Nigeria: Economy is slowly but surely recovering

By Rafiq Raji, PhD

My forecasts suppose the economy could record positive growth in Q3-2017 but almost certainly in Q4. There are those who are more optimistic, however, supposing that this could be as early as Q2. After my earlier optimism about a recession exit as early as Q1, I am taking a much more cautious view this time around. My revised forecasts take into consideration the historical trendline growth of the economy during its good and bad times. The midline scenario puts the economy on a positive growth trajectory only as early as Q3. If this happens earlier, I would be pleasantly surprised. But of course, even as the economy would likely exit recession this year, technically, that is, the positive effects on peoples’ wallets would probably take longer to manifest. When businessess start investing again, they typically make new hires which then translate into greater consumption and so on. They already are: recent business expectations (-1.5 in Q2 from -27.7 in Q1) and purchasing managers’ index (52.9 in June from 52.5 in May) data published by the CBN point to a recovery.

FX liberalization is only immunization against crude oil price volatility
Central bank governor Godwin Emefiele has been receiving plaudits lately. With the exchange rate stabilizing, some of his fervent critics have been on the record wondering if he were not right with his unorthodox policies after all. I do not share this view. Had crude oil prices remained tepid – and they largely still are, the Central Bank of Nigeria (CBN) would not have had the confidence to allow for a separate so-called investors’ and exporters’ (I&E) FX window. Besides, the increased FX trades, about $4.2 billion thus far, recorded via the window is a vindication of earlier views that a fully liberalized market would not only give foreign portfolio investors confidence in the market but also relieve the CBN’s foreign exchange reserves. Bear in mind that a sustained bullish trend in the crude oil markets remains doubtful. In addition to Nigeria and Libya, which are exempt from OPEC production cuts, increasing their output more than envisaged, other members of the cartel, Saudi Arabia for instance, have also recorded above-target production. So the increased FX trades in the I&E window are not so much about portfolio managers counting on oil prices to rise as they are hoping the CBN would keep its word this time about ensuring investors would be able to bring and exit their funds at will. At a market-determined rate.

Rate cut would not be data-dependent
In light of the recent rate cut surprise by the South African central bank, some economists are already hedging their bets about the CBN’s July monetary policy meeting. They now wonder if the CBN might not similarly succumb to political pressure to cut rates. Unlike in the South African case, however, a CBN rate cut would not be data-dependent. Yes, annual consumer inflation has been slowing, lately to 16.1 percent in June from 16.3 percent in May. Were base effects not a significant factor, the downward trend may not have been so smooth. This is because month-on-month inflation has not been similarly sober, averaging at 1.5 percent since the beginning of the year. That said, there are some economists who have long held the view that monetary policy easing would be required to lift the economy out of the doldrums.

But why is inflation still so high? Food inflation is a dominant reason why. And it is not entirely a hard currency story, albeit that continues to be a significant factor. The 2016 cereal harvest, which was completed in January 2017, was above-average, up 5 percent to 22.6 million tonnes. So, supply is not short. Farmers are increasingly finding it more lucrative to export their produce, however, even for crops which are yet not in ample supply. Take the recently launched yam exports initiative of the government, for instance, even though there is currently a 20 million metric tonne supply-demand gap. Prices would almost certainly rise consequently. Never mind that the same mistake being made with crude oil and the other primary goods is being made here. What the authorities should desire to export should not be raw yam tubers but processed yam products. We should earn more of the value here instead of subsidizing it for another market only to import the more expensive processed good afterwards. Food prices have also remained high because of our exploitative business culture: a price increase is usually sustained artificially longer than necessary. That is, when market conditions change, traders are not similarly swift in reducing prices.

Truth is, if the CBN desires that inflation remain sustainably on a downward trend, it must resist the temptation to cut rates just yet. Easier policy by the CBN would not only accelerate inflation, it may just like before not translate into lower commercial bank loan rates. The CBN is probably mindful of the recent outreach by the Nigerian Senate over high interest rates. In a rebuttal, the argument was made about how perhaps the first point of call should be government securities, which but for that with a 3-month tenor, currently yield on average at least the inflation rate. The authorities are not being generous for the sake of it. They have no choice. It is the barest minimum they must pay to compensate for price risk. And the fiscal authorities need the money. Commercial bank loans which must compensate additionally for default and tenor risk must be priced higher. Banks also have to add some of the unique costs they bear due to the difficult operating conditions in the country, where they pay for myriad things that ordinarily should be provided by the government. Power supply, for instance. A rate cut would be ineffective at this time.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz.

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