• Friday, March 01, 2024
businessday logo

BusinessDay

Buhari faces race against time in reformation drive

Buhari-5

President Buhari is taking the right steps to address the longstanding foundational issues, and investors are pleased about it, but he is in a race against time.

Not only is the economy in bad shape, but the speed and volatility in the global economy could leave it in a worse state.

One fact that has remained elusive is that while there is need to zoom down and micro-manage the economy (especially given the atrocious scale of theft), Nigeria doesn’t exist in a vacuum.

There are several other moving parts of the global economic puzzle which affect Nigeria, and which have to be monitored.

Nigeria, as a frontier economy is vulnerable to external economic shocks

As a frontier economy, Nigeria is vulnerable to a host of external economic conditions.

It is vulnerable to international credit/investment flows and reversals, it is vulnerable to monetary policy and interest rate, changes in the advanced economies, and it is vulnerable to the global demand dynamics. Either of these factors could easily impact the economy.

Window of opportunity

Nigeria is in desperate need of capital inflows to revive both public and private investment, which in turn will trickle down to household wages and boost private consumption.

Right now, there is a window of opportunity to obtain the much-needed capital, as credit is still cheap. But it won’t stay cheap for too long because a September Fed rate hike is likely.

US Prime-lending rate is at 3.5%, while the US Fed rate is at 2.2%.

The Nigerian government currently borrows at a much more expensive 14% – 15% in the domestic market, allowing the banks make easy money without actually lending robustly to the real economy. While it can conveniently borrow at around 5% -6% from the foreign markets

Why is a Fed rate hike more likely to happen sooner than later

It turns out that the US economy has turned performed decently compared to other parts of the developed world, and there might be no more need for rock bottom rates.

The US’ labour market is literally on fire. Its economy added more jobs in 2014 than in any other year since 1999. Total jobs in its economy has now surpassed its 2007 peak.

It’s Quit Ratio, which signals increased worker choice and a tight labour market has grown to 1.5. This means that people have grown more confident about leaving their jobs. And fewer people are claiming unemployment insurance.

Consumer spending is also rising gradually, signalling that confidence has bounced off its crises levels. Americans’ collective disposable personal income has risen 3.4 percent from a year ago. Its Consumers’ debt service burden is also easing, owing to the rock bottom interest rates, leaving more room to increase consumption spending.

Buhari needs a few key ministers to keep watch on some of these external factors, and help pilot the economy accordingly. The most pressing seems to be a finance minister to come to CBN governor Emefiele’s aid.

Naming the cabinet has emerged as the most pressing issue in the eyes of foreign investors along with addressing the capital controls.

Funnily, tackling corruption doesn’t appear on foreign investors’ wish list because it naturally comes along with the Buhari package.

Private foreign investment will come in if the capital controls can be taken off and funds can flow more freely. Public investment spending can be spurred if the government borrows at the prevailing low rates in the international market, and thus, Nigeria’s economy will be stimulated.

Edozie Ifebi