Tag Archives: Economics

Europe could do more for Africa

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

It is a little annoying that this year’s African Union (AU) – European Union (EU) summit (29-30 November), the fifth now, has been overshadowed by recent revelations by CNN – an American news organisation much reviled by President Donald Trump – of black Africans being enslaved in Libya on their way to Europe illegally. Europe’s concerns about increasing illegal migration from African countries, often at great peril – for those who choose to make the journey, that is – would ordinarily have been the focal point at the summit regardless. European governments have committed to helping with evacuating the victims and prosecuting the culprits. Of course, it is not unlikely that the most secret bit of their ruminations wonders if the ugly phenomenon may not finally be the deterrent they so desperately seek to stop the rising illegal immigration rate of Africans to Europe. European governments have been at their wits’ end trying to stop the uncontrollable flow hitherto. Of course, the bad press that comes with many that die on the journey across the sea is not necessarily helpful. And it speaks to the motivation of the travellers if despite the dangers of the journey, more continue to embark on it. Even so, EU countries have become more stringent, as their citizens increasingly worry about losing jobs to migrants who do not mind lower pay; albeit their eyes are typically set on better skilled fellow Europeans. Upon arrival on the shores of Europe, often that of Italy, and after being rescued, the few that “made it” amongst the multitude at the beginning of the perilous journey back home, are sent to camps where they would sometimes stay for months or years. In the past, they could transition from these camps to what they eventually find to be a less than ideal “dream life” in Europe. Lately, sterner restrictions have increasingly made even this less likely: more are repartriated home these days. But these are the lucky ones. They are alive and have a chance to rebuild their lives. That said, the proportion of Africans that make this dangerous journeys pale in comparison to the many, youths mostly, who stay behind and try to make a meaning of their lives. Themed “Investing in the youth for a sustainable future”, it is this latter group that the 5th AU-EU Summit in Abidjan focuses on.

Faith and works
So at least, European governments know what the problem is. 60 percent of Africa’s 1.3 billion population is aged below 25 years. That is 761 million people. One estimate put the number of young Africans entering the labour market annually at about 10 million. Of these, only about 30 percent secure wage employment. The other 70 percent? We know some seek greener pastures abroad, for sure; and clearly in not so salubrious ways for most. Crucially, the majority are idle, thus posing a security risk not only to their countries, the African continent, but abroad as well. Trying to resolve the problem is at the core of the joint Africa-EU strategy. The advocacy here is that what has been done thus far, laudable though they are, could be much more. The European Union is quick to tout its 7-year €30 billion official development aid to 2020, for instance. It is a drop in the ocean. Compare with this: Africa needs at least $90 billion annually over at least a decade to plug its infrastructure deficit alone. There is a consensus, at least, that aid is not the solution. Better trade, could be, though. In this regard, the EU could be more forthcoming. Its Economic Partnership Agreements (EPAs) with African countries are controversial. Some African countries have reservations about them; Nigeria for instance. And there are quite a few amongst the ones that signed them which did so grudgingly. One issue is usually about the potential loss of revenue that African governments would suffer from allowing reciprocal tariff-free European access to African markets. To be fair, there has been some accommodation by the EU to compensate for this. The problem is that it pales in comparison to the potential loss. The great matter is how the EPAs in their current form might stymie Africa’s industrialization. Of course, it could be argued that automation and the so-called fourth industrial revolution are greater and more imminent threats. Even so, Europe should back its good faith with more action.

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Diversified Nigerian economy still about oil

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Last week, I was part of a brilliant panel at the 2017 Bonds, Loans and Sukuk Nigeria Briefing event in Lagos that discussed the Nigerian economic outlook for the coming year. With the economy largely looking upward, the panel was naturally upbeat about the future; no doubt helped by the release of better than expected Q3 GDP data just about 30 minutes earlier. The forecasts one had just before the data release had to be momentarily revised upwards, for instance. Above 1 percent GDP growth rate for 2017 is beginning to look feasible certainly; from earlier projections of below 1 percent. More importantly, earlier estimates of about 2 percent for 2018 seem somewhat conservative now. With planned ramped-up public spending, because of the political cycle no less, expected lower inflation and interest rates, likely appreciation of the naira on the back of likely high for longer crude oil prices, 3 percent GDP growth next year would not be farfetched at all. One veteran company board guru in attendance agreed as much in private.

What if
Amid this optimism, however, an experienced foreign portfolio manager rightly asked a so-called disconfirming question. What if oil prices go south again? Of course, recent events suggest that scenario is not likely for another year, at least. But if one were to learn from history, sometimes all it takes for things to go awry can be no more than a single event. For example, if anyone said previously that Russia would be crucial to solving the Syrian and North Korean crises and indeed be germane to whether the oil producers’ cartel OPEC (which meets on 30 November) would be able to sustain the efficacy of its production cuts, you would have been sceptical. But that is exactly the case now. No one could have envisaged the radical anti-corruption move by Crown Prince Mohammed bin Salman (MBS) of Saudi Arabia or that his power would be formalized so quickly, for instance. Incidentally, the Saudi royal’s youthful exuberance is already becoming writ large: while the Yemeni war is still ongoing and the cold shoulder towards Qatar persists, MBS virtually held hostage the head of government of a sovereign country; and with the benefit of hindsight clearly forced him to read out a resignation letter that was intended to instigate a conflict with Iran. Otherwise there is no other explanation for why Lebanese prime minister Saad Hariri would, following summons from the Saudis, quit office in Riyadh on supposed intelligence of plans to assassinate him and then suddenly change his mind after what is believed to be an internationally brokered “release” from their watchful eye. (Upon returning to Beirut, Mr Hariri announced he would not be leaving office after all.) And since then, MBS has been unrelenting in his acerbic rhetoric towards the Iranian leadership. At this rate, it is beginning to seem like the bad blood between the Arabs and Persians might be a better trick for keeping the price of crude oil above $50 than any coordinated production cuts could ever do; albeit the Saudi and Iranian oil ministers have been largely speaking with one voice on an expected extension of the period for the production cuts. Besides, both countries need oil prices to remain high.

Political tune dictates
So what was my reply to the portfolio manager I referred to earlier? The problem with the Nigerian economy has never been about its structure. An economy that is 90 percent non-oil is not any sense of the word a mono-economy. It has always been the policy response. Unlike the popular perception, there is not so much a fixation on the exchange rate by foreign portfolio investors as there is on the crude oil price: they know to fly to safety the moment it seems like it would sustainably be below $50. Without saying so explicitly, what he really meant to ask about was the likelihood of capital controls if oil prices tanked again. And my view is that irrespective of the very nice commentary coming from the lips of officials at the central bank about the many lessons they have learnt during this most recent foreign exchange crisis, if another one comes about in the coming year, they would likely respond in a similar or worse fashion. Why? Electioneering ahead of the 2019 elections has begun in earnest. So, we are already in a political cycle. Within such a context, does anyone really think the Central Bank of Nigeria (CBN) would simply hands off if crude oil prices go back to the $30-$40 area? Bear in mind that even at the current above-$50 price levels, the CBN is believed to still participate actively in the buoyant investors’ and exporters’ (I&E) FX window; albeit on both the demand and supply sides. Thus, should crude oil prices fall again, I doubt very much the CBN would behave any differently; especially under a government that is keen on a second term and is led by a president that is very sensitive to the level of the exchange rate. To be fair, it would not be because the CBN does not know the right thing to do. And its officials were definitely not dumb in the past. They simply did not have the political space to do the smart thing. In the coming year, that space would become even smaller.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/diversified-nigerian-economy-still-oil/

African central banks to close year cautiously

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Over the course of this business week (starts 20 November), central banks of the largest regional economies on the African continent would decide on interest rates. They are likely to keep them unchanged. Even as inflation has been slowing gradually in Nigeria, it remains high. And it is primarily driven by food inflation. Improved agricultural production on the back of a good harvest is expected to moderate prices over time. Besides the authorities are currently marketing a Eurobond that could be as much as $5.5 billion if everything goes well. It is not likely the Central Bank of Nigeria (CBN) would like to be seen making decisions other than ones that are data-dependent. In any case, CBN governor Godwin Emefiele has signalled the benchmark rate would stay pat at 14 percent for the remainder of 2017, with potential cuts next year when inflation would have slowed considerably.

