15%, compared to 20.76% in June 2023.

The rising inflation rates pose significant challenges for the Central Bank of Nigeria (CBN) as it grapples with balancing monetary policy to rein in inflation while supporting economic growth.

The ongoing pressures from high food prices and energy costs necessitate urgent policy interventions to stabilize the economy and protect the purchasing power of Nigerians.

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Inflation to Climb Again in June, but at a Reduced Pace, Predicts Meristem

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Nigeria's Inflation Rate - Investors King

As Nigeria awaits the release of the National Bureau of Statistics’ report on June 2024 inflation, economic analysts project that while inflation will continue its upward trajectory, the pace of increase will moderate.

This comes after inflation rose to a 28-year high of 33.95% in May, up from 33.69% in April.

Meristem, a leading financial services company, has forecasted that June’s headline inflation will rise to 34.01%, a slight increase from May’s figure.

The firm attributes this persistent inflationary pressure to ongoing structural challenges in agriculture, high transportation costs, and the continuous depreciation of the naira.

Experts have highlighted several factors contributing to the inflationary trend. Insecurity in food-producing regions and high transportation costs have disrupted supply chains, while the depreciation of the naira has increased importation costs.

In May, food inflation grew at a slower pace, reaching 40.66%, but challenges in the agricultural sector, such as the infestation of tomato leaves, have led to higher prices for staples like tomatoes and yams.

Meristem predicts that food inflation will persist in June, driven by these lingering challenges. Increased demand during the Eid-el-Kabir celebration and rising importation costs are also expected to keep food prices elevated.

Core inflation, which excludes volatile items like food and energy, was at 27.04% in May. Meristem projects it to rise to 27.30% in June.

The firm notes that higher transportation costs and the depreciation of the naira will continue to push core inflation up.

However, they also anticipate a month-on-month moderation in the core index due to a relatively stable naira exchange rate during June, compared to a more significant depreciation in May.

Cowry Assets Management Limited has projected an even higher headline inflation figure of 34.25% for June, citing similar concerns.

The firm notes that over the past year, food prices in Nigeria have soared due to supply chain disruptions, currency depreciation, and climate change impacts on agriculture.

This has made basic staples increasingly unaffordable for many Nigerians, stretching household budgets.

As inflation continues to rise, analysts believe the Central Bank of Nigeria (CBN) will likely hike the benchmark lending rate again.

The CBN’s Monetary Policy Committee (MPC) has raised the Monetary Policy Rate (MPR) by 650 basis points this year, bringing it to 26.25% as of May 2024.

At a recent BusinessDay CEO Forum, CBN Governor Dr. Olayemi Cardoso emphasized the MPC’s commitment to tackling inflation, stating that while the country needs growth, controlling inflation is paramount.

“The MPC is not oblivious to the fact that the country does need growth. If these hikes hadn’t been done at the time, the naira would have almost tipped over, so it helped to stabilize the naira. Interest rates are not set by the CBN governor but by the MPC committee composed of independent-minded people. These are people not given to emotion but to data. The MPC clarified that the major issue is taming inflation, and they would do what is necessary to tame it,” Cardoso said.

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