Nigeria’s fragile economic recovery
There is an urgent need for the mitigation of any negative fallout in the global economic arena to sustain the exit from recession. This calls for prudent economic management and the harmonisation of monetary and fiscal policies.
The IMF in its report following the conclusion of its “2018 Article IV Consultations with Nigeria” the other day, appropriately called for positive actions by the authorities to enhance the sustenance of the economic recovery which it also described as very fragile.
Nonetheless, some positive things have happened in recent times suggesting a good outlook in the short to medium term. Oil production, of late, has been sustained at very high levels matching up very reasonably with targets set in the 2018 budget estimates.
It appears government has been able to address, to a reasonable extent, the rumblings in the Niger Delta region such that, contrary to fears in certain quarters, there have been minimal disruptions to oil production. Over the past one year militancy in the region have largely been curtailed.
Regarding markets for Nigeria’s crude, recent reports indicate that Indonesia is already negotiating to provide a large market for Nigeria’s crude in the face of dwindling demand from some of the traditional buyers.
In addition to that, the price of crude in the oil market has been surprisingly very favourable to the Nigerian economy.
As reported, the price of the OPEC basket of 14 crudes had stood at about $63 in March. This has had positive effects on the foreign exchange reserves such that it recorded a four-year high at about $44 billion in March 2018.
According to the Central Bank of Nigeria (CBN), if things continue this way, there is the likelihood of the reserves hitting the $60 billion mark by 2019.
This provides some measure of confidence in dealing with the international economy in trade and other financial transactions.
With reasonable dollar inflow of portfolio investments, some stability has been introduced into the foreign exchange market despite the periodic intervention of the CBN in enhancing supply in the market to maintain some price band.
Another positive development in this era of recovery is the falling posture of inflation since 2017. The inflation rate, which stood at about 18.72% by the National Bureau of Statistics (NBS) figures, in January 2017 is now recorded to be below 15% by the latest figures.
This has been accentuated by the tight monetary policy stance of the CBN which has kept the monetary policy rate at 14% for a very long time.
Infact the IMF and some other experts suggest that the restrictive monetary policy stance should be sustained until inflation gets to a single digit, where it was prior to the change of government in 2015. Some even advocate an increase in the MPR above 14% to increase the credit squeeze and thus facilitate the further fall of inflation.
Indeed, this has been a good time for investors in government securities with treasury bill rate rising as high as 18% in 2017, now moderated downwards with the implementation of a government policy to rebalance Nigeria’s debt portfolio with foreign debts incurred to retire some of the huge domestic debts. These are the good stories on the recovery of the economy.
On the downside, there have been concerns over the banking sector risks as highlighted by the IMF in their report. The fear of insolvency in some of the banks appears real.
The need for strict banking supervision and the enforcement of prudential requirements exist. Also, the non-oil sector has not experienced the kind of growth envisioned in the ERGP. Non-oil revenue, though relatively on the increase, is insufficient to address the negative consequences of the growing debt profile of the country.
From a Debt Management Office (DMO) statistics, the debt portfolio as at December 2017 stood at N21.73 trillion while the domestic debt component stood at N12.589 trillion in 2017.
There has been a rising trend in government borrowing since 2015. This does appear too reassuring given that about N1.6 trillion has been spent on debt servicing and the debt stock rose by N1.327 trillion between September and December 2017.
The debts have essentially been used for financing capital expenditure in the budgets to stimulate the economy. The worry really is not in the amount but in the projects on which they have been invested and if they are capable of leading to a repayment of the loan.
There appears to be no single signature projects of the Buhari administration to which these borrowings can be attributed. The claim by the Minister of Finance that over N2 trillion have been spent on capital projects therefore appears suspect.
Worrisome, however, is the persisting crisis in the pricing of petroleum products and the claims and counter-claims of the existence of subsidy. Is the N145 per litre price of premium motor spirit realistic or not? Is N171 the appropriate price as implied by the Minister of State for Petroleum?
The challenges to micro, small and medium-sized enterprises, in terms of high interest rates and the effect of this on their productive activities are enormous.
Though the tightening of the monetary policy stance helps to maintain macro-economic stability, it has the downside risk of stifling production at the micro level. This is compounded by persisting poor infrastructure and growing insecurity in the country.
From the foregoing, the seeming recovery of the Nigerian economy since last year has been driven largely by external factors – the increasing crude oil prices and relative peace in the Niger Delta region.
The recovery has not emanated from the government’s ERGP. The “holding forth” effort as well as the cleaning of fiscal indiscretions have been successfully managed by the conduct of monetary policy by the CBN. Hence a strengthening of the CBN is desirable.
In this fragile economic recovery, the CBN must be able to provide a platform for the efficient harmonisation of its policies with the fiscal authorities, to guide the economy to the path of sustained and stable growth.
Government also needs to enhance the business environment and scale up its drive on the ease of doing business in the country.
Also, in as much as enhanced tax revenue by government is worth the efforts, government should resist the urge to stifle local businesses through unnecessary taxes.
During the Monetary Policy Committee (MPC) bi-monthly meeting in the last quarter of last year, the CBN called for the “implementation of policies that will sustain Nigeria’s economic growth due to the fragile state of the growth”. That call rings true and relevant even today.
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