Recession likely, devalue naira now

By Rafiq Raji, PhD

It is no longer news that the Nigerian economy contracted by almost half of a percent in the first quarter of 2016 – my forecast for subscribers to my firm’s research service ( and Reuters was -0.7 percent. Some clueless individuals have tried putting the blame on Dr Yemi Kale, the head of Nigeria’s statistics bureau. Complete nonsense. Considering the delayed passage of the 2016 budget into law, foreign exchange restrictions and the policy uncertainties in tandem, the negative growth headline did not come as a surprise. In my column of 23 February 2016 – “Budgets have never been so crucial for South Africa and Nigeria” – I highlighted this possibility. Then I wrote: “Year-on-year economic growth in the first quarter of 2016 would likely be lacklustre – could be negative even – due to constrained economic activity in the quarter thus far.” I offered reasons why this could be the case in my column of 12 April 2016 (“Buhari needs to be pragmatic”): “These economic difficulties are due to bad policy choices by Nigeria’s current leader, Muhammadu Buhari. The scarcity of foreign exchange and fuel can be traced to his administration’s penchant for price control. The naira is depreciating in the parallel market because of speculation fueled by inappropriate pricing of the currency by the country’s central bank. Fuel is scarce because marketers stopped importing the commodity to avoid losses. With fuel subsidies stopped and foreign exchange needed to replenish supplies scarce, marketers have little incentive to fill the supply gap; especially as the regulated price provides meagre margins. Until a market-driven approach is adopted on all these fronts, the problems are likely to remain.” The quasi-deregulation of fuel pricing in May – owing admittedly by Vice-President Yemi Osinbajo to the scarcity of foreign exchange – is a vindication of these views.

A recession – two consecutive quarters of negative growth – is highly likely this year. A similarly higher base in Q2-2015 and tepid activity in Q2-2016 thus far is why. I actually now see the risks to my revised 2 percent growth forecast for 2016 – 4 percent earlier in the year when I was cautiously optimistic about the ability of the Buhari administration – significantly to the downside; the economy grew by 2.7 percent in 2015, even then a significant drop from 6.3 percent only a year earlier. Other challenges have arisen. Just as some progress was being made in tackling the terrorist group Boko Haram, Fulani herdsmen from the northern parts of the country (authorities initially alleged they were foreigners) began engaging in wanton killings of rural farmers in the south, residents of which are now contemplating arming themselves. With emoluments for former Niger Delta militants cut, there are renewed agitations in that part of the country as well; evident in increased oil and gas pipeline vandalization. Gas supply disruptions have cut power generation by about half sometimes – even at full capacity, power supply is inadequate in any case. President Buhari was slow to react, albeit he has since directed the armed forces to do the needful. Still, the deterioration in security is instructive. A strategic appraisal suggests the disruptions are likely sponsored, in view of presidential elections in 2019: President Buhari rose to power on the promise of improving the security situation.

Amid the foregoing, the monetary policy committee (MPC) of the Central Bank of Nigeria (CBN) meets on 23-24 May. Annual consumer inflation accelerated to 13.7 percent in April, effectively making the monetary policy rate of 12 percent – raised to this level by 100 basis points in March – negative in real terms. The most recent inflation data available at the committee’s meeting in March was for February: 11.4 percent. The pace of consumer inflation has since quickened: 12.8 percent in March. With likely continuing naira weakness – especially on currency devaluation expectations – and the authorities’ expansionary fiscal stance, inflation is likely to accelerate further. Thus, inflation expectations have risen significantly. As recession also looms, the committee faces a policy dilemma – not entirely, considering its hitherto accomodative stance (since July 2015) before tightening policy in March failed to stimulate the economy. Still, the MPC needs to tighten policy further. My view is that committee members may opt for a 100 basis point rate hike to 13 percent at this meeting – a 200 basis point increase is probably more appropriate. There are also indications the CBN would soon announce a new foreign exchange policy framework – likely in the committee’s press statement on 24 May. A two-tier system and a wider exchange rate band have been mooted. Restrictions on disruptive short-term portfolio inflows are also being considered it seems – one committee member suggests this at the meeting in March. More importantly, a robust foreign exchange policy framework would ease current uncertainties and provide some predictability. In tandem, there is a need for the CBN to devalue the naira further – by at least 25 percent to 250 naira in exchange for the U.S. dollar (currently about 200 naira) in the first instance. Vice-President Osinbajo – who is formally in charge of economic policy – has signalled this is likely soon. However, President Buhari – who has not hidden the fact that he really calls the shots – is yet to show concurrence publicly. There is speculation he may have acquiesced however, in light of the worring state of the country’s finances. In any case, there has never been a better time for the CBN to do the right thing. That is; devalue the naira as needed and tighten monetary policy as necessary to curb the initial but likely temporary jolt of inflation.

Also published in my BusinessDay Nigeria newspaper back-page column. See link viz.

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