The MPC now walking tall

When we read the personal statements of members of the monetary policy committee (MPC) following their meeting in late May, we noticed a distinct rise in their confidence. Their mood in the previous 12 months could be described as one of despair. In layman’s language, the prevalent view was that they were not responsible for the contraction in the economy or the surge in inflation and that somebody else (ie the FGN) had to pick up the pieces. The game changer, of course, has been the new fx policy.

The new confidence is in danger of developing into exuberance. One member accepted that “the economy is not entirely out of the woods”. The confidence, however, has legitimately grown since the last meeting. The investors’ and exporters’ window (NAFEX) has gained in momentum.

Members lauded the convergence of fx rates. One estimated that the margin between the interbank and bureaux de change (BdC) rates had narrowed from 150% in Q4 2015 to 23%, while noting that a margin of 5% was sustainable in most jurisdictions. Another argued strongly that multiple currency practices should be retained and made the point that the then BdC rate of N380 per US dollar was a little off his estimated PPP rate of N350.

On inflation, we isolate the view that the rate is far above the level that could be viewed beneficial to growth. Another member warned of the threat from another hike in the electricity tariff, which he termed inevitable in view of the structural crisis in the industry.

Members are without exception oil price bears. A typical view cited reports that oil majors are to invest US$10bn in shale oil prospects in the US in the hope of driving production costs down to US$20/b.

Another theme is the build-up of pressures in the banking sector. One member cited data showing that its assets had declined in US dollar terms by 27.4% in 2016 due to fx “depreciation”. NPLs had increased while credit extension growth (other than to government) had fallen sharply. A better informed member acknowledged that a few banks had let the side down.

For the “off-message” argument in the statements, we choose a strong case put forward against the CBN’s expanded developmental role. This argument pointed to the negative impact on money supply, inflation and the banking industry of the CBN’s many sector-based credit interventions. It suggested that the interventions amounted in some cases to the application of sticking plaster to very large problems, and queried their legitimacy since the National Assembly is supposed to approve all appropriations.

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