CBN MPC Communique No. 136 - May 2021
Central bank: cbn | Type: statement | Date: 2021-05-25

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CENTRAL BANK OF NIGERIA COMMUNIQUÉ NO. 136 OF THE
MONETARY POLICY COMMITTEE MEETING HELD ON
MONDAY 24th AND TUESDAY 25th MAY 2021
The Monetary Policy Committee (MPC) met on the 24th and
25th of May 2021 as the global economy gradually emerges
from the six-quarter long COVID-19 pandemic with
lingering uncertainties. The recovery is on account of
widespread vaccinations, easing of restrictions, reopening
of economies and gradual return to international travels.
India and Brazil however continue to battle high levels of
infections and fatalities resulting from mutating strains of
the virus. In the domestic environment, the economy is
expected to remain on the current trajectory of recovery
in 2021, mirroring the cautious optimistic trend in global
output recovery. The Committee reviewed the
developments in the global and domestic economic and
financial environments in the second quarter of 2021 and
the outlook for the rest of the year.
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Ten (10) members of the Committee were present at this
meeting.
Global Economic Developments
The Committee noted that while the vaccination against
COVID-19 is drastically reducing fatalities across several
economies, the recovery remains uneven and is tilted
against developing economies compared with the
developed economies with better access to vaccines.
Other emerging markets economies with strong
manufacturing capabilities like China are also on the verge
of full recovery.
Accordingly, the International Monetary Fund (IMF) revised
global output growth for 2021 to 6.0 per cent. This
represents an upward revision of 0.5 percentage point,
compared with the earlier projection of 5.5 per cent. The
projection is, however, dependent on the efficient
deployment of COVID-19 vaccines and sustained policy
support across economies to strengthen the recovery of
global output growth.
Prices, however, are expected to rise globally due to the
massive monetary and fiscal injections in several countries
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to mitigate the impact of the Pandemic. The MPC noted
the gradual recovery of prices, especially amongst some
developed economies as inflation continued a steady
movement towards the long-term objective of their central
banks. It is expected that inflation may breach the long-
term objective of several central banks in the medium-
term, as economic activities continue to recover with more
people being vaccinated. In several Emerging Market and
Developing Economies (EMDEs), inflation has remained
relatively high, with some economies confronted with
significantly higher inflationary pressures than others,
because of legacy structural issues, capital flow reversals
and unabating exchange rate pressures.
The prevailing conditions in the global financial markets
remained relatively stable, as central banks sustain
monetary accommodation. There are, however, growing
indications that monetary policy normalization may
commence amongst some key central banks by the fourth
quarter of 2021. The timing and pace of this normalization
must, however, be carefully managed to mitigate the risk
of a financial crisis post-Pandemic.
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Domestic Economic Developments
Available output data from the National Bureau of Statistics
(NBS) showed that real Gross Domestic Product (GDP)
grew by 0.51 per cent in the first quarter of 2021, compared
with 0.11 and -3.62 per cent in Q4 2020 and Q3 2020,
respectively. Real GDP was driven largely by the non-oil
sector, which grew by 0.79 per cent in Q1 2021 compared
with 1.69 and -2.51 per cent in Q4 2020 and Q3 2020,
respectively. The major drivers of the non-oil GDP were
Agriculture and Industry with sectoral growth rates of 2.28
and 3.05 per cent, respectively in Q1 2021. Whereas
Agriculture declined by 1.14 percentage points from 3.42
per cent in Q4 2020, Industry, supported by growth in
Manufacturing and Construction, grew by 3.30
percentage points from -0.25 per cent in Q4 2020. The
sectoral contribution of Services to GDP, however,
contracted from 1.31 per cent in Q4 2020 to -0.39 per cent
in Q1 2021. The oil sector, contracted by -2.21 per cent in
Q1 2021, from -19.76 and -13.89 per cent recorded in Q4
2020 and Q3 2020, respectively. The weak performance in
the oil sector is largely attributable to the decline in
production, in compliance with the OPEC+ production cut
agreement.
