Question

CASE STUDY 1: Lloyds Banking Group Monetary Policy Committee
You are a voting member of Lloyds Banking Group Monetary Policy Committee (MPC) and are expected to make a policy decision at the next MPC meeting in January 2021. The current Repo rate is 4.25% and the allowable inflation target ranges between 3% to 5%. The Research department has presented the following global and domestic market update for your consideration.
Key extracts of the presentation are summarized below:
Extract 1: Global update
According to the IMF’s World Economic Outlook (WEO) for October 2020, the global economy is expected to recover substantially in 2021 following the negative effects of COVID-19. The impact of COVID-19 outbreak has lessened significantly since the first cases were made public at the beginning of the year 2020. To curb the spread of the pandemic, governments worldwide imposed severe restrictions and lockdown measures, subsequently bringing economic activities to a virtual standstill in the process. According to the latest WEO, the global economy is now projected to recover and grow by 3.8 percent in 2021, which is an upward revision from a 2.3 percent growth published in the WEO update for January 2021. The upward revision is on the back of successful easing of lockdown restrictions and resumption of economic activities in both advanced and emerging market economies. The global output is then projected to expand by 5.8 percent in 2021.
Extract 2: Emerging market update
Emerging market and developing economies (EMDEs) improved moderately in the second half of 2020 and are expected to recover strongly in 2021. Overall, EMDEs are projected to grow by 2.0 percent in 2020, before recovering to a strong growth of 6.6 percent in 2021. Going forward EMDEs are expected to experience a sharp recovery in 2021 once the adverse effects from this economic shock subside.
Extract 3: Domestic market update
1.   Domestic growth remained positive during the last quarter of 2020, supported by construction, wholesale and retail trade, as well as the communication sectors. In contrast, activities such as livestock farming and uranium mining performed weakly.
2.   Going forward, the domestic economy is forecasted to improve in the remainder of 2021, also supported by construction activities, as well as strong growth in demand. Declining international commodity prices remain a concern, as it may negatively affect mineral production.
3.   Inflation has shown an upward trend for the past five months. Annual inflation rose from 4.9 percent in June 2020 to 6.1 percent in January 2021, mainly due to increases in food and transport prices. As a result, this recent trend of inflation is expected to average around 7 percent for the year.
4.   The annual growth rate in domestic private sector credit increased steadily to 17.8 percent in December 2020, compared to 14.3 percent in December 2019. Growth in private sector credit resulted from higher demand by both individuals and businesses. The rise in household debt largely reflected strong growth in unproductive instalment credit and overdraft loans which remains a concern for the MPC.
5.   During the last quarter of 2020, the trade deficit increased significantly. A rapid growth in imports of vehicles, partly financed by instalment credit, remains a concern. The total number of vehicles sold during the last four months of 2020 increased by more than 50 percent, compared to the same period in 2019. The value of imported vehicles amounted to N$2.2 billion, which is a significant amount in relation to the total import bill of goods of N$15.9 billion. Unproductive imports have put pressure on international reserves of the country and require monitoring.

Extract 4: Key domestic sector updates
Construction Sector update:
The contraction in the construction sector is expected to deepen during 2020 as projects anticipated to kickstart earlier are likely to be delayed. The construction sector is expected to contract by 16.3 percent and 1.5 percent in 2020 and 2021, respectively. The deeper contraction for 2020 is based on expectations that some of major projects, which were expected to commence in 2020 are likely to be delayed, mainly due to COVID-19 induced travel restrictions. This assertion is supported by the recent directive by the Minister of Finance to SOEs and Government Ministry to suspend capital projects until further notice.
Uranium Sector update
Uranium mining is similarly projected to contract during 2020, followed by a mild recovery in 2021. The uranium mining sector is expected to contract by 22.4 percent in 2020, before expanding by 4.6 percent in 2021. The sector is first and foremost grappling existing factors that include insufficient supply of water required for their operations and persistently low uranium prices, viewed together with the reduction in long-term supply contracts. This means that uranium mines are more exposed to spot prices, which squeezes their margins. There is, however, an indication that COVID-19 and resulting travel restriction have not prevented the mines from exporting their output thus far and it may not constitute a major factor in the foreseeable future. The volumes produced during the first three months of 2020, were 26.4 percent lower than the production for the corresponding three months of 2019, making any prospects to catch up with 2019 production levels unlikely.

CASE STUDY 1 QUESTIONS
1.   Based on Extracts 1-3 in the case facts presented above, Recommend the monetary policy stance and decision that Lloyds Banking Group should take and Justify your recommendation with three (3) reasons found in Case study 1 above

Justification should include specific facts related to the case study!!!

2.   Based on Extract 4 above, Identify one reason for the expected contraction in the construction sector and two reasons for expected contraction in the Uranium sector

Answer 1

1) The monetary policy that Lloyd banking group should adopt is expansionary monetary policy. The tools that should be used in this policy are lowering reserve requirements by the banks and lowering of the rate of interest. This will lead to increase in the supply of money in the economy resulting in growth in level of employment, output.

The reasons for taking up such a policy are:

• To resume economic activities and reach projected expansion level of global output at 5.8%, increase in money supply is needed. (Extract 1)
• Rise in household debt has increased which has led to unproductive instalment credit. This has reduced consumption expenditure. With increase in supply of money, there will be more investments, more employment and increase in consumption expenditure. (Extract 3)
• There has been rise in trade deficit because of increase in imports which are mostly financed by instalment credit. Increase in money supply, reduction of interest rate will lead to more investment and production in home country. This will lead to reduction in import. (Extract 3).

2) The construction sector is expected to contract by 16.3% in 2020. One of the reasons of this contraction is travel restrictions because of COVID-19. The restrictions on travel has led in the delaying of some major construction projects which were expected to commence in 2020.

There is contraction expected in the Uranium sector also by around 22.4% in 2020. The reasons responsible for this contraction are mostly

• insufficient supply of water
• Constant low prices of uranium along with reduction in long term supply contracts.