MPC has slim room to maneuver as economy nears recession

…Fuel/ FX crises to hurt Q2 GDP

…Unemployment rate jumps to 12.1%

 …Manufacturing slumps 7%

 Members of Nigeria’s Monetary Policy Committee (MPC), who begin a two day meeting today will have to respond to the reality of an economy contracting and possibly sliding into recession, largely as a result of foreign exchange (FX) policies the committee has endorsed in the past year.

Africa’s largest economy unexpectedly contracted by o.36 percent year-on-year in the first quarter of 2016, the first time since 2004, data from the National Bureau of Statistics (NBS) showed on Friday.

Combined with inflation at six year highs of 13.7 percent in April, an unemployment rate of 12.1 percent in the first quarter (Q1) of 2016, fuel shortages that crimped growth and a manufacturing sector where growth collapsed by 7 percent, the MPC will have little room to maneuver in its decision expected tomorrow.

” Indeed it is a tight one. The MPC now has to contend with fighting off an economy from slipping into recession in an inflationary environment,” Abiodun Keripe, head of research at Elixir Investment Partners Limited, said in response to BusinessDay questions.

“The big challenge is that the inflation is not being driven by a rise in demand but rather a leap in costs and prices from subsidy extinction and FX cost. The quick fix to my mind is for the MPC committee to sort out issues around FX illiquidity and pricing. This will directly filter through into correcting the inflationary pressure and indirectly boost demand and business activities.”

Some analysts say Nigeria cannot escape a recession  defined as two consecutive quarters of negative growth.

The country’s economic problems have been compounded by capital controls imposed by regulators and a lack of policy direction by the new government which inhibited the flow of foreign investment.

“It is extremely important for the MPC to address FX problems if we don’t want the economy to slump irreparably,” said Oluwatosin Ojo, Head of Research at investment firm Cardinal Stone Partners, in response to BusinessDay questions.

“The decision of the MPC to raise rate in January to combat inflation was imprudent because rising inflation was due to exchange rate pass-through. Therefore, we believe the fact that we may actually be in a recession is enough wake-up call on the exchange rate policy, which if addressed can help revive growth.”

Talks about possible currency adjustment at this week’s MPC meeting has been rife since Vice President Yemi Osinbanjo hinted so a few weeks back at a conference.

Nigerian President Muhammadu Buhari, placed foreign exchange restriction on 41 items, a policy that resulted in capital flight, crimped production output and led to the naira dropping to a record low on the alternative market.

The manufacturing sector which declined 7 percent has been particularly hit hard from a lack of access to FX to import raw materials.

 “We have one more month to evade a recession, and that’s just not going to happen. Let’s not fool ourselves,” Bismarck Rewane, chief executive officer of Lagos-based consultancy Financial Derivatives Co., said.

“We’ve had strikes, petrol queues, and disruption of oil production, all showing we’re headed to another negative quarter.”

The GDP report showed that the oil Sector real GDP contracted by 1.89 percent year on year (YoY) (Q4’15: -8.28% YoY and Q1’15: -8.15% YoY).

Non-oil Sector real GDP also contracted by 0.18 percent YoY (Q4’15: 3.14% YoY and Q1’15: 5.59% YoY) with major sub-sectors including Agriculture growing by 3.09 percent YoY (Q4’15: 3.48% YoY and Q1’15: 4.70% YoY) and Manufacturing contracting by -7.0 percent YoY (Q4’15: 0.38% YoY and Q1’15: -0.70% YoY).

“This is effectively the price we have to pay for delayed actions on budget passage and subsidy removal,” said Taiwo Oyedele, a partner and head of tax and regulatory services, at consulting firm PriceWaterHouseCoopers (PWC).

A separate report released by the NBS showed that Nigeria’s unemployment rate rose to 12.1 percent in the first quarter of 2016 from 10.4 percent in the previous three months.

President Buhari last month signed Nigeria’s N6.1 trillion ($30.6 billion) 2016 budget into law ,up 20 percent from the 2015 levels, as the nation looks to spend its way out of the economic slowdown.

Government intends to spend more than N200 billion on road construction, representing a 1001 percent increase  from last year’s N18 billion.

“Technically there is no recession unless we see two consecutive quarters of negative growth. This is not yet the case, and with some momentum from passage of the budget hopefully Nigeria can avert a recession,” said Razia Khan, Africa chief economist at Standard Chartered Bank.

Analyst say problems emanating from the FX policy of government may have started playing out in other sectors of the economy and policy makers must take urgent steps to resuscitate business activities.

“The CBN must shift focus away from managing inflation and elevate the position of real growth in the next MPC meeting,” Ayo Teriba, chief executive officer of Economic Associates Ltd., an advisory firm, said in a phone interview with Businessday.