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The Committee noted the marginal growth in the
Manufacturing Purchasing Managers’ Index (PMI) to 49.0
index points in April 2021 from 48.8 index points in March
2021. This increase is a lead indicator of recovery of output
growth following the easing of restrictions to curtail the
spread of the Pandemic. The Non-manufacturing PMI,
however, declined marginally to 47.3 index points in April
2021, compared with 47.9 index points in March 2021.
The employment level component of the manufacturing
and non-manufacturing PMIs rose moderately in April 2021
to 46.5 and 48.2 index points from 45.9 and 47.7 index points
in March 2021, respectively.
The Committee noted the moderate decline in headline
inflation (year-on-year) to 18.12 per cent in April 2021 from
18.17 per cent in March 2021, following nineteen
consecutive months of continuous rise. The decrease was
driven by a marginal slowdown in food inflation to 22.72 per
cent in April 2021 from 22.95 per cent in the previous month.
This was partly attributed to the Bank’s massive
interventions in various sectors of the economy to stimulate
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aggregate demand and boost production, particularly for
Small and Medium Scale Enterprises. The MPC, however,
noted that headline inflation remained well above the
ceiling of the Bank’s 6-9 per cent inflation corridor as a
result of a combination of factors, including: the
heightened security tensions in the country and
deteriorating public infrastructure. As a result, the Bank
expressed its support to the Federal Government’s
commitment to tackle insecurity as this will improve the
business environment and encourage economic activities
to reduce inflation.
The MPC was also mindful of the impact of exchange rate
pressures resulting from capital flow reversals associated
with the COVID-19 shock, as investors sought for safe
havens. It, however, applauded extant measures by the
Bank in ensuring both liquidity and stability in the Foreign
Exchange market as well as moderating the exchange
rate pass-through to inflation.
On the performance of monetary aggregates, the
Committee noted that broad money supply (M3) grew by
1.15 per cent in April 2021, compared with 0.04 per cent in
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March 2021. This development was largely driven by
growth in Net Domestic Assets (NDA), while Net Foreign
Assets (NFA) contracted. The growth in Net Domestic Assets
reflects the growth in aggregate credit supported by the
ongoing broad based monetary and fiscal stimulus.
Accordingly, gross banking sector credit at end-March
2021 stood at N23.53 trillion compared with N22.68 trillion at
end-December 2020. This represents an increase of N0.85
trillion (year-to-date), of which commercial & merchant
banks disbursed (N0.66 trillion), microfinance banks (N0.13
trillion), development finance institutions (N0.05 trillion), and
primary mortgage banks and finance companies (N0.01
trillion).
The liquidity condition in the banking system in the review
period was determined by several factors including; fiscal
disbursements and withdrawals by states and local
governments, periodic CRR debits, foreign exchange
interventions, Open Market Operations, and maturing CBN
bills, the net effect of which imposed liquidity constraints on
the banking system.
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The Committee noted the moderate decline in the equities
market (year to date) as the All-Share Index (ASI)
decreased by 1.97 per cent to 38,287.58 on May 24, 2021
from 39,045.13 on March 30, 2021. Similarly, Market
Capitalization (MC) decreased by 4.30 per cent to N19.96
trillion on May 24, 2021 from N20.82 trillion on February 26,
2021.
The MPC noted that the Capital Adequacy Ratio (CAR)
and the Liquidity Ratio (LR) both remained above their
prudential limits at 15.8 and 38.9 per cent, respectively. The
Non-Performing Loans (NPLs) at 5.89 per cent in April 2021,
showed progressive improvement compared with 6.6 per
cent in April 2020. The MPC, however, urged the Bank to
sustain its tight prudential regime to further reduce the level
of Non-Performing Loans in the industry.
The Committee noted the external reserves declined
marginally to US$34.17 billion as at May 21, 2021, from
US$34.29 billion as at end-April 2021. This reflects sales to the
foreign exchange market and third-party payments.
Outlook
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The optimism for medium-term macroeconomic recovery
in both the global and domestic economies is slow, but
steadily growing, even as some level of uncertainty are still
present. This is due to the unabating COVID-19 pandemic
in some countries such as India and Brazil caused by
mutation of the virus into more fatal strains. In addition, the
recovery is uneven and seem to be more tilted towards
countries that have high vaccination rate than those less
vaccinated or that are still suffering from the effects of
more fatal strain of COVID-19 disease. As conditions
improve however, central banks of Advanced Economies
are beginning to signal the possible shift to monetary policy
normalization by the fourth quarter of 2021.
