CBN In Policy Dilemma As It Turn To Development Finance Ahead Of Recession

The Central Bank of Nigeria (CBN) says it will have to continue with its development finance in order to ensure sector growth in Nigeria, as the CBN governor Godwin Emefiele acknowledge the possibility of recession in the third quarter of this year following the contraction of the economy in the second quarter of 2020.

Emefiele said the CBN will pursue an expansionary monetary policy amidst rising infaltion. The CBN will use the development finance to enable rise in output in order to stabilise inflation rate. It was gathered that the move by the apex bank was agreed on during the Monetary Policy Committee meeting held last week.

“The committee was therefore of the view that to abate the pressure, it had no choice but to pursue an expansionary monetary policy using development finance policy tools, targeted at raising output and aggregate supply to moderate the rate of inflation.

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"At present, fiscal policy is constrained and so cannot, on its own, lift the economy out of contraction or recession, given the paucity of funds arising from weak revenue base, current low crude oil prices, lack of fiscal buffers and high burden of debt services.

“Therefore, monetary policy must continue to provide massive support through its development finance activities to achieve growth in the Nigerian economy.” Emefiele said.

CBN In Policy Dilemma Over Recession

It has been projected by various international agencies including World Bank, International Monetary Fund (IMF) and Fitch Ratings that Nigeria's economy will enter recession this year. The Finance Minister, Zainab Ahmed, had also confirmed the recession of these international agencies, stating that 2020 will be the worst year for Nigerians.

Contraction of economy in two consecutive quarter leads to economy recession. Already, Nigeria's economy contracted in the second quarter of 2020, another contraction in the third quarter means Nigeria's economy is in recession - this is the fear of the CBN, and Emefiele said if output growth contract in the third quarter of 2020, there will be no escaping the recession.

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The Q2 contraction has caused a policy dilemma for the CBN as the apex bank is trying to avoid a second contraction in the third quarter. Emefiele said MPC is in a policy dilemma despite its price and monetary stability mandate, as it is battling with what direction its policy should take due to the Q2 contraction.

Emefiele said that “It is, therefore, of the view that, if a recession occurs in Q3, the committee would be confronted with proposing policy options in a period of stagflation." He added the CBN will take bold actions because inflationary pressure will continue due to the removal of subsidy on fuel price, the increase in energy prices, and the adjustment of the exchange rate.

Emefiele said bold actions will be taken because one of the factors used in determining the price of petroleum products and energy prices is the currency adjustment. He said MPC suggested that sectors that could resolve the supply constraints in petrol pricing, energy pricing and food availability should continue to receive funding from CBN.