The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) is expected to hold its second meeting of the year on the 20th and 21st of March. Suppose the evolution of events in the international and domestic scenes since the last policy meeting is anything to go by, we envisage that the MPC is now at a crossroads of navigating between the Scylla of pausing as risks of over tightening emerge and the Charybdis of hiking too much and watching the economy fall off a cliff. On the global scene, systemic central banks continue to march on with their interest rate hiking cycle as labour market conditions remain resilient while inflationary pressures remain above medium-term targets, albeit softening. In the domestic economy, the sustained elevated price pressures in February will be a cause of concern to Committee members, more so that the headline inflation is expected to remain sticky in the coming months. At the same time, the downside risks to economic activities have increased, worsened by the currency redesign drive. Thus, in our view, an optimal choice at this time is to guard against complacency about the domestic economy’s ability to bend without breaking and remain sensitive to data. Consequently, we lean towards a smaller hike, similar to the actions of central banks of developed economies. Accordingly, we expect the Committee to increase the MPR by 50bps and retain other policy parameters.
Local Economy Expected to Remain on a Growth Path, Albeit Slowly
According to the National Bureau of Statistics (NBS), the domestic economy surprised positively, growing by 3.52% y/y in Q4-22 (Q3-22: +2.25% y/y). The growth print was primarily driven by the non-oil sector, reflecting gains associated with the (1) sturdy telecommunication sub-sector’s performance; (2) seasonality effect in agriculture, albeit limited by flooding incidents; (3) manufacturing sector’s return to growth; and (4) improved credit to the private sector. Accordingly, the non-oil sector grew by 4.44% in Q4-22 (Q3-22: +4.27% y/y). Meanwhile, the oil sector’s contraction moderated to 13.38% y/y in Q4-22 (Q3-22: -22.67% y/y) as crude oil production settled higher at an average of 1.34 mb/d in the review period (Q3-22: 1.20 mb/d). Overall, the economy grew by 3.10% in 2022FY (2021FY: +3.40% y/y).
In Q1-23, we expect crude oil production (including condensates) to average 1.50 mb/d in line with the (1) government’s efforts at curbing crude oil theft and vandalism and (2) restarting of some shut-in oil wells after the pandemic-induced shut-ins. However, we expect the (1) currency redesign drive and (2) election uncertainties to constrain activities in the non-oil sector. Consequently, we have revised our estimates for Q1-23 and 2023FY growth downwards to 1.89% y/y (previously: 2.44% y/y) and 2.70% y/y (previously: 3.02% y/y), respectively. Overall, we expect the Committee to remain cautiously optimistic that domestic growth will stay on a growth path, albeit at a subdued pace. Hence, the Committee is likely to highlight the need to strengthen output expansion and forestall the reversal of gains recorded so far by slowing down on the pace of rate hikes and maintaining the ongoing monetary and fiscal interventions in critical growth-enhancing sectors.
Inflationary Pressures Likely to Remain Sticky Despite High Base Effects
After the moderation witnessed in December, inflationary pressures rose for two consecutive months, settling at 21.91% y/y in February (January: 21.82% y/y). For us, the persistent increase in price pressures primarily reflects (1) intermittent PMS scarcity and the associated fuel price increases and (2) low food supply exacerbated by restricted access to fertilizer and high conflict incidences. Overall, in February, food prices rose by 3bps to 24.35% y/y while the core inflation moderated by 32bps to 18.84% y/y.
Consequently, analysts at Cordros Capital say “We expect the MPC to express concerns about the persistent inflationary pressures, likely attributing it to supply shocks worsened by the PMS scarcity, and electricity tariff increases amid spending relating to the 2023 general elections. While we envisage the Committee to express a positive outlook on prices as electioneering activities wind down, we expect members to urge the fiscal authority to sustain its real sector interventions and take decisive steps in tackling the contributory legacy factors limiting food production and distribution in the country.
Local Currency Weakness Remains Unabating
Foreign investors remain on the sidelines given the lack of FX reforms, higher global interest rates and weak macroeconomic narrative. In addition, CBN’s FX supply to the different FX market segments remains significantly below pre-pandemic levels. Meanwhile, the demand for the greenback remains high as market players continue to source for FX to fulfil and clear their outstanding obligations. Consequently, the exchange rate settled at NGN461.09/USD at the official market (IEW) as of 15 March 2023 (24 January: NGN462.00/USD).
Although the decline in gross FX reserve is likely to be a source of concern at this meeting, we expect the Committee to highlight the need for the apex bank to maintain its periodic FX interventions and intensify its call to the fiscal authorities to amplify their efforts in ensuring higher crude oil production over the short-to-medium term. Accordingly, the Committee will likely reiterate that the CBN should address the pressures on the local currency by boosting the FX supply for productive activities.