Available data and forecasts for key macroeconomic
variables for the Nigerian economy, suggest that output
growth will continue to recover for the rest of 2021. This is
premised on the continued support for agriculture to
improve food supply, reduce inflation and improve
employment. Others include efforts of both the monetary
and fiscal authorities to improve infrastructure challenges
in the country. The forecast for the Nigerian economy for
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2021 is, thus, strong domestic push to support recovery
particularly to ensure an end to insecurity in the country.
Consequently, as the productive capacity of the economy
improves and the supply chain fully restored, we expect
inflationary pressure to ease further, as the supply of goods
and services offset demand.
The Committee’s Considerations
At this meeting, the MPC recognized that the twin
problems confronting the Nigerian Economy that must be
addressed relates to stagflation, reflected in rising inflation
with simultaneous contraction in output.
Committee further recognized that the strategies put in
place to rein in inflation through the use of series of
administrative measures by the Bank to control money
supply through liquidity mop up in the banking industry had
started to yield results. It also recognized that measures put
in place to stimulate output growth through the use of its
intervention facilities to inject liquidity into employment
generating and output stimulating initiatives like the
Anchor Borrower Program, Targeted Credit Facility and
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Agri-Business Small and Medium Enterprise Investment
Scheme (AGSMEIS) had started to yield results.
In the view of the MPC, although the economy had
successfully exited the recession, the recovery was very
fragile given that the GDP of 0.51 per cent was still far
below population growth rate. Committee therefore was
of the view that, there is a strong need for the Monetary
Authorities to consolidate on all administrative measures
taken not only to rein in inflation, but also on the actions so
far taken to grow output.
In the Committee’s view, such measures should include
boosting consumption and investments, as well as
diversifying the base of the economy through FX restrictions
for the importation of goods and food products that can
be produced in Nigeria. It also urged the Bank to continue
to put in place measures that will boost export earnings.
On consumption and investment, MPC noted that the
intervention facilities under the Anchor Borrowers was
N631.4 billion granted to 3,107,949 small holder farmers
cultivating 3.8 million of land hectares; for the AGSMEIS,
N111.7 billion to 29,026 beneficiaries; and for the Targeted
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Credit Facility, N253.4 billion to 548,345 beneficiaries -
comprising 470,969 households and 77,376 SMEs.
Notwithstanding that all these have helped in boosting
output, the Bank should continue to aggressively increase
its interventions in these subsectors, including agricultural
processing and manufacturing. Under the National Youth
Investment Fund, N2.04 billion was disbursed to 7,057
beneficiaries, of which 4,411 were individuals and 2,646
were SMEs. Under the Creative Industry Financing Initiative,
the CBN has disbursed N3.19 billion to 341 beneficiaries
across movie production, movie distribution, music and
software development.
Under the N1 trillion Real Sector Intervention, N856.3 billion
had been disbursed for 233 real sector projects, of which
77 are in light manufacturing, 36 in agro-based industry, 30
in services and 11 in mining. Under the N100 billion
Healthcare Support Intervention fund, N97.4 billion has
been disbursed for 91 health care projects, of which 26 are
pharmaceutical and 65 hospital services. Also, N232.5
million has been disbursed to 5 beneficiaries under the CBN
Health Care Grant for Research on Covid-19 and Lassa
Fever. Under the National Mass Metering program, N35.9
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billion has been disbursed to 9 DisCos for the acquisition of
656,752 electricity meters. Under the Nigerian Electricity
Stabilization Facility 2 (NEMSF-2), N93.8 billion has also been
disbursed to 11 DisCos.
The Committee members applauded Government’s
efforts in combating the headwinds imposed by the
Pandemic and urged that going forward, Government
should avoid an entire nationwide lockdown like was
experienced in 2020, as this will reverse the wholesome
gains jointly achieved between the Government and the
Central Bank in response to the outbreak of the Pandemic.
