Negative GDP Rate, Galloping Inflation Top Agenda as MPC Meets Tomorrow

Analysts differ on way forward

Kunle Aderinokun,
Obinna Chima in Lagos and James Emejo in Abuja

As the monetary policy committee of the Central Bank of Nigeria (CBN) meets tomorrow to deliberate on the issues affecting the economy, negative GDP growth rate and galloping inflation would top the agenda.

At this week’s meeting billed to hold on Monday May 23 and Tuesday May 24, the MPC would determine whether or not to change the Monetary Policy Rate (MPR), the benchmark interest rate, which was raised to 12 per cent from 11 per cent, and the Cash Reserve Ratio (CRR), which was raised to 22.5 per cent from 20 per cent at its last meeting. The meeting would also decide whether or not to tinker with the liquidity ratio, which was left unchanged at 30 per cent at its last meeting.

Last Friday, on a day it released an unemployment rate of 12.1 per cent in the first quarter of this year, an increase from 10.4 per cent of the previous quarter of 2015, the National Bureau of Statistics (NBS) announced a real Gross Domestic Product (GDP) growth rate of -0.36 per cent, in Q1 2016, which is an appalling drop from 2.11 per cent in Q4 2015. The Q1 growth rate was lower by 2.47 per cent from the growth recorded in the preceding quarter and further lower by 4.32 per cent from the rate recorded in the corresponding quarter of 2015.
Quarter on quarter, real GDP slowed by 13.71 per cent . The latest GDP growth rate, historically, a 12-year low, indicates Nigeria is on recessionary mode.

This is coming four days after NBS released the April inflation figures, which showed that the consumer price index rose further to 13.7 per cent in April from 12.8 per cent in March and 11.4 per cent in February. The bureau attributed the 0.9 per cent rise in the headline index to the lingering structural constraints which had continued to manifest in electricity rates and kerosene prices.
It emerged that the real growth of the oil sector, which contributes mainly to the economy, slowed by 1.89 per cent (year-on-year) in Q1 of 2016.

Oil production was lower relative to the corresponding quarter in 2015 by 0.07mbpd when output was recorded at 2.18mbpd . And t he oil sector contributed 10.29 per cent to total GDP in the review per cent higher than the share in Q4 of 2015 by 2.24 per cent but marginally lower than the contribution in the corresponding period of 2015.
Nigeria, in recent times, has been experiencing negative effect from activities of the resurgent Niger Delta militants, which has translated to a loss of 800,000 barrels of oil per day due to pipeline vandalism. In effect, crude oil production of 2.2 mbpd has declined to 1.4mbpd. This development poses threat to the budget, which is predicated on the 2.2 mbpd target, since the government is incurring huge loss in revenue accruing to the federation.
However, economic analysts and observers are divergent in their views on the current development, what should be outcome of the MPC meeting and the way forward for the economy.

Analysts at Eczellon Capital Ltd, led by its chief executive officer, Diekola Onaolapo, posited that, “the dismal GDP and Job reports coupled with the current high inflation levels (13.7 per cent) clearly show that the government’s economic policies are not effective and require an urgent review to avoid further plunge in economic activities.”
Nevertheless, they added, “the Q1 GDP has 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 & Financial services) are still very inherent.”

The analysts noted that, “the continued contractions in the nation’s manufacturing and financial services sectors indicate that the current faulty FX structure in the country 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.”
According to them, “the spill-over effect of this is the primary driver for the rising rate of unemployment in the country.”
Thus, the Eczellon analysts urged that, “as the Monetary Policy Committee of the CBN commences its meeting on Monday, it is imperative that the committee takes a decisive stance to alter the nation’s current FX policy to allow for flexibility in the pricing of the naira”

This, according to them, “ should go a long way in addressing the uncertainty currently bedeviling the nation’s economy as well as attract the much needed inflows to support the nation’s economic growth. Likewise, it would complement the newly-introduced price regime in the downstream petroleum sector and aid the government in achieving the objectives of its 2016 expansionary programmes.”
Specifically, the analysts stated that, “we envisage that the committee’s members may vote to tighten monetary policy further via a 100 basis points increase in MPR as well upward adjustment to the CRR (Cash Reserve Ratio). This will of course raise questions as to the appropriateness of such a decision in a period of waning economic growth.”
Speaking along the same line with the Eczellon Capital analysts, Managing Director, Financial Derivatives Company Ltd, Bismark Rewane, who stressed the need for increased stimulus to reflate the economy, called for a review of the country’s forex policy in order to encourage foreign direct investments.

He said the latest GDP growth rate was a confirmation that the country’s policy prescriptions were suspect.
Bismarck, who said stimulus programmes should be implemented with urgency, pointed out that the delay in signing the budget and the activities of the militants in the Niger Delta also contributed to the poor GDP figures recorded in the first quarter of the year.
He said the amount of stimulus required to reset the economy would be profound.

