Saturday, June 19, 2021

    MPC Retains Key Policy Parameters amid Sluggish Real Output Growth in Q1 2021…

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    In the first quarter of 2021, Nigeria printed a year-on-year (y-o-y) real output growth rate of 0.51% to N16.83 trillion (or USD112.24 billion) as it further recovered from last year’s recession, albeit slowly.

    So far, we have seen FG significantly ease lockdown measures as households and businesses have been allowed to resume economic activities, but not fully.

    Although the country’s recovery rate from
    recession appeared rather slow, the several billions of Naira in economic stimulus packages provided by the monetary and fiscal authorities to help households and businesses cope with the effects of COVID-19 supported the fragile economic recovery.

    Specifically, the fragile growth was propelled essentially by a 0.79% growth in non-oil sector; with the Information & Communication, Manufacturing and Agricultural sectors recording the biggest growth rates of 6.47%, 3.40% and 2.28% respectively.

    The oil & gas sector, however, we saw a 2.21% y-o-y decline in real output to N1.56 trillion (or USD10.40 billion) as average daily oil production fell quarter-on-quarter (q-o-q) by 16.91% to 1.72 million barrels per day (mbpd).

    On a quarterly basis, real GDP declined by 13.93% to N16.83 trillion (or USD465.85 billion) from N19.55 trillion in Q4 2020; with the non-oil sector plummeting by 17.02% to N15.27 trillion (or USD101.84 billion).

    Agriculture, Trade and Information & Communication sectors, the three largest contributors to real GDP at 52.87% (combined), plunged by 28.61%, 13.10% and 19.42% respectively.

    However, the oil & gas sector growth ballooned by 35.65% to N1.56 trillion (or USD10.40 billion) as crude oil prices increased in Q1 2021.

    Meanwhile, the Monetary Policy Committee (MPC) after its two-day meeting which ended on Tuesday, May 25, 2021, decided to hold all key policy parameters constant.

    The Monetary Policy Rate (MPR) was unchanged at 11.50% and the asymmetric band was retained at +100 bps and – 700 bps around MPR.

    Cash Reserve Ratio was retained at 27.50% and the Liquidity Ratio left unchanged at 30%.

    Some of the Committee’s observations include: recovery across global economies due to widespread vaccination, easing of restrictions, reopening of more economies and gradual return to international travel; albeit, it noted that India and Brazil have continued to battle high levels of infections and fatalities, resulting from mutating strains of COVID-19 virus.

    Also, it observed 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 vaccinated.

    The MPC noted that Inflation in Nigeria remained well above the ceiling of the apex bank’s 6% to 9% inflation target corridors as a result of deteriorating public infrastructure and insecurity.

    Hence, its willingness to arrest the current challenge of Stagflation – rising inflation combined with little growth in output – from the supply side (that is, boost production over demand to crash prices).

    Meanwhile, the Committee remained mindful of the impact of exchange rate pressure resulting from capital flow reversal associated with COVID-19 shock as investors sought for save haven assets even as it focuses on moderating exchange rate pass-through to inflation.

    The relatively high inflation and interest rates, as well as the worsening insecurity would limit the potential GDP growth in 2021 – IMF’s 2021 growth forecast was 2.5%.

    Meanwhile, we note that the unanimous decision of the Committee members to leave all key policy parameters unchanged was to allow further economic growth given the fragile GDP growth rate printed in Q1 2021.

    However, we feel that the harmonization of the exchange rate at the official and Investors & Exporters windows, worsening insecurity, probable subsidy removal and market reflective electricity tariff, may in the medium-term assert pressure on inflation rate and negatively impact growth.

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