A member of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), Prof. Mike Obadan, has said the country’s weak fiscal policy is putting, “significant pressure on monetary policy in addressing economic challenges.”
Obadan, stated this in his personal comment at the March 2021 MPC meeting, the communique which was posted on the CBN’s website yesterday.
He noted that the country relies on crude oil for the bulk of its forex earnings and government revenue, which are vulnerable to frequent shocks in the global oil market.
According to him, because of the absence of savings, the country is confronted with limited fiscal space to effectively address the twin economic crisis.
“Also, because of uncomfortable public debt accumulation, there is very limited headroom for further borrowing. Consequently, fiscal policy remains weak and this puts significant pressure on monetary policy in addressing the economic challenges.
“Also, unlike in the advanced countries, Nigeria’s industry, in particular, manufacturing, is comatose making the economy to be heavily dependent on imported manufactured goods,” he said.
According to the Professor of Economics, serious efforts were made by the government in the 1970s to encourage industrialisation through import-substitution policies. He, however, noted that the manufacturing factories developed were not sustained in the absence of enabling environments.
In his contribution, the Deputy Governor, Operations Directorate, CBN, Mr. Folashodun Shonubi, stated that the Nigerian banking system has continued to show signs of resilience, describing as the major channel for sustaining the economy during the crisis and beyond.
“Industry asset, deposit and credit grew further at end-February 2021. The average capital adequacy ratio improved to 15.2 per cent, against 15 per cent regulatory threshold, while industry liquidity ratio, at 44.5 per cent in February 2021, remained above regulatory threshold of 30 per cent.
“Measures of profitability were positive, though the non-performing loans (NPL) ratio deteriorated marginally to 6.3 per cent, above the regulatory minimum of five per cent.
“Growth in credit to the government, domestic claims and credit to private sector reflected impact of various measures by the Bank to promote flow of credit to drive economic activities.
“Money market rates were moderated by ample banking system liquidity, buoyed mainly by inflow from maturing bills. The capital market closed on a bearish note in February 2021 due to switch by investors to take advantage of the higher yields in the fixed income market and profit taking sell-off,” Shonubi said.
According to him, though the fiscal space has remained tight, performance of major fiscal measures moderated in February 2021.
He disclosed that retained and total distributed revenue increased over the levels in January 2021, while overall deficit was lower than the level in the previous month.
“Decline in government expenditure reflected weak capacity of the fiscal authority in a period that requires aggressive spending to boost economic activities.
“The external sector was characterised by persisting demand pressure in the foreign exchange market and deteriorating balance of payments position,” he added.
He commended the central bank’s effort at improving external sector conditions through its various policies to promote non-oil exports and remittances.
According to Shonubi, sustained implementation of the measures was expected to yield desired outcomes in the coming months.
“Recent moderation in fiscal deficit, improvement in retained revenue due to modest rise in crude sales and decline in debt-service-to-revenue ratio, on account of Covid-19 Relief-loan repayment deferment concession, are envisaged to provide some head room for the fiscal authority.
“Rising food prices, as the major driver of inflation, has been attributed largely, to insecurity induced disruptions to food farming and distribution, as well as, other rigidities affecting availability and cost of essentials.
“In addition, subtle monetary drivers of inflation may be attributed to rising credit and money supply, high liquidity etc. it is therefore pertinent that as the fiscal authority takes pragmatic steps to resolve the structural bottlenecks, the Bank, must in addition to supporting growth, act to preserve price stability, especially since inflation is seen more as a monetary phenomenon.
On his part, the CBN Governor, Mr. Godwin Emefiele, noted that short-term prospect of the domestic economy was tepid and vulnerable.
According to him, a speedy and even rollout of the Covid-19 vaccines could bolster global growth with a positive spill-over to the domestic conditions.
“I note also that growth is below potential and inflationary pressures persist. Per capita income, household purchasing power, incidence of poverty, labour productivity, business confidence, and unemployment rate remain outside tolerable levels.
“Tensions around food production belts heighten macroeconomic fragilities, worsen structural imbalances, aggravate supply-side constraints and threaten the long-term objective of price stability.
“I note that inflation is creeping to unacceptable levels. Yet, this must be balanced with the need to ensure that recovery of the economy is at a sustainable level,” he said.
– Thisday