The Monetary Policy Committee of the CBN held their monthly meeting on April 15th. Afrinvest prepared an analysis of this communique. Read below and you can also download the report below too.

1. MPR is still retained at 6.0%, with an asymmetric corridor of +2.0% and -5.0%;
2. Technical Committee’s recommendations on the injection of the N500.0bn financing facility for the emergency power projects for industrial clusters, as well as modalities regarding the refinancing/ restructuring of banks’ exposures to the manufacturing sector and SMEs approved;
3. Banks required to submit their risk-based interest rate pricing models on a monthly basis. Loan pricing should henceforth be stated at a fixed spread above MPR and adjusted along with MPR movements;
4. Complementary policies being put in place by the CBN Board endorsed, including the revised guidelines for loan loss provisioning, the N200.0bn guarantee for real sector lending and regulations governing margin lending;
5. CBN to continue its efforts towards the expedited passage of the AMCON Bill and its speedy implementation.

Key Domestic Macroeconomic Statistics
Provisional data from the National Bureau of Statistics (NBS) show that in Q1 2010, real Gross Domestic Product (GDP) grew by 6.68%, largely driven by the non-oil sector. Overall GDP for 2010 is however projected at 7.53%, with the non-oil sector still expected to be the main driver.

The year-on-year inflation fell to 11.8% in March 2010, from 12.3% in February 2010. This could be attributed to numerous factors, including the on-going money contraction, delays in the passage of the 2010 federal budget and the improvement in the supply of petroleum products.

The MPC re-stated its position that the risk of inflationary pressure in the near-to-medium term remains real; it however asserted that it will continue to monitor price developments to facilitate an enabling environment for sustainable growth and employment.

Implications
Afrinvest Research re-iterates its position that the N500.0bn facility for emergency power projects is a step in the right direction. We also believe that the ongoing review of regulations governing margin lending as well as prudential guidelines on loan loss provisioning will improve transparency and corporate governance in the banking sector. It will also help the banks to more efficiently hedge against risks.

Retail lending rates have remained stubbornly high despite the significant fall in interbank rates, deposit rates and the Standard Deposit Facility rate. This has therefore resulted in a wide spread between lending and deposit rates. Banks are still unwilling to lend to the real sector, given their rather reticent approach to the creation of new risk assets. The MPC is therefore trying to establish a proper transmission mechanism from policy rate adjustments to market (interest) rates and, hopefully, channel funds from the banks to the real sector.

Afrinvest Research is of the opinion that though banks may still be unwilling to resume lending, they will however be forced to do so over time as they come under increasing pressure from a number of angles; coupled with recent CBN measures taken to encourage lending, shareholders would also begin to press for better returns than what currently obtains (deposits with the CBN at a low rate and money market securities with low yields), thus mounting pressure on the banks to resume lending. We also believe that the sector will witness even more intense competition amongst operators, which would naturally force them to resume lending as they fight for turf.