Economic outlook from Emefiele’s positive lens
The curtain falls, in a matter of weeks, on one of the most turbulent years the global economy has experienced in recent decades.
While some economies have long adjusted to the COVID-19 pandemic, many could not model the Russia-Ukraine conflict as a risk factor in their outlook analysis until towards the middle of the second quarter when the crisis degenerated into a full-blown war.
At best, a few countries could only adapt to the reality of the unexpected supply chain disruption and heightened energy crisis while many, especially in Africa, have had to pay a costly price for the shocks.
From Europe to America and Asia to Africa, households have had to bear the brunt of the harsh cost of living crisis that has left many people poorer than they were at the turn of the year. From the United Kingdom to the United States, the consumer price index (CPI) has seen the fastest growth in over four decades.
In the face of global efforts to ease the food and energy price crisis, projections by leading development organisations highlight possible more downside risks. The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, at the weekend when he spoke at the Bankers’ Night, also pointed to an “increasingly bleak” global economic outlook.
“The short-term outlook of the global economy is increasingly bleak as the lingering effects of the pandemic-induced supply chain disruptions and economic fragmentation are worsened by the uncertainties triggered by the eruption of the Russian-Ukraine war. Accordingly, the IMF projects that more than a third of the global economies will suffer a recession within the next two years, especially as the US, EU and Chinese economies stagnate. In emerging markets, growth forecasts have been revised downward for China, India, Mexico, Turkey, and South Africa reflecting country-specific factors, uncertainties in the financial conditions, and rising spillover effects of global geopolitical tensions.
“As external conditions flounder, inflationary pressure is expected to worsen and become more persistent in many economies. The rate in key advanced economies is projected to remain historically elevated at double-digit levels up to 2023q3 at the earliest. As such, tight monetary conditions will remain prevalent over the short-term, straining financial markets in many EMDEs and exacerbating the underlying vulnerabilities,” Emefiele told bankers who gathered in Lagos.
But the CBN boss was rather more optimistic about the local economy and pointed to what he called a good short-term outlook. The optimism, according to him, is based in findings from extensive simulations conducted by the apex bank.
First, the governor highlighted the prospect of non-oil performance as a major factor that would shape the economy, arguing that the GDP growth rate is projected to remain positive in the remaining quarter of 2022 and during 2023.
“The performance of the non-oil sector will be buoyed by the continued efforts at entrenching indigenous productivity in high-impact real sector activities, especially agriculture, MSMEs, and manufacturing. Domestic aggregate demand is further expected to be bolstered by the anticipated budgetary outlay and the surge of electioneering spending in the next few months. From 3.54 per cent in quarter two of 2022, growth is projected to reach 3.7 per cent in quarter three and 3.47 by the fourth quarter,” he stated.
Emefiele was concerned that inflation expectations are rising as existing structural rigidities are compounded by global factors and elections-associated liquidity upsurge.
For the rest of the year and towards mid-2023, he said: “Nigeria’s rate of inflation is projected to remain elevated and above the 12.5 per cent growth-aiding threshold.” He, however, disclosed that the bank’s in-house model-based simulations suggest that the inflation rate could fall steadily to less than 15 per cent by end of 2023.
Of exchange rate, he noted: “Though the CBN has so far managed to maintain exchange rate stability, the current capital flow reversals from emerging markets are expected to continue to exert considerable pressure on market rates. This pressure could be amplified by the forthcoming elections, especially as the political marketplace heats up. Notwithstanding these pressures, the CBN is determined to maintain its stable exchange policy stance over the next few months through innovative policy measures to manage the demand and supply of foreign exchange.”
He also looks forward to a strengthened balance of payment, especially with the fast-growing non-oil export receipts and efforts to reverse the poor performance of the oil sector. The sector has buckled under theft, which has reached a worrisome level in the past year. It is expected that the government would double down efforts to combat the scourge in the coming months to increase earnings from the oil sector.