For South Africa, the rand went into a tailspin lately, rising above the psychological 14.0 level for much of the past two weeks, as rumours persist about the desire of the Jacob Zuma-led government to make higher education free, amid well-known financial constraints. With a pliable finance minister at the helm, it is also now widely believed President Zuma has successfully ‘captured’ the Treasury. So even, as annual consumer inflation likely slowed to 4.8 percent in October, from 5.1 percent earlier, it may accelerate in November and December on the back of rand weakness and volatility. The headline would probably be no more than 5 percent by year-end, though; within the 3-6 percent inflation target band of the South African Reserve Bank (SARB). Over a 12-18 month horizon, consumer inflation would probably slow to 3-4 percent, however. Under different circumstances, this could justify a rate cut. However, the November monetary policy committee (MPC) meeting, the last this year and one just weeks before a tense leadership contest in the ruling African National Congress (ANC) party, require the SARB to exercise the utmost restraint. And even as the SARB pretends not to be perturbed by market moves, it does pay attention to the inflationary impact of rand weakness and volatility; and indeed the political noise that tends to be the trigger lately. A balanced outcome would thus be for the benchamark rate to remain unchanged at 6.75 percent.

And for Kenya, ongoing troubles related to a controversial presidential election rerun boycotted by the opposition, mean the Central Bank of Kenya (CBK) would need to continue exercising caution. It has shown much dexterity throughout the impasse thus far, though, as the shilling has remained largely stable. And inflation has been slowing; came out at 5.7 percent in October from 7.1 percent in the prior month. More importantly, inflation expectations suggest the headline would likely come out much lower in coming months; about 4.5 percent in December, say, and plausibly less than zero percent in Q2-2018 due to base effects. Even so, it would be better if it kept its benchmark rate unchanged at 10 percent at this meeting with a view to easing policy when the political situation improves.

Politics, politics, politics
The elective conference of South Africa’s ruling ANC party in December is on everyone’s minds. Mr Zuma’s rhetoric about the preferred candidate by the business community has not been comforting. The president has all but mentioned his deputy, Cyril Ramaphosa, in name when making accusations about the presence of western-backed traitors in the ANC. Judging from his countenance and body language, Mr Zuma is likely to do everything in his power to block Mr Ramaphosa from replacing him. Turns out, though, Mr Ramaphosa is leading in support from the party’s branches, whose delegates to the conference would elect the next party president. Many reckon if Mr Ramaphosa wins, he would move swiftly against Mr Zuma in a bid to replace him as head of state much sooner. Should his rival and Mr Zuma’s ex-wife, Nkosazana Dlamini-Zuma win, however, it is highly probable Mr Zuma would retain his position till it expires in 2019. To further this goal, it is believed Mr Zuma might fire Mr Ramaphosa as deputy president in the coming weeks. Ironically, this could actually boost Mr Ramaphosa’s chances.

In the Nigerian case, all indications suggest President Muhammadu Buhari would be seeking a second term in office; after ill-health hitherto increasingly made it unlikely he would do so. His recent activities point to a full campaign mode. He visited the southeastern part of the country recently; albeit to campaign for his party’s candidate at elections in one of the states there. But that only provided cover for his visit; he seemed reluctant to embrace the region hitherto. He and his aides vehemently deny this, of course. His defence rings hollow in the face of his actions, however. His inner circle is very exclusive. A recently announced ambitious N8.6 trillion budget for next year also has political coloration. Put simply, the political cycle is in full steam. There are thus risks of fiscal slippages as the administration rushes to show it has been doing well. Recently announced plans to appoint more ministers are not necessarily borne out of a desire for efficiency as they are about dishing out patronage. Such behaviour tends to cascade down to lower levels of government, with negative effects for the fiscus.

