MPC: how to steady economy amid falling oil prices

Increased weaknesses in the global financial markets, falling oil prices, continuous capital flow reversal and moderate currency depreciations, especially in the emerging markets where Nigeria plays were the thrust of deliberations at the just-concluded Monetary Policy Committee (MPC) meeting. COLLINS NWEZE writes on the committee’s appraisal of developments in the domestic financial markets in the face of declining oil prices.

Nigeria’s worst economic storm seems over. That was in January 2016 when crude oil price touched $25 per barrel (pb), with little hope that it would rebound.

More than 95 per cent of Nigeria’s foreign exchange (forex) earnings come from crude oil exports. Nearly three years after, the prices have risen significantly, touching $60 per barrel  last Friday.

But Friday’s figure was far below the over $80 per barrel recorded about three months ago and that explains the worry at last week’s Central Bank of Nigeria (CBN)-led Monetary Policy Committee (MPC) meeting held in Abuja.

Analysts said crude oil market volatility has soared in the second half of 2018, with prices touching a four year highdropping to current levels.

Analysts were calling for $100 oil but now seem to think prices will drop to as low as $40 per barrel.  While inventory build-ups and oil traders continue to impact prices in short term, it is the Kingdom of Saudi Arabia actions in December, a potential hike in United States interest rates and a rumbling trade war between China and the US that will really move the market.

The MPC members said volatility in crude oil prices showed elevated financial fragilities and policy uncertainties, the gradual erosion of rule-based multilateral trading system, tighter financial conditions with latent disruptive portfolio adjustments, increased capital flow reversals with potentials for heightened exchange rate depreciation and some volatility, fiscal fragilities and increased debt burden, geo-political tensions and increasingly depressed aggregate demand in some countries.

These factors will continue to shape developments for the rest of 2018 and into 2019.

The MPC also noted that monetary policy in most advanced economies, particularly the US, continued on a path of normalisation in view of strong wage growth and declining unemployment.

The committee noted the positive outlook for output growth, evidenced by the Manufacturing and Non-manufacturing Purchasing Managers Indexes (PMI), which stood at 56.8 and 57 index points, respectively, in October

2018, indicating expansion for the 19th and 18th consecutive months.

“This was attributed to the stability in the foreign exchange market, implementation of the 2018 capital budget and the on-going intervention of the Central Bank of Nigeria (CBN) in the real sector of the economy. However, the recent incidence of flooding across the country and the impact of herdsmen attack on farming communities could affect output growth for the rest of the year,” it said.

Overall, the Committee believes that, even though output recovery remains fragile, the effective implementation of the 2018 capital budget, relative improvements in power supply, progress with counter-insurgency in the North- East and sustained intervention by the CBN in the real sector, will improve the investment climate and reduce unemployment. Consequently, the MPC reaffirmed its support for all initiatives designed to stimulate domestic output growth.

The Overall Outlook and Risks

Forecasts of key macroeconomic variables indicate a positive outlook for the economy in fourth quarter of 2018. The Committee expects that the effective implementation of the Economic Recovery and Growth Plan (ERGP) and the

2018 budget, improvements in the security challenges, enhanced flow of credit to the real sector and stability in the foreign exchange market will redirect the economy on a path of inclusive and sustainable growth.

Besides, increased production in the oil and the non-oil sectors are also expected to drive output growth in the medium term. The Committee, however, acknowledged the downside risks to this outlook to include: reduced portfolio inflows, weak of fiscal buffers, low domestic credit, and sluggish aggregate demand.

“The inflation outlook suggests continued but moderate inflationary pressure to the end of 2018, based largely on increased consumer spending for the Christmas festivities, election-related expenditure and increased pace of implementation of the 2018 Federal government budget. Improvements in the security, increased harvests as well as a stable exchange rate are expected to moderate the rise in inflation”.

Overall, the outlook for the economy remains positive with a growth projection of 1.75 per cent in 2018.

The Committee assessed the macroeconomic environment in 2018 and noted the modest stability thus far achieved in domestic prices, output growth and the financial system. The Committee noted that the economy was on the right path but some key sectors continued to experience significant challenges. The MPC, however, expressed concern about the tepid growth expectations and growing uncertainty in the global financial markets arising from the poor reception of the Brexit deal by British politicians, continuing trade war between the US and her major trading partners, as well as the commencement of US sanctions on Iran.

The Committee believed that although the domestic economy was recovering modestly from recession, however, the recovery was tepid and efforts should be stepped up to strengthen aggregate output and demand.

In this regard, the Committee urged the CBN to deepen and broaden access  to finance to high employment elastic sectors with particular emphasis on small and medium scale enterprises.

 Financial stability indicators

The MPC noted the improvements in the financial stability indicators, including non-performing loans, capital adequacy and liquidity ratios of the Deposit Money Banks (DMBs).

It urged the CBN to sustain its surveillance over the Banking industry by taking prompt corrective measures to further improve stability in the system. The committee also called on the fiscal authorities to build significant buffers to strengthen the efficacy of monetary policy.