The MPC carefully assessed the options on direction of
policy in the short to medium term. It re-appraised current
measures by the Government to purchase COVID-19
vaccines and the general preparedness of relevant public
health agencies to guard against the spread of the
mutating strains of the virus. To this end, the Committee
noted the appropriate steps taken by the Government to
ensure that up to 70 per cent of the populace get
vaccinated to drastically drive down the infection rate in
the country and hence, sustain economic activities.
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The Committee noted the persisting security crisis,
especially in major food producing regions of the country
and the severe toll on food supply and prices. It noted that
inflation had moderated marginally due to the unrelenting
effort of the Bank in supporting agriculture to boost food
supply and prices. The Committee, thus, re-iterated its call
to the Government to intensify effort towards addressing
the security situation in the country to ease supply
bottlenecks and bring down food prices. The MPC further
noted Government’s commitment towards investing in
public infrastructure despite constrained fiscal position and
urged a continued focus on this objective, while exploring
the option of effective partnership with the private sector,
as improved road networks, telecommunications and
power supply will greatly and proactively impact the
supply chain and moderate price increments. It further
noted the need for collaboration with Nigeria’s huge
diaspora, through the issuance of diaspora bonds targeted
at specific infrastructure projects. Even as the Committee
noted that the public debt stock was currently high, it was
of the view that project specific diaspora bond issues could
conveniently pay itself back without imposing a burden on
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Government finances. It noted the complementary role
this would play in boosting foreign exchange supply,
accretion to reserves and easing of the current exchange
rate pressure.
The Committee noted that the equities market remained
stable, an indication of investor confidence in the Nigerian
economy in the medium-term. The MPC thus urged the
Bank to maintain its collaboration with the fiscal authority
to improve the investment climate towards attracting
sustainable Foreign Direct Investment (FDI).
With the developments in the Banking system, the
Committee applauded the efforts of the CBN in ensuring a
reasonably low level and steady reduction in Non-
Performing Loans (NPLs), even as aggregate credit
continued to expand through the crisis period. While NPLs
remained marginally above the Bank’s regulatory
threshold, members noted that it was in line with the current
state of macroeconomic imbalances occasioned by the
Pandemic.
The Committee’s Decision
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The recent developments in the domestic economy
presented two broad options to the MPC, which were to
either aggressively address the high inflationary pressure or
continue to pursue measures aimed at supporting the
recovery.
Whereas the Committee remained overwhelmingly
committed to supporting the efforts of the Federal
Government in ensuring full restoration of the productive
capacity of the economy, members remained much more
focused towards achieving price stability in the short to
medium-term. The MPC noted that economic growth
could be hampered in an environment of unstable prices.
To this end, the choice therefore was between loosening
the stance of policy to ease credit further or tighten to
moderate price development or maintain a hold stance in
order to allow previous policy measures continue to
permeate the economy while observing global and
domestic developments.
The Committee noted that an expansionary stance of
policy could transmit to reduced pricing of the loan
portfolios of Deposit Money Banks and result, therefore, in
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cheaper credit to the real sector of the economy. On the
converse, this expected transmission may be constrained
by persisting security challenges and infrastructural deficits.
On the other hand, while a contractionary stance will only
address the monetary component of price development,
supply side constraints such as the security crisis and
infrastructural deficits can only be addressed by policies
outside the purview of the Central Bank. A tight stance in
the view of members, will also hamper the Bank’s
objectives of providing low cost credit to households, Micro
Small and Medium Enterprises (MSMEs), Agriculture, and
other output growth and employment stimulating sectors
of the economy.
Based on the above considerations, the MPC made the
decision to hold all policy parameters constant.
The Committee thus decided by a unanimous vote to
retain the Monetary Policy Rate (MPR).
In summary, the MPC voted to:
I. Retain the MPR at 11.5 per cent;
II. Retain the asymmetric corridor of +100/-700 basis points
around the MPR;
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III. Retain the CRR at 27.5 per cent; and
IV. Retain the Liquidity Ratio at 30 per cent.
Thank you.
Godwin I. Emefiele
Governor, Central Bank of Nigeria
25th May 2021