Petrol price hike will fuel inflation, CBN warns

Opponents of deregulation got some institutional backing yesterday.

The Central Bank of Nigeria (CBN) feels deregulation – the Federal Government’s magic pill against the ailments of the oil industry’s downstream sector - is a risk to inflation in the short and medium term.

Besides, the anticipated general increase in prices has already worsened the critical nature of the policy dilemma that the apex bank faces.

The government says deregulation will save billions by plugging the holes in the system, but critics say the policy will send prices climbing and impoverish the masses.


Said CBN Governor Sanusi Lamido Sanusi, who disclosed this yesterday in his communiqué on the Monetary Policy Committee (MPC) Meeting in Abuja: "The committee observed that while inflation has decelerated, it is important to recognise that seasonal factors and the planned deregulation of the prices of the petroleum products pose a major risk to inflation outlook in the near to medium term. It is this context that heightens the criticality of the policy dilemma now being faced by the Central Bank of Nigeria CBN."

According to Sanusi, providing further impetus to the current accommodative monetary policy could be inflationary in the short to medium term.

He said MPC discovered that "the inflation rate as measured by the year-on-year increase in all items consumer price index was 10.4 percent in September 2009. This outcome is lower than the headline inflation of 15.5 percent in December 2008 and lower than the average headline inflation of 12.6 percent for the first 9 months of the year. Food inflation has been between 12.5 and 13.0 percent in QIII of the year."

He went on, however, to state that the CBN had taken a balanced view of the measures required for fostering growth prospects and containing inflationary pressures. It will also further strengthen liquidity management.

The CBN governor said foreign reserves stood at $43.34billion as at the end of September 2009, an improvement of about $1.64billion over August, mainly owing to the receipt of the SDR allocation.

But Sanusi also noted that "as at October 30, 2009, foreign exchange reserves are provisionary, estimated to be US$43.05billion. Crude oil prices in the international markets have edged upward in recent weeks.

"If current oil price trend is sustained and if the expected recovery in both developed and emerging countries is realised, there will be further improvement in the level of foreign exchange reserves, with implications for liquidity and exchange rate management. The committee will continue to ensure stable exchange rates determined by market forces."

He said the committee decided to leave the Monetary Policy Rate (MPR) unchanged at 6 percent and introduced asymmetric corridor of interest rate around the MPR.

"Monetary Policy Rate (MPR) – the rate at which the CBN lends to banks – will remain unchanged at 6 percent, but an asymmetric corridor of interest rates around the MPR is introduced," he said.

He however added that the rate on the standing lending facility will remain at 200 basis point above the MPR, while the rate on the standing deposit facility will be 400 basis point below the MPR.

Sanusi said there would be quantitative easing to bridge the gap currently estimated at about N500billion between the levels of the current monetary aggregates and the benchmark levels for 2009.

He said the modalities for the quantitative easing include investments bonds to be issued by the Asset Management Company (AMC), adding that the establishment of the AMC is, however, subject to the approval of the National Assembly.

Other modalities include the redemption of promissory notes issued by the Federal Ministry of Finance as well as by the CBN in connection with the retirement of debt and liabilities arising from purchase and assumption of failed banks.

Sanusi said purchase by banks under the AMC will be based on terms aimed at strengthening the balance sheets with a focus on asset quality; improving liquidity and capital adequacy as well as on reducing debt relating to the stock market to stimulate activity in the capital market.

According to Sanusi, the CBN has already presented the AMC Bill to the Office of the Attorney-General of the Federation but it will definitely be presented to the National Assembly by next week.

He pointed out that CBN is working to ensure that the AMC actualises the acquisition of loans in the capital market by next month.

With effect from November 16, 2009, the temporary ban placed by the CBN on the use of Bankers’ Acceptance and Commercial Papers will be lifted and the CBN will issue guidelines on this before the date, said Sanusi.

Sanusi went on: "In view of the fact that the audit of the banks has been concluded and adequate provisions have been made for non-performing loans and to stimulate credit growth and strengthen banks’ balance sheets, the 1 percent general provision on performing loans contained in the existing prudential guidelines is hereby waived for the year 2009 as a countercyclical measure. New prudential guidelines will be issued before the end of first quarter 2010."

He announced that there are presently 1000 Micro Finance Banks (MFBs) in Nigeria and the apex bank is already understudying Ghana, South Africa, India and Indonesia to adopt their model for MFBs management.

He gave the assurance that the apex bank would ensure that depositors of the micro finance banks do not lose their money.

Sanusi denied setting up any committee on the polymer note scandal, saying: "On the polymer note, I did not set up any committee. What I have said is that at this point in time we do not have the name of any Nigerian who has taken bribe in connection with the polymer transactions. A newspaper has reported that bribes were given in connection with the contract given in Nigeria. All the names mentioned are foreigners but in the event we get any information on any Nigerian involved, I will ensure that EFCC investigates the matter to a logical conclusion."

On the Equitorial Trust Bank (ETB), Sanusi said what he could assure Nigerians was that the management of the bank would not go back.

Asked whether he actually wanted the banks’ Chief Executive Officers (CEO) involved in financial misappropriation shot, Sanusi said he imagined the magnitude of the money involved and said N236billion was loaned to one person.

"I said look if not for law and order the offence is so grave that he should be shot. It is a statement. I don’t want to go back to all the issues we raised and why. But what do you do when you see an institution in which over N200billion goes to a corporate institution with the MD. N236billion, that is the amount we shared in the Federation in the month of September taken by one person you will say they should get him shot. That was the statement. I did not say that he should be shot. But I am sure that in a country like China they would have been shot."

Deriding the way Nigerians trivialise the enormity of offences while sentencing convicts, Sanusi said: "But in Nigeria, they will not be shot; may be they will get two years imprisonment."

Asked of his position on tenures for bank chiefs, the CBN boss noted that the regulators, including the Nigeria Deposit Insurance Corporation (NDIC), would examine the matter before announcing any position.

He wondered why any chief executive officer would want to continue after spending 10 years in the position.

Sanusi said the Federal Government is not interested in owning the banks, adding that the apex bank is now at the stage of protecting shareholders and maximising their values.

Said he: "We are done with our primary focus; protected depositors and creditors. We are now at a point to protect shareholders and maximise their values. Some of the people that claimed to be shareholders in the banks were not shareholders. They took money from the banks’ balance sheets, bought shares and did not pay single kobo for the shares. Those shares should be cancelled."