Managing an Economy in Dilemma

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Faced with rising inflation and contracting economic growth, 2016 is a year that policy makers and operators in Nigeria would not forget in a hurry, writes Obinna Chima

The Nigerian economy is in a dilemma in the sense that on one hand, it is officially in recession and at the same time, it is battling high inflation. In most other climes, inflation is very low when the country is in recession and with that it is always very easy to deal with.
This is because, faced with such a situation, the simple thing textbook economics tells us is for the nation to spend its way out of the recession. Here, spending is increased so as stimulate consumer demand by pushing out a lot of money.

However, in a situation where the country is faced with a high inflation environment, then there is a problem. The economy is boxed into a corner. If you fix inflation, you may be worsening recession. If you fix recession, you may also be worsening inflation. So, this is a unique problem that requires a unique solution.

This is exactly the situation the Nigerian economy is suffering in 2016. The contraction in the country’s Gross Domestic Product (GDP) in the first three quarters of 2016 as well as the steady rise in the Consumer Price Index (CPI), which is used to gauge inflation, clearly manifested in the activities of firms and households in the country as consumer confidence deteriorated. The slow budget implementation also impacted economic activities negatively.

With these, consumer Confidence in Nigeria decreased to -28.20 in the third quarter of 2016 from -24.20 in the second quarter of 2016. Consumer Confidence in Nigeria averaged -8.57 from 2008 until 2016, reaching an all time high of 6.38 in the first quarter of 2011 and a record low of -28.20 in the third quarter of 2016.

Also, the country’s unemployment rate rose further to 13.9 per cent in the third quarter of the year (Q3 2016) compared to 13.3 per cent in the previous quarter, according to the NBS. Unemployment rate was recorded at 12.1 per cent in Q1; 10.4 per cent in Q4 2015 and 9.9 per cent in Q3 2015. The NBS also revealed that a total of 27.12 million persons in the Nigerian labour force were either unemployed or underemployed compared to 26.06million in Q2 and 24.5 million in Q1 2016.

GDP Contraction
For instance, the third quarter real GDP growth data released by the National Bureau of Statistics (NBS) had shown that the country sank deeper into recession, contracting by 2.26 per cent from -2.06 per cent in the second quarter of this year, and -0.36 per cent in the first quarter. This represented a 0.18 per cent drop from the growth recorded in the preceding quarter and lower by 5.08 per cent relative to the corresponding quarter in 2015. The contraction in GDP was largely driven by the militancy in the Niger Delta, which resulted in a drop in oil output during the third quarter to 1.63 million barrels per day (mbpd) and the oil sector’s contribution to GDP, notwithstanding the rebound recorded in the agriculture sector. Nigeria depends on oil exports for 90 per cent of its foreign exchange earnings, reflecting the impact of a depressed oil sector on the economy.
The latest GDP growth data further confirmed the level of weakness in the economy, which has been hobbled by rising unemployment and job losses, declining capacity utilisation, and acute foreign exchange shortage.

Inflation
The inflationary pressure was strong in 2016. In fact, inflation in 2016 rose far above the upper boundary that was set by the central bank. From 9.62 per cent in January, the CPI climbed to 11.38 per cent February, 12.77 per cent in March and 13.77 per cent in April. Furthermore, it jumped to 15.58 per cent in May, 16.48 per cent in June, 17.13 per cent in July and 17.61 per cent in August. In addition, the CPI edged higher to 17.85 in September, 18.33 per cent in October and 18.48 per cent in November. In all, the CPI rose by 92 per cent in 2016.

Interest Rate
The Monetary Policy Committee (MPC) met a total of six times this year. At January MPC, the benchmark monetary policy rate (MPR) was left at 11 per cent and the committee met against the backdrop of challenging external conditions and downside risks in the domestic economic environment. It, however, raised the MPR to 12 per cent in March and also retained it at same level in its May meeting. However, at its July meeting, the MPC raised the MPR to 14 per cent and left it unchanged till the end of the year.

Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele pointed out that although interest rate remains a veritable tool for curtailing inflation, with inflation at 18.3 per cent; “the CBN would be abjectly failing on one of its cardinal objectives if it cuts interest rates at this time.”

According to him, although he remains a strong believer in low interest rates, discussions around low interest should be based on facts, rather than politics or emotions.

“For those who say we need a rate cut to spur growth, we need to remind that high inflation is highly inimical to economic growth. Indeed, many empirical studies have estimated the threshold level at which inflation becomes significantly growth retarding to be 11 percent for developing countries.