“So, basically in the first quarter of this year, we had no budget, we had no spending, meanwhile we blocked leakages. Although we sterilized cash, we did not jumpstart the economy with spending. On the other hand, we had no exchange rate policy.
“So, the consequence of all of these put together and the complete evaporation of international investors from the market, affected the economy in the first quarter of 2016. More than anything else, the vandalism of pipelines all came together to create the storm. So, we had negative growth in the first quarter and there is the possibility of another negative growth in the second quarter except something dramatic happens.

“Which means officially we would be in recession. If that is the case, the amount of stimulus required and the policy management would have to be much more profound for us to get the desired effect,” he added.
He however acknowledged that with policies such as the removal of fuel subsidy and the path to downstream deregulation, the economy was on the right path, just as he maintained that Nigeria needs to adopt a flexible exchange rate policy.
” These are inevitable and if not done, it would be catastrophic and damaging to the economy. This is crunch time as far as I am concerned for Nigeria,” he added.

Also, an Associate Professor of Finance and Head, Banking & Finance, Department, Nasarawa State University, Keffi, Dr. Uche Uwaleke, said the government needed to vigorously implement the capital budget to help the economy rebound and avoid a recession.
Uwaleke added: “What it clearly shows is that economic recession is already around the corner with successive slump in GDP growth rate. This development is largely on account of energy and forex shortages which have led to persistent drop in the Purchasing Managers Index (PMI) as well as capacity utilization of firms.

“The consequence has been massive job losses and high unemployment rate. Worse still, inflation rate is at an all-time high at 13.7 per cent. The quick fix is to vigorously implement capital budget especially in the area of infrastructure as well as other social welfare schemes in order to reflate the economy.”
The professor advised the CBN to ease monetary policy and not to devalue the naira at this time. According to him, “doing otherwise will plunge the economy into further recession.”

For the Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, “rather than the blanket increase in interest rate which affects all sectors equally, I will suggest a reduction in the benchmark interest rate while the MPC should use targeted money supply mechanism to inflate the sectors that need liquidity while mopping up liquidity from sectors where it is excessive.”
On exchange rate, Ademola noted that, “the CBN in early February 2015 announced the closure of the official market which was then selling USD at N168/$ and the use of the interbank market which was between N197 and N200 to a Dollar. However, the scarcity of FX brought about by the sustained low oil price and low external reserves led the CBN to arrange with Exploration and Production (E&P) oil and gas companies to sell their green backs to downstream oil marketers for fuel importation.”
Nevertheless, Ademola pointed out that, “the recent announcement by the Minister of State for Petroleum of an exchange rate of N285 for the green back transactions suggest either the creation of another FX market or a devaluation of the interbank market from N198 to N285.”

“I will expect a clearer picture on this at the MPC meeting and my expectation is the announcement of an official devaluation of the Naira,” he added.
However, Ademola’s view differs from that of Managing Director, Global Analytics Derivatives Ltd, Tope Fasua, who said: “I would expect the MPC to maintain their monetary policy stance for now, because we are in a tight situation. Inflation seems to be running away, but increasing the MPR further will hurt the real sector and make the government even more unpopular. More stress for the real sector leads to further retrenchments and a ratcheting of unemployment indices.”

According to him, “The inflation we are seeing is imported because of our entrenched dependence on imported goods, and the concomitant increase in cost of production. The MPC will do well not to help the inflation to grow further. Yet they cannot begin to reduce the MPR and ease up CRR for now, because more liquidity in the system will have the same inflationary effect. I would rather they stay their hands and observe further. Frequent policy changes can be detrimental to planning.”

Expressing the same view with Fasua, Managing Director, Dunn Loren Merrifield Asset Management Ltd, Tola Odukoya, noted that, “in view of the various developments that have contributed to weaken monetary indices thus far, I believe the monetary authorities will be inclined to take decisions that will reverse – or at least, impede – the rate of inflation from going into the mid-to-upper teens.”
“Therefore, the CRR may be increased depending on the desired objective of the committee,” he added.
But, the Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, stressed the need for the right mix of policies to save the economy.

“It is difficult for us to escape recession because the end of the second quarter is next month and it looks like we are even going to see a worse growth in the second quarter because we have seen economic variables all declining.
“We have seen high level of unemployment, we have seen strike action, disruption in oil production, worse in power supply, and others. So, we are moving into a recession. But we need to adopt the right policies at this time,” he added.

On his part, a Senior Lecturer at the Department of Economics, Pan-Atlantic University, Dr. Bongo Adi, calls for a proactive approach to policy implementation. According to him, delays in taking policy decisions also have its consequences on the economy.
“One of the stabilisation policies they have done is the removal of subsidy on petrol that the government has already done. That means that the government would have some money to spend on capital expenditure. But other pressure mounting on government like the blowing up of pipelines by militants in the Niger Delta. Oil production is at an all-time low and that remains a challenge for us all,” he said.