MARKET INDICATOR

By Obinna Chima

The first quarter of 2016 ended last week with little to cheer about the economy. Generally, the slowdown in economic activities due to the delayed passage of the 2016 appropriation bill into law as well as the persistent scarcity of foreign exchange saw investor confidence reduce drastically in the first three months of the year.

In fact, Nigeria’s inflationary pressure, which intensified in March, pushed all five parameters of the Sales Managers Index to a 12-month low. A new set of data released recently showed that Nigeria’s Business Confidence Index down for the seventh consecutive month as it reached the lowest level in a year. Businesses in the survey commented on poor consumer demand, rising unemployment, high inflation, lower oil prices and difficult exchange rate conditions.

The Market Growth Index measured by the report also showed fifth consecutive decline and the lowest since March 2015. The Product Sales Index fell first time in 12 months as managers point to general rise in prices charged for products and services. At the employment level in the first quarter of 2016, the staffing index fell below the 50.0 no-change mark for the first time, as companies comment on staff rationing as part of cost-cutting measures at lower level of employment.

Naira Volatility
Although in the first quarter of the year, the Central Bank of Nigeria (CBN) firmly held the official exchange rate at N197 to a dollar, the level of volatility recorded on the parallel market was unprecedented. The premium between the parallel market rate and the official market rate at the forex market, remained wide at an unacceptable margin. Following speculations that the CBN may soon exclude payments of school from its lists of items eligible for foreign exchange at the official market, panic buying of the greenback hit the parallel market.

Owing to this, the naira continued its downswing on the parallel market as it fell sharply to about N400 to a dollar, compared with the about N270 to a dollar it was at the beginning of the quarter.

The Bankers’ Committee had discussed ways of ensuring that the demand for foreign exchange for the purpose of paying school fees abroad, among others, does not crowd out real sector investments. The discussions also centered on how to redirect foreign exchange to the real sector, particularly industries that utilise raw materials. But some commentators viewed the deliberation by the committee as a signal that the central bank may soon be allocating forex to payment of school fees abroad.

Also, the central bank in the quarter cancelled the sale of dollars to Bureau De Change (BDC) operators in its bid to preserve the country’s decreasing external reserves.

Inflation
The Consumer Price Index (CPI), which measures inflation in Nigeria, rose sharply to 11.4 per cent in February, compared to 9.6 per cent the previous month, according to the National Bureau of Statistics (NBS). The latest figure saw inflation breach the CBN’s target band of between 6 – 9 per cent. The last time inflation hit double-digit in the country was in December 2012 at 12 per cent.
Also, in the first quarter, one of the biggest global rating agencies, Standards & Poor’s (S&P) revised the country’s sovereign credit outlook to negative, from the stable it was previously, just as the country’s total merchandise trade fell to N3.65 trillion in the fourth quarter of last year compared to N4.02 trillion in the previous quarter. S&P stated that Nigeria’s foreign exchange policy was creating dislocations in product and financial markets.

Monetary Policy
At the end of its January meeting, the MPC had maintained the benchmark Monetary Policy Rate (MPR), the Cash Reserve Requirement (CRR), and the liquidity ratio at 11 per cent, 20 per cent, and 30 per cent respectively. The MPC also maintained the asymmetric corridor at +200 basis points and -700basis points respectively. Nigeria’s external reserves stood at $27.864 billion as of last Thursday.

But at its March meeting, the MPC raised the MPR to 12 per cent from 11 per cent. It also increased bank’s CRR to 22.5 per cent from 20 per cent, in a move aimed at tightening liquidity, which the central bank blamed for the current pressure in the foreign exchange market with a strong pass-through to consumer prices. The MPC also kept liquidity ratio unchanged at 30 per cent, and further resolved to narrow the asymmetric corridor around the MPR from +200 and -700 basis points to +200 and -500 basis points respectively.

The CBN governor, Mr. Godwin Emefiele, said the decision to resume the tightening regime after a four-month break, followed the evaluation of both internal and external factors, explaining that the “balance of risks is tilted against price stability”.

IMF on Nigeria’s Economy
The International Monetary Fund (IMF) in the quarter also pointed out that the Nigerian economy is currently facing substantial challenges, saying lower oil prices have significantly affected the country’s fiscal and external accounts. The Fund stated this in the conclusion of its 2016 Article IV Consultation with Nigeria, by its Executive Board. The document was dated March 31. The IMF, however welcomed recent monetary policy tightening by the Central Bank of Nigeria (CBN), and recommended that the central bank targets price stability to maintain inflation within the target range.

Continuing, the IMF noted that while the non-oil sector accounts for 90 per cent of the country’s Gross Domestic Product (GDP), the oil sector plays a central role in the economy.

Furthermore, it pointed out that lower oil prices have significantly affected Nigeria’s fiscal and external accounts, decimating government revenues to just 7.8 per cent of GDP and resulting in the doubling of the general government deficit to about 3.7 per cent of GDP in 2015.

Delayed Appropriation Bill
After a three-month delay, the National Assembly in March passed the 2016 budget of N6.060 trillion, the first that will be implemented from scratch by the Muhammadu Buhari administration. The budget that was passed by the legislature had a reduction of N17 billion from the N6.077 trillion proposed by the executive.
Chairman of the Senate Committee on Appropriation, Senator Danjuma Goje, while presenting the budget report to the Senate, said never in the history of the National Assembly since 1999, has an annual budget witnessed more cuts as was the case with this year’s budget.

He blamed the budgetary cuts on the country’s economic challenges, explaining that cuts were made in recurrent spending, the budget deficit and borrowing plan.
While some senators expressed concern about the reduction in recurrent expenditure, saying it may affect the payment of salaries, Goje explained that provisions had been made under service wide votes to take care of the federal government’s wage bill.

But the president has said he would not sign the 2016 Appropriation Bill, passed into law by the National Assembly unless he critically reviewed it. The president said in view of the controversial alteration and padding of the budget proposals, he needed to review the document to be certain that its contents tallied with the authentic budget proposal presented to the National Assembly.