“With ours at 18.3 per cent, one must question the judgment of cutting interest rates at this time. Finally, I think it is important to underscore that interest rates reflects not just the cost of capital but also the cost of doing business, and so we need to also look at interest rates from the perspective of the lender.

“Given that most banks have decided to individually provide security, power, and other infrastructure, it is not surprising that some of these costs are passed on to customers in the form of high interest rates. Notwithstanding these facts, we will continue to use moral suasion to encourage commercial banks to be more considerate in interest charges on customers,” the CBN governor said.

Naira and Exchange Rate Management
The naira exchange rate against the dollar depreciated severely in 2016 due to scarcity of the greenback as well as pressure from importers and investors for capital repatriation. For instance, on the parallel market, the naira dipped by 76 per cent to about N485 to the dollar as at December 25, 2016, compared with the N275 to the dollar it was as at December last year.

On the official FX market, the CBN during the year ditched its 16-month-old peg on the naira in June and introduced a flexible exchange rate regime to allow the currency to trade freely on the interbank market. It also introduced the Futures and Forwards FX markets. In addition to these, as the complaints of FX scarcity intensified, the CBN created an arrangement whereby special FX auction would be held periodically for the importation of critical raw materials by manufacturers as well as for the aviation sector.

Banking Sector Fragility
The situation in the economy also impacted the banking sector as non-performing loans increased to 11 per cent in 2016, from the five per cent threshold that was set by the central bank. The international rating agencies also reviewed downwards their ratings on Nigerian banks.

Also, the central bank, during the year, intervened in Skye Bank Plc, which raised concerns about the health of Nigerian banks. The CBN’s intervention at Skye Bank led to the removal of the bank’s chairman, its chief executive officer as well as some of its directors. The central bank had explained that it took the decision to intervene in the bank following the persistent failure of Skye Bank to meet minimum thresholds in critical prudential and adequacy ratios, which culminated in the bank’s permanent presence at the CBN lending window, its huge non-performing loans (NPLs) profile as well as its low liquidity ratio, the central bank in a proactive move effected a change in the board and management of the bank. But the central bank insisted that Nigerian banks remains strong.

Anchor Borrowers’ Programme
The central bank during the year intensified efforts on its Anchor Borrowers’ Programme (ABP). Launched in 2015, the initiative was an innovative way of improving access to finance for farmers and manufacturers. Presently, the CBN has committed over N23 billion to the project and is a aggressively extending it to states that have the potential to cultivate rice. The focus presently is on rice, with plans to take on other crops in 2017.
Emefiele said that emphasis was now placed on creating an enabling environment for a more diversified growth structure that is not dependent on the sale and production of one produce – crude oil. He said the initiative would also lead to job creation.

The ABP was designed to assist small scale farmers to increase the production and supply of feedstock to agro-processors. The programme is aimed at creating an ecosystem to link out-growers (small holder farmers) to local processors, increase banks’ financing to the agricultural sector enhance capacity utilisation of agricultural firms involved in the production of identified commodities and as well as the productivity and incomes of farmers. The anchor borrowers’ programme is also a platform to build capacity of banks in agricultural lending to farmers and entrepreneurs in the value chain, reduce commodity importation. It is also expected to reduce the level of poverty among small holder farmers and create jobs while assisting rural small-holder farmers to grow from subsistence to commercial production levels.

Way Forward
Looking at the way forward, a former Deputy Governor of the CBN, Mr. Tunde Lemo, urged the federal government to embark on medium to long term policy to diversify the economy.
“Another thing is that the government must work on productivity. When you make your economy a lot more productive, then people would come. All of that is also medium to long-term. But you and I have a responsibility today to moderate our importation. We should reduce our propensity to import. About four items gulped 56 per cent of our forex. Last year we spent 30 per cent of our forex importing refined products. That is self-inflicted,” Lemo stressed.

To the Chief Executive Officer, Graeme Blaque Group, a financial advisory firm, Mr. Zeal Akaraiwe, there is need for increased monetary and fiscal policy collaboration to get the economy out of recession.

“We have structural issues that we have not yet addressed and we are fighting the symptoms. Inflation that the central bank is fighting is a symptom and not the issue. The issue I have with hike in MPR is that it takes about six month for a monetary policy change to be felt in an economy.

“So, our economic team – the Minister for Trade and Investment, the Minister for Finance, the CBN Governor, the Vice President, the Head of Customs, all need to sit down and map out a strategy that they would all execute jointly. CBN alone cannot get us out of this problem,” Akaraiwe said.