Alarm Bells Ringing for Nigeria’s Economy

The recent warning by the Central Bank of Nigeria (CBN) over a possible relapse of the economy into a recession should be a concern to the federal government, Obinna Chima and James Emejo write

Exactly a year after the country exited a biting economic recession, the alarm bells have started ringing again.

The warning of a possible relapse of the economy into recession was sounded last week by the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, same way he did prior to the last recession the economy suffered about two years ago.

More worrisome is the fact that the CBN Governor’s warning came exactly 24 hours before the United States Federal Reserve effectively reduced the Nigerian market’s attractiveness to offshore investors after widening its benchmark rate by another 25 basis points to between two to 2.25 per cent, would clearly worsen the country’s woes. To add to this, the Federal Reserve Chairman Jay Powell has given strong indications that the Fed was gearing up for another hike in December and would maintain its tight monetary policy till  2020.

In effect, carry trade in Nigeria would increasingly yield lower returns over the next two years, especially given the current subdued short-term domestic debt yields, analysts at CSL Stockbrokers Limited disclosed.

With this development, Nigeria will most likely see a decline in future net foreign inflows with external reserves likely to come under additional pressure.

Unfortunately, this came just as few days into the last quarter of the year, the federal government is yet to begin the implementation of the 2018 capital budget, a development that is already impacting the economy adversely. Clearly, politics has taken the centre stage as the 2019 elections draw closer with economic activities relegated to the background.

Indeed, the N9.12 trillion aggregate budget, which was passed by the National Assembly on May 26, and signed into law on June 20, 2018 by President Muhammadu Buhari, has a capital component of N2.8 trillion.

Over three months after presidential assent and about three months to the end of the year, the implementation of the capital budget has remained in abeyance. Fiscal policy lag has over the years contributed to the weakness in Nigeria’s economy.

THISDAY findings had revealed that failure to implement the capital vote might have nothing to do with paucity of funds.

This is just as CBN’s data showed that Nigeria’s total non-oil export earnings, at $480.56 million, fell by 13.1 per cent in August.

Indeed, Emefiele, who briefed journalists at the end of last week’s Monetary Policy Committee (MPC), warned that the country’s much-celebrated exit from recession last year, may be under a threat of relapse, considering the weak economic growth recorded by the country in the second quarter of 2018.

Also, of particular concern to the monetary authorities was the fact that efforts to curb inflation, stabilise exchange rate and grow the reserves, appeared to be under threat as evidenced by latest macro-economic fundamentals. 

Emefiele, precisely attributed the dismal performance of the economy partly to the continued delay the fiscal authorities to commit to the implementation of the 2018 budget to relieve the supply side growth constraints as well as address the flooding incidents, which has become perennial.

He, therefore called on the government to fast track the implementation of the 2018 budget to help jump-start the process of sustainable economic recovery, and to facilitate passage of the Petroleum Industry Bill in order to increase the contribution of the sector to overall GDP and to forestall further contraction of the economy as well as avoid a likely fall-back to a recession.

To the chief executive of Global Analytics Consulting Limited, Mr. Tope Fasua, the CBN’s red flag on the economy was “very serious.”

He added: “It’s a very serious alarm because central banks don’t do that often. By the time central banks make such statements I believe the horse has bolted from the ban.

“The statement is a   clear symptom of a broken economy.  I hope we aren’t in for another rough economic ride.”

To the Director General of the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, “If the government does not sit up, we would be in trouble. We just exited recession and it will be very bad for the economy to slip back into recession.”

To the Chief Executive of the Financial Derivatives Company Limited, Mr. Bismarck Rewane, “Policy makers in Nigeria will now have to sit up and do more work.”

Rewane added, “The US has increased interest rate by 25 basis points. Inflation in the US has come down, while inflation in Nigeria has gone up and interest rate in Nigeria remains the same.

“So, the difference between inflation and interest rate in Nigeria has increased in favour of the US. Therefore, what this means is that in the near future, the naira will come under pressure, relative to the US dollar.”

Also, Prof. Uche Uwaleke of the Nasarawa State University, Keffi, said it would be dangerous for the federal government not to heed the warning. 

According to him, the CBN warning can only be ignored at the economy’s peril. Nigeria has been through this road before.

“Only some months ago, soon after the recession by mid 2017, the economy appeared set to embark on a journey of sustained positive economic growth especially on the heels of oil price recovery. GDP growth rate headed north.

“External reserves grew and exchange rate stabilised. Inflation rate maintained a downward trend amidst a bullish stock market,” he added.

Uwaleke also stated, “As a matter of fact, the Nigerian stock market was rated among the top three in 2017. Today, the table is turning for the worse, GDP growth plunged from 2.11 per cent in Q4 2017 to 1.95 per cent in Q1 2018 and further down to 1.5 per cent in Q2 2018.

“Worse still, the agric sector, which recorded relatively high growth rates in previous years, including the period of recession was only able to grow by 1.19 per cent in Q2 2018. Headline inflation is now witnessing a spike after several months of disinflation with the food index accounting for much of the increase.

“The pressure on external reserves has resumed, following a drop from over $48 billion only a few months ago to less than $45 billion.

“This development threatens exchange rate stability. The stock market has been in the bearish territory for most part of the year. A lot of foreign investors have fled the country partly on account of the political tension and economic uncertainty fuelled by the non-implementation of the capital component of the 2018 budget.”

Uwaleke stressed that, “There are concerns that government borrowing is becoming unsustainable. Although debt to GDP ratio is still well below International threshold of 56 per cent, the high debt service to revenue ratio, a superior debt burden indicator, at over 60 per cent is choking out government expenditure on critical infrastructure.

“There is the need to prioritise the economy over politics at this time by paying closer attention to the Economic and Recovery Growth  Plan (ERGP), including through the vigorous implementation of the capital components of the 2018 budget. 

“Furthermore, the government should take advantage of the rising oil prices to build fiscal buffers. More effort should be put in place to ramp up oil production including sustained engagements with stakeholders in the Niger Delta region. 

“Also, threats to agricultural output from farmers/herders’ clashes and flooding should be addressed pro-actively.”