CBN warns Nigeria will fall back into recession unless…

Godwin Emefiele, Governor of the Central Bank of Nigeria (CBN), has warned that Nigerian is experiencing a fragile economic recovery and will fall back into recession, unless there is a bold monetary and fiscal policy to aid economic growth.

Emefiele stated that available forecasts of key macroeconomic indicators point to a fragile economic recovery in the second quarter (Q2) of the year, urging a fast tracking of reforms to boost growth.

Emefiele spoke at a news conference to mark the end of its 2-day Monetary Policy Committee (MPC), yesterday in Abuja.

“The Committee cautioned that this recovery could relapse in a more protracted recession, if strong and bold monetary and fiscal policies are not activated immediately, to sustain it. Thus, the expected fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries, all expected to drive the growth impetus for the rest of the year, must be pursued relentlessly,” Emefiele urged.

Nigeria, an OPEC member, which has Africa’s biggest economy, is in the second year of a recession, largely caused by low oil prices.

The country relies on crude oil sales for around two-thirds of government revenue and 95 percent of foreign currency earnings.

The CBN held its benchmark interest rate at 14 percent on Tuesday, for the sixth straight time since 2016, as Emefiele cited the need to allow gains of existing policies to fully trickle down.

“In consideration of the headwind confronting the domestic economy and the uncertainty in the global environment, the committee decided by a vote of six to two, to retain the MPR (monetary policy rate) at 14 percent,” said Emefiele.

The MPC voted to maintain the Cash Reserve Ratio (CRR) at 22.5 percent, the Liquidity Ratio unchanged at 30 percent and also the asymmetric corridor around the MPR at +200 and -500 basis points.

Razia Khan, Managing Director, Chief Economist, Africa, Global Research, at Standard Chartered Bank, London, said there was little surprise in the CBN decision to hold its policy rate at 14, and keep all other rates unchanged.

“What was noteworthy about today’s MPC statement? First, the rhetoric around the economic recovery has changed very subtly. It is no longer seen as something that might happen on autopilot. Risks to the 2017 recovery are seen to be more substantial,” Khan said, in an email note to BusinessDay.

“There are ongoing concerns about the weakness of financial intermediation. Fiscal stimulus is viewed by the MPC to be relatively untargeted. There are concerns about the scale of the FG deficit. Recovery will not be without its risks.”

Data from the National Bureau of Statistics (NBS) showed that the contraction in the economy moderated to 0.52 per cent in first quarter of 2017 from 1.30 per cent in fourth quarter of 2016. Fifteen economic activities recorded positive growth in the first quarter of 2017, showing strong signs of recovery. The Purchasing Managers Index (PMI) for manufacturing and non-manufacturing activities, stood at 52.9 and 54.2 index points in May and June 2017 respectively, from 52.7 and 52.5 index points in May 2017, indicating an expansion for the third consecutive month. Similarly, the Composite Index of Economic Activities (CIEA) rose from 55.85 to 59.50 index points between April and June 2017.

However, the positive data set is counterbalanced by money supply (M2) which contracted by 7.33 per cent in June 2017, annualised to a contraction of 14.66 per cent, in contrast to the provisional growth benchmark of 10.29 per cent expansion for 2017.

The development in M2 reflected a contraction of 7.45 per cent in net foreign assets (NFA) in June 2017.

Credit to the private sector, also declined relative to end-December 2016 by 0.02 per cent.

The MPC noted the widening fiscal deficit of N2.51 trillion in the first half (H1) of 2017 and the growing level of government indebtedness and expressed concern about the likely crowding out effect on private sector investment.

According to the MPC, constrained growth in the monetary aggregates provides evidence of weak financial intermediation in the banking system, arising from the constraints imposed by developments in the macro economy.

To have a sustainably low interest rate environment, government has to change its borrowing structure, according to Kayode Tinuoye, head of research at United Capital.

“Cutting rates at this time will reduce the cost of debt service, but it could also upstage modest stability in the FX market, spark a resurgence in inflation and trigger an exit of portfolio investors. Easing will also pull interest rates into negative territory, while holding will signal consistency and ensure FX stability,” Tinuoye said.

On the intervention made by the Nigerian Communications Commission (NCC) and CBN into the telecommunication network formerly known as Etisalat, now known as 9mobile, Emefiele said the company is on course to be sold with robust interest shown by foreign and local investors.

“Advisers have been appointed to midwife the process for major investors to intervene in the company and take it over. I am very gratified at the surge in interest by potential investors. This interest will be eventually made open, the advisers will advertise for request for proposal (RFP), everybody will go to the data room and conduct their due diligence and after that, the best person that presents himself will win.”

Etisalat increased its subscriber base in the month of June, its 4,000 staff continued to be employed and its revenue which seemed to be most tumultuous had remained at least N16 billion monthly, according to Emefiele.

Emefiele said the CBN is particularly concerned about high inflation at 16.1 Percent and also what it sees as “liquidity surfeit” in the banking sector.

Nigeria’s inflation slowed 0.15 percent points to 16.10 percent in June 2017, majorly helped by the CBN’s recent foreign policies which have so far created dollar liquidity and dampened the effect of imported prices.

This is the fifth consecutive decline in the rate of inflation since January this year.

Although inflation has decelerated, the MPC commentary still suggests that this might be substantially due to a base effect, which may not be long-lasting.

The MPC expects moderation in that base effect in August, but this may be offset by the positive impact of the harvest in third quarter of 2017, and some deceleration in food price inflation.

Emefiele explained there is also a convincing argument that an accommodative monetary policy will further pull real interest rate into the negative.

Twenty out of twenty-three economists polled by BusinessDay, predicted that the Central Bank would keep the main interest rate unchanged, while two voted for a rate cut and another for a hike.

“Our base case remains for Nigeria’s policy rate to be kept on hold at 14 percent, through to the end of 2017, even as year on year inflation decelerates further. This will be necessary in order to support the nascent NAFEX FX regime, especially with the pledge to cap Nigeria’s oil output at 1.8mn bpd,” said Khan of Standard Chartered.

 

PATRICK ATUANYA, HOPE MOSES ASHIKE & LOLADE AKINMURELE, Lagos, ONYINYE NWACHUKWU, Abuja