Uche Usim, Abuja
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), last week raised the red flag that the economy was treading precariously on the path to another recession.
The CBN Governor, Godwin Emefiele, who read the communique after the 263rd MPC meeting held in Abuja explained that the economy slowed to 1.95 per cent and 1.50 percent within the first and the second quarter of 2018 respectively.
He said the MPC identified rising inflation and pressure on the external reserves created by the intensified capital flow reversal, as amplified by the bearish trend in the equities market, even though the exchange rate remained very stable.
The MPC, he added, was also concerned over the potential impact of liquidity injection from the election related spending and increase in Federation Account Allocation Committee (FAAC) distribution, which was rising in tandem with increase in oil receipts.
He had earlier warned that the Federal Government’s spending pattern showed it was not ready to save for the rainy day. As a panacea, “the MPC called on the government to fast track implementation of the 2018 budget to help jump start the process to sustainable economy recovery and to facilitate passage of the Petroleum Industry Bill in order to increase contribution to the overall GDP”, Emefiele said.
For economic watchers, CBN’s warnings are not coming as a surprise considering that the issue of economic contractions, when juxtaposed against the nation’s N22.4 trillion debt stock and shrinking reserves, show clearly that Nigeria is in dire straits. Worse still, the passage and full implementation of annual budgets have constantly been immersed in the dirty waters of politics at the expense of the economy.
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Moreover, the National Bureau of Statistics (NBS) and the International Monetary Fund (IMF) have never minced words in explaining that the economy, though out of recession, still remained very frail and highly susceptible to cyclical shocks, if not urgently nursed to full recovery. They spotted poor growth in the non-oil-non-agricultural sector (representing about 65 per cent of the economy) as a challenge that needed to be tackled aggressively.
The IMF said difficulties in accessing financing and high inflation continued to weigh on companies’ performance and consumer demand, even though it recognised that government authorities had begun addressing macroeconomic imbalances and structural impediments through the implementation of policies underpinning the Economic Recovery and Growth Plan (ERGP).
Notwithstanding, some experts believe economic gaps like slow and insufficient investment in infrastructure, slow and weak capital injection, electricity shortages, insecurity challenges, poor economic diversification initiatives, slow passage and delay in budget passage and implementation, that landed the country in the pit of recession, are yet to be closed.
They have therefore argued that government, rather than focus on economic prosperity, seems to be completely carried away with politicking and totally fixated on oil receipts now selling at $80/barrel, amid a stable production climate.
They say the anticipated heavy spending of taxpayers’ money towards the 2019 elections remains injurious because it has no positive bearing on the economy.
Commenting on CBN’s warnings, a professor of the Capital Market and Head, Banking and Finance Department, Nassarawa State University, Prof Uche Uwaleke, said ignoring the apex bank’s red flag will be at the peril of the country’s economy.
He said: “We have been through this road before. The events leading to the recent economic recession about which the CBN also issued warnings should serve as a lesson for the government. “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. 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 percent in Q4 2017 to 1.95 percent in Q1 2018 and further down to 1.5 percent 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 percent in Q2 2018”.
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Uwaleke added that headline inflation was now witnessing a spike after several months of disinflation and with the food index accounting for much of the increase. He said the pressure on external reserves has resumed resulting to a drop from over $48 billion a few months ago to less than $45 billion currently.
“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. “There are concerns that government borrowing is becoming unsustainable even though the Debt Management Office has continued rