CBN Frets Over Huge Spending to Fight Boko Haram

Central Bank of Nigeria (CBN)’s monetary policy committee has warned that military operations against Islamic insurgents in the North could pose liquidity risks for the economy.
Sanusi Lamido Sanusi, governor of the CBN and chairman of the Committee, who said this at the end of the committee’s two-day meeting, projected that the emergency rule declared in the three North Eastern states may spur increased spending by government, with its attendant liquidity risks in the economy and hinted the apex bank might have to tighten the MPR if there are serious risks on the fiscal side.

Sanusi said: “The recent military action in the North-East will result in additional spending”
The federal government declared last week state of emergency in three states in the North-East, Borno, Adamawa and Yobe.
The committee also voted to retain Monetary Policy Rate (MPR) at 12 per cent with a corridor of +/-200 basis points around the midpoint.
The MPR is the benchmark rate at which the CBN lends to other banks.
By a vote of 7 members to three, the Committee also left the Cash Reserve Requirement, (CRR) unchanged at 12 per cent and Liquidity Ratio at 30 per cent, with the Net Open Position at 1.0 per cent.
Sanusi said, “The committee noted with caution the high Gross Domestic Product growth projection in view of the extant risk factors such as widespread insecurity, weak infrastructure and probable flooding from the projected heavy rains in some parts of the country.
“The state of emergency in the North-East and the accompanying military operations in that axis have the potential to adversely affect economic activities generally, including agricultural production and food prices as well as consumer demand.
“In addition, the recent military action in the North-East will result in additional spending. Although the government has announced that there will be no supplementary budget, the Coordinating Minister for the Economy and Minister of Finance has already announced that there will be a drawdown on a contingency vote embedded in the 2013 budget to cover emergencies.
Headline inflation increased from 8.6 per cent in March to 9.1 per cent in April, remaining within the target single digit range for the fourth consecutive month in 2013.
The figure, according to the central bank boss, reflects a combination of base effect and the success of tight monetary policy, which have led to a muted growth in the monetary aggregates and exchange rate stability.
He said while the principal risks to the inflation outlook remained fiscal spending and possible pressures on the exchange rate from any attrition to reserves caused by declining revenues as a result of output leakages, there was the need for prudence in monetary policy action.
Source: NCW