Indeed, the non-oil sector is becoming the golden goose. But the Central Bank has effectively commenced tapering its development funding amidst aggressive monetary tightening, which has taken the benchmark interest rate to 16.5 per cent, the highest in recent history. These may have an overreaching impact on the vibrancy of the non-oil sector and possibly weaken its outputs and job-creation capacity.
But the governor promised that the monetary framework would remain supportive of the real sector including agriculture within the context of its price stability objective.
“The monetary policy will remain focused on the objectives of price, monetary and exchange rate stability. Our policy stance will, accordingly, remain tight to curtail inflation pressure, regulate capital flows and buoy the naira-dollar exchange rate. Monetary policy decisions will remain balanced, judicious, research-driven, adequate and supportive of the real economy, subject to underlying fundamentals,” he revealed.
Nigeria’s interest rate is at an all-time high in recent times. But with the rise of the hawks across the globe, Nigeria stands between the jaw of a shark and a lion’s claw. Earlier in the year, the International Monetary Fund (IMF) and the World Bank raised the alarm that the emerging markets could see a massive outflow of capital to developed economies if they do not respond appropriately to the hawkish move by the Federal Reserve System and other leading central banks.
This year, the Fed has raised its benchmark by 3.75 per cent, cumulatively. A policy option to rate increase means more devastating inflation, a higher exchange rate crisis and an increase in capital outlook. The options before the monetary authority have been that of two equally deadly poisons but Emefiele has insisted that the economy would not survive uncontrolled inflation hence the aggressive interest hike to restore short-term stability while the bank works with the fiscal authority to fix the supply side rigidities.
As the head of the monetary authority, Emefiele is not expected to cast doubt on the prospect of the economy. But whether one agrees with his position is a matter of perspective and interpretation of the economic indicators. In terms of direction and magnitude, the first measure of economic performance (GDP) looks bright.
Last quarter, the output recorded 2.25 per cent growth, the first time in six quarters that economic growth would lag behind the average population growth. The growth was also about 1.3 percentage points less than 3.54 per cent growth recorded in the second quarter.
For the first time in the life of the administration, the economy has grown steadily for eight consecutive quarters. The IMF had projected the country’s economy to expand by 3.2 per cent this year and slow down to three per cent next year as against the 3.4 per cent it finished last year. Interestingly, the recent growth leans more on the non-oil sector even as crude production falters.
Last quarter, for instance, oil production output fell to 1.2 million barrels per day (mbpd), from an average of 1.43 mbpd recorded in the previous quarter. Oil production shot up from 1.56 to 1.72 mbpd in the first quarter of last year. Since then, the production level has been on a ‘reducing balance’.
Inadvertently, Nigeria could be on a path to building the inclusive growth it deserves. But the recent flooding, which swept away 332,327 hectares of land, is a blight on the growth prospect. Already, growth in the agricultural sector came behind the average performance last quarter.
The sector recorded 1.34 per cent (year-on-year), an increase of 0.12 per cent points from the corresponding period of 2021, and an increase of 0.14 per cent points from the preceding quarter, when growth was 1.2 per cent. For a sector that contributes 29.67 per cent to the overall real GDP and creates about 35 per cent of employment, according to the International Labour Organisation (ILO) modelling, this speed of growth is obviously short of what is required to drive inclusive growth.
Perhaps, the country’s Multidimensional Poverty Index (MPI) 2022 gives a snapshot of the support gap in the agriculture sector. Of the 133 million or sixty-three per cent of Nigerians that are multidimensionally poor, 72 per cent live in rural areas where farming is an economic mainstay.
Over the years, the condition of rural communities has been identified as a cause and effect of the low incentives given to agriculture and the recent may have even increased the complexity of finding solutions to the challenges confronting the rural areas, where about 80 per cent of the country’s citizens live. Shouldn’t this be modelled into the growth plan in the coming year?