Reversing trend in faltering economic numbers

Nigeria’s faltering economic indices, which reached a new high in May, with inflation and first quarter 2016 Gross Domestic Product’s data tending towards recession, have stoked reactions from market analysts and operators.

The two reports, released almost simultaneously, which also coincided with the Monetary Policy Committee (MPC) meeting- the forum of the policy making arm of the Central Bank of Nigeria (CBN), raised new speculations over where the “pendulum” will swing to.For stakeholders, the coincidences are opportunities for urgent review of economic policies to avoid further plunge into economic crisis.

Meanwhile, ahead of the of MPC decision, the Nigerian equities market on Monday, opened in the red and for the first time in five weeks, as profit taking thrived, following the impressive gains that were recorded in the previous week. Consequently, the All Share Index slid 0.4 per cent to settle at 27,015.97 points. In the same vein, market capitalisation plummeted by N34.7 billion to N9.3 trillion.

The major drags to market performance were basically from the financial institutions, as activity levels waned, pushing volume and value down by 43.4 per cent and 46.8 per cent to 316.5 million units and N1.9 billion respectively.

The Associate Research at Eczellon Capital, said the dismal GDP and employment reports coupled with the current high inflation levels at 13.7 per cent, clearly show that the government’s economic policies are not effective, hence require an urgent attention, which the ongoing MPC meeting might offer the first leap.

He expressed concern that the first quarter GDP may have set the tone for the nation to enter into an economic recession by the end of the first half of the year, as the weaknesses in the non‐oil sector- manufacturing and financial services are still very inherent.

For him, the continued contractions in the nation’s non-oil sector indicate that indicate that the current foreign exchange is faulty and continues to weaken economic activities, which is forcing more manufacturers to shut down factories as well as limit the ability of financial institutions to expand credit in the economy.

As the MPC commences its meeting it is imperative that it takes a decisive stance to alter the current foreign exchange policy to allow for flexibility in the pricing of the Naira. This would go along way in addressing the uncertainty currently bedeviling the economy, as well as attract the much-needed inflows to support growth,” he said.

For those with extreme pessimism on Nigeria’s future, the country will grow by 1.8 per cent year-over-year and headed into a full-blown economic crisis.

Of course, Nigeria continues to battle numerous challenging economic fronts- the main being lower oil prices and the management of the little foreign exchange reserves, which many analysts, particularly, the foreign ones, have more or less branded a failure.

“This is very bad news for Nigeria’s government, which has justified the current foreign exchange system as a method of promoting non-oil industries. It is now clear that these policies have — as we’d long argued — made a bad situation worse,” said John Ashbourne of the Capital Economics’ Africa.

Already, the weak economic growth number has been attributed to a 5.77 per cent fall in the performance of the non-oil sector, which effectively puts its real growth rate at negative -0.18 per cent; ‐7.0 per cent; financial services‐11.3; and real estate services -4.7 per cent.

The oil sector on the other hand, expanded by ‐1.89 percent, which is an improvement compared ‐8.28 percent and 8.15 per cent recorded in the fourth quarter of 2015 and first quarter of 2015 respectively. However, the positive development came surprising, given the record low oil prices at the beginning of the year coupled with marginal decline in the nation’s oil production to 2.11 million barrels per day from 2.16 million barrels per day in the last quarter of 2015.

It is noteworthy that the MPC, in its March meeting, which followed the twin-challenge of increase in inflation to 11.4 per cent and a marked slowdown in the pace of economic expansion to 2.11 per cent in the fourth quarter of 2015‐ the lowest in   16 years, the MPC opted to combat inflationary pressures by raising MPR by 100 basis points from   11 per cent to 12 per cent.

It also raised Cash Reserve Requirement by 250 basis points from 20 per cent to 22.5 per cent, while retaining Liquidity Ratio at   30 per cent and voted to narrow the asymmetric corridor from  +2 per cent and ‐7 per cent to  +2 per cent and  -5 per cent.

Since   the   March   meeting, the   economy   has   continued   to   face   tremendous   macroeconomic   headwinds, with pace of economic growth in the first quarter of 2016 falling by -0.4 per cent from the 2.11 per cent and 3.96 per cent recorded   in   fourth quarter of 2015   and   first quarter of   2015.

Following   the   jump   by   12.8 per cent in   the   March   reading, headline   inflation   index   continued   its   northwards   movement   for   the   third  consecutive  month to advance  by 13.7 per cent in the month of April, signaling Nigeria’s worst inflation reading since August 2010.

The upward  advancement  in  general  price  levels  by 90  basis  points   were   driven   by   marked   increase   in   both   food   and   core   sub-­‐index   which   increased   by 13.2 per cent and  13.4 per cent respectively, compared to 12.74 per cent and 12.17 per cent recorded in March.

These developments were largely driven by the worsening fuel scarcity which has had crippling   effects on business operations and transport costs across the country, the foreign exchange   situation, which continues to negatively impact costs of imported goods as well as near absence of a   virile fiscal policy blueprint required to stimulate growth.