Leading opposition figure in Kenya, Raila Odinga, who recently returned from an American trip amidst police-induced chaos, has been leading the charge for secession in the western and coastal areas. Political motivations inform the recent ratcheting up of tensions in this regard. Besides, Mr Odinga is advocating the estalishment of a Peoples’ Assembly via a proclamation of parliament, where the ruling Jubilee party, which is averse to the proposal, has a majority. Continued protests and tight security measures have been stifling business activities and would definitely weigh on economic growth in the fourth quarter of this year. A ruling by the Supreme Court on 20 November on petitions about the conduct of the presidential election rerun could either ease or heighten tensions. In the past, the outcome would have been expectedly one that would not cause much disruptions. After a bold landmark ruling cancelling the first poll in August, the court’s judgement could go either way. With such political dynamics about in these key African countries, it makes sense for their central banks to be on guard.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/african-central-banks-close-year-cautiously/

2018 budget should be passed before year end

By Rafiq Raji, PhD

Muhammadu Buhari, the Nigerian president, presents his 2018 budget statement to the legislature on 7 November. He reportedly wanted to do it in late October; to allow ample time for the spending proposals to be considered and passed by December. Some lawmakers have expressed reservations about this. BusinessDay, the newspaper which publishes this column, found out why. There are at least three executive proposals currently under consideration by the lawmakers. First is the 2018-2020 Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP). Second is a N135.6 billion virement proposal. And third, a US$5.5 billion foreign borrowing request. My view is that the lawmakers can get them all done on or before 31 December. And they should. Considering how much they get paid, it would not be too much to ask that they go into overdrive, consider and pass them all before heading for their Christmas break.

More spending
In the MTEF, the 2018 spending estimate is put at N8.6 trillion, up by about 16 percent relative to the 2017 budget of N7.4 trillion. Oil production is assumed at 2.3 million barrels per day (mbpd), which would probably be no more than 1.8 mbpd if a likely OPEC production cap in November is sanctioned. But even this level of production may be weighed on by imminent militant attacks on oil and gas infrastructure by agitators in the Niger Delta region. Additional tax measures are planned. A 15 percent tax on luxury goods from 5 percent currently, for instance. An ongoing tax amnesty programme till March 2018 should also boost the government’s finances. Tax revenue performance this year has been quite impressive, with respect to VAT at least; N797.5 billion was realised between January and October 2017, up about 20 percent from the same period last year.

Better narrative
It is not news that the 2017 budget was only partially implemented; never mind shortfalls here and there even for the parts that were. As the authorities likely plan to issue a US$5.5 billion eurobond imminently, it would help a great deal if investors are able to see how things are beginning to indeed change for the better. There have been some positive developments lately. The World Bank recently affirmed the authorities’ ease of doing business reforms are working, raising Nigeria’s ranking 24 places to 145th out of 190 countries. Central bank governor Godwin Emefiele was also recently conferred with an award by Forbes magazine. And in late October, Nigeria kept its place in the MSCI Frontier Markets Index (country weight of 8 percent); attributed to a rebound in the foreign exchange market. So, imagine how truly positive the Nigerian investment narrative would be if the authorities are able to also demonstrate they are succeeding with fiscal policy.

Good plan
Concerns have been raised about the supposedly planned US$5.5 billion eurobond, though. The country’s historical pains with indebtedness make Nigerians naturally wary. Public debt of N19.6 trillion (US$64.2 billion) in June, about 16 percent of 2016 GDP of US$405 billion, should ordinarily not be concerning. But electioneering for the 2019 polls has started in earnest. And President Buhari, hitherto thought might not be seeking a second term in light of his fragile health, recently signalled he has decided otherwise. So there is the risk that new borrowings might not be spent wisely. In response, finance minister Kemi Adeosun is taking pains to explain the rationale behind the plan. Of the US$5.5 billion they plan to borrow, US$3 billion would be used to refinance the authorities’ current debt portfolio. The remaining US$2.5 billion, which would be new borrowing, is intended to in part fill a hole in the 2017 budget; already appropriated for. It seems like a good plan, if you ask me.

Be bold
Feelers that came out initially were that the planned foreign borrowing would be done in two parts. I do not believe this to be wise. Interest rates are rising in the developed world, with the American Federal Reserve expected to hike rates again in December. And only last week, the Bank of England raised its benchmark rate by 25 basis points to 0.5 percent, the first time since 2007. What this portends for African sovereigns looking to issue eurobonds is that potential subscribers are going to insist on higher yields; albeit they would by far still not be as dear as those in their domestic debt markets.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/2018-budget-passed-year-end/

South Africa: Gigaba’s first test

By Rafiq Raji, PhD

Malusi Gigaba, the sometimes colourfully dapper – his unique wardrobe include suits with such ‘interesting’ colours like green and purple – South African finance minister, presents his first budget statement on 25 October. It is not the big one; that won’t be due until next year. But the mid-term budget would be a good first test of his 7-month stewardship thus far. Economists polled by Reuters put the likely revenue shortfall in the current fiscal year to be announced by Mr Gigaba at R40 billion (US$3 billion). (It could be up to R55 billion, some suggest.) I did not provide a shortfall forecast but the fiscal deficit projections I expect the finance minister to announce are as follows: 3.3 percent of GDP for the 2017/18 fiscal year, 3.1 percent for 2018/19, 2.8 percent for 2019/20 and 2.6 percent for 2020/21. Of course, if growth were to improve, they would be a little lower. However, there is not much to suggest that the needed structural reforms to spur growth would be implemented anytime soon.

Show me the money
Ahead of Mr Gigaba’s speech, several allegations have emerged he might be following a meticulous script written by his controversial principal, Jacob Zuma, the president of South Africa. Lately, he has made some moves that deserve commendation, though. Dudu Myeni, a Zuma acolyte and perhaps much more, would finally leave her post as chairperson of loss-making and highly indebted national airline, South African Airways (SAA), in early November. Even this supposedly laudable move is being viewed with suspicion. There have been suggestions that the R5 billion (US$374 million) that is needed by end-October to ensure SAA remains solvent could be funded from the coffers of the Public Investment Corporation (PIC), the manager of public workers’ retirement funds. Additionally, as much as US$7 billion in total might be drained from the PIC to sustain ailing state-owned enterprises (SOEs). These suggestions have been met with vehement opposition by labour unions and others. To allay such fears, Mr Gigaba has provided assurances that the PIC’s funds would not be put to such use and has ordered an investigation into alleged irregularities at the PIC. Such moves might still not be enough. Earlier, Julius Malema, the firebrand opposition Economic Freedom Fighters (EFF) party “commander-in-chief”, accused Mr Gigaba of being the architect of the now infamous phrase: “state capture”; which implies the domineering influence of a few private actors in collusion with public officials over state resources. Mr Malema analogizes the finance minister’s assurances to a rat saying one’s cheese is safe with it. Curiously, PIC chief, Daniel Matjila, who earlier asserted machinations were afoot to see his back at the investment firm because he won’t let go off “the keys to the big safe”, somehow got a clean bill of health from the PIC board in late September; after an internal audit about whether he allocated funds improperly. Interestingly, Mr Matjila now says he has not entirely ruled out providing some funds for SAA. But should public workers’ hard-earned pensions be used to revive something so intractably failing? Surely not.

Game of thrones
Hitherto loud political noise have recently become even louder, after President Zuma lost a court case that if he had won, would have enabled him escape his day in court for myriad corruption charges. Regardless of recent directives by the prosecution authorities that he make representations to them before end-November, it is not likely he would be prosecuted (if at all) before he secures a deal to leave office relatively unscathed (see my earlier column on 17 October 2017: “What next after Zuma fails to shake off corruption charges?” for broader views on this). More pertinent is that plans are likely at an advanced stage to remove Mr Ramaphosa as deputy president. The speculations have been fuelled even more by frantic denials from the president’s office. But in Mr Zuma’s case, when there have been speculations in the past, they tend to happen eventually; that is, even after many denials. Besides, a recent surprise cabinet reshuffle that saw the exit of Blade Nzimande, an ardent Zuma critic and leader of the South African Communist Party (one of the ruling African National Congress (ANC) tripartite alliance partners) suggests Mr Ramaphosa’s axing is only a matter of time. Turns out the wait may not be too long. Just this past weekend, reports emerged that Mr Ramaphosa might be arrested and charged with treason as early as November. The reason the president would want Mr Ramaphosa out of his government is not too difficult to discern. Should his deputy win the elective ANC presidential elections in December, Mr Zuma’s likely premature retirement may be very cold indeed.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/south-africa-gigabas-first-test/

Bank of Uganda should seize the day

By Rafiq Raji, PhD

Recent political developments in Uganda are sobering, but not surprising. Yoweri Museveni, the Ugandan president, is pushing through parliament, legislation that would allow him stay in power another 5 years, and perhaps for life. He has already been in power for 31 years. There are indications some citizens may no longer be passive about such autocratic tendencies: contentions about the controversial law seeking to remove age limits on contestants for the presidency caused a brawl during at least two recent sittings of the Ugandan legislature. Security operatives, allegedly from President Museveni’s special forces, were immediately deployed to eject the erring lawmakers. Of course, a downside is that instead of the security agencies putting more time to closing the many unsolved murder cases in the country, they are busy going after perceived enemies of the president. Never mind the bizarre mandate they recently added to their primary remit: policing indecent dressing and pornography. There could not be greater evidence of misplaced priorities. More likely is it, though, that the authorities seek to distract the populace from more pressing problems. Be that as it may, there have been some positive happenings on the back of having a relatively secure political leadership.

Bright future
The authorities recently agreed terms with a consortium to build a much desired crude oil refinery; after a number of failed talks with previously interested investors. Their persistence has clearly paid off, though. Because not only have they agreed what seem like quite good terms, the investors are of great standing. The consortium, which includes American industrial giant, General Electric, would build and operate the country’s first refinery, hopefully processing a greater part of the country’s recoverable oil reserves of 1.4-1.7 billion barrels; a feat that has largely eluded other African oil producers. So even as Mr Museveni’s longrunning rule deserves much criticism, it is highly unlikely the refinery feat would have been achieved if his position were not so secure. A fragile political leadership could have easily succumbed to pressure from global industry giants who harped about the weak economic case of the project. Earlier botched negotiations were with Russia’s RT Global Resources (which then put the project at about US$2.5 billion) and a subsequent one with South Korea’s SK Engineering. It is not all done yet, though. A project framework agreement is yet to be signed, but is expected to be endorsed soon. Better still, this new agreement involves regional neighbours, Kenya and Tanzania, which have committed to 2.5 percent and 8 percent stakes respectively. Additionally, construction has started on the US$3.5 billion joint crude oil pipeline with Tanzania, expected to be completed by 2020, about the same time first oil is expected. An ambitious Uganda now envisages membership of the oil producing countries’ cartel, OPEC, then. If all goes according to plan, growth could be in the high single-digits in just half a decade from now, when as the International Monetary Fund (IMF) estimates, the crude oil economy could account for at least 4 percent of output; albeit it is not likely to match pre-global financial crisis growth of above 10 percent. Growth would likely still be decent in the short to medium term, though, about 5.7 percent in 2018, the IMF reckons, from an estimated 5 percent in 2017.

Last chance
I made a call to my clients for an additional interest rate cut by the central bank in August, after one by a 100 basis points to 10 percent in June. The Bank of Uganda (BoU) thought otherwise and kept its benchmark rate unchanged. I am reiterating my call for at least a 100 basis point rate cut to 9 percent. With inflation slowing, and likely to slow further, I think the monetary policy committee (MPC) has a chance to ease policy at its October meeting; lest it misses the chance to do so for the remainder of the year. At 5.3 percent, annual consumer inflation was largely unchanged in September; only a basis point higher than the earlier month’s headline of 5.2 percent. But this was still great progress from a year-to-date high of 7.3 percent in May. That said, prices accelerated quite significantly on a monthly basis in September, by 1 percent, after barely 0.2 percent in August. The increased price pressure is likely fleeting, though. Monthly core inflation last month was just 0.1 percent, from zero percent earlier; pushing annual core inflation by about the same pace to 4.2 percent from 4.1 percent in August, well within the authorities’ 5 percent target. My forecasts put annual consumer inflation at about 4 percent by year-end. The committee should seize the day.

Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. http://www.businessdayonline.com/bank-uganda-seize-day/

Nigeria: Still delicate

By Rafiq Raji, PhD

The Nigerian economy exited recession in the second quarter of 2017 to much applause. Readers of my column would recall my earlier expectations of a positive recovery in the first quarter of 2017. When that did not happen, I took a more cautious view that a recession exit was likely in Q3 but almost certainly in Q4. Needless to say, I was pleasantly surprised that it finally happened in Q2. A particular client, I thought, would at least be already ahead of its competitors if they acted on my recommendation that the recession was going to be shortlived. But now that the economy is recovering, how sustainable is it likely to be? That would depend on a few things. Government policy for one. Agriculture proved to be resilient during the slump and yet despite stimulus efforts by the authorities in the sector, growth has been slowing. This must be a little frustrating for the Central Bank of Nigeria (CBN), which has been at the forefront of encouraging banks to lend to the agriculture sector. It may very well be that one is being a little hasty: there are indications the CBN is beginning to succeed. Recently, Stanbic IBTC Bank signed a 50 billion naira agreement with the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL), an agricultural credit guarantee scheme that used to be a unit within the CBN. Should the partnership succeed, more than 90 thousand jobs are expected to be created. And that is just one bank. Also, power generation has begun to improve, rising to about 7,000 mega watts (MW) lately; albeit only about 96 percent can be transmitted and just two-thirds reach consumers. In any case, it would likely remain a while before there is ample electricity to spur the type of industrialization needed to employ the country’s teeming jobless youths.

High food prices weighing on inflation 
Annual consumer inflation has been slowing; 16 percent in August from almost 19 percent in January, although the price index accelerated by the same monthly pace in both months. So, price pressures remain persistent. High food prices are majorly why, with food inflation – about 51 percent of the consumer price index (CPI) – at 20.3 percent in August from 17.8 percent in January. There are myriad reasons for this. Floods in the agricultural belt states of Kogi, Benue and environs mean this year’s harvest has likely been jeopardized. Incidentally, these are areas that have also been barraged by Fulani herdsmen attacks, leaving damaged crops in their wake. Continued insecurity in the northeastern parts of the country also means a significant portion of the farming community remains idle. Never mind that at least 5 million people in these parts are reportedly in need of food aid. Additionally, exporting food is now very lucrative. So what should ordinarily be sold in local markets are increasingly ferried to neighbouring countries and further abroad, where they can be sold at a premium. Some of the food inflation is imported, however, about 13 percent of the CPI. So, a still dear foreign exchange rate is also a factor. There is much to cheer about in this regard, though. Above US$50 crude oil and relative security in the oil-producing Niger Delta area means rising production volumes have been improving the authorities’ finances. These would likely be constrained still, as the authorities’ 2.2 million barrels per day (mbpd) target for 2017 now seems highly unlikely. Because even if that much could be produced, there are indications the oil exporting countries’ cartel the country belongs to would not allow output above 1.8 mbpd.

Burgeoning debt
There is growing concern about the government’s debt burden, rising to US$64.2 billion (16 percent of GDP) in June from US$63.8 billion two years earlier. Ordinarily, there should not be much worry at this relatively benign accumulation rate. But in the period, foreign debt has increased by almost half. And debt servicing is beginning to weigh overmuch on tax revenue, which the International Monetary Fund (IMF) put at more than two-thirds. Also, the authorities have not been as successful as they would have liked in securing foreign concesssionary debt. There are a couple of reasons for this. It held on to a costly fixed exchange rate regime for too long, haemorrhaging much valuable hard currency. Had the government been more prudent, floating the naira early on that is, it would not have needed to borrow as much. A populist political leadership also meant the CBN lost a great deal of its independence, to the dismay of investors and development partners. Consequently, multilateral financial institutions were relunctant to lend money while such a sub-optimal policy regime subsisted. There is reason to be optimistic now, though. A new FX market platform now allows foreign portfolio investors to trade at market-determined exchange rates. Hard currency inflows have surged consequently, with at least US$9 billion in volumes recorded in the first 6 months of the platform’s operations.

Do not rock the boat
The best the CBN can do at this time – its monetary policy committee would be deciding on interest rates on 26 September – is thus to maintain its current policy stance; one that has engendered naira stability and brought a new lease of life to the equity and fixed income markets. For those who desire that interest rates be lower (the monetary policy rate is currently 14 percent), the fundamental question remains whether they would buy government securities if yields were not high enough. When the authorities recently sought to test if they would, subscriptions were unsatisfctory. So, until market participants are willing to accept lower yields, it would not make sense for the CBN to start reducing interest rates. And that would not likely be the case until inflation is much lower, in the third quarter of 2018, say, when it is likely in the single-digits. Until then, the CBN would do well to do nothing.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/nigeria-still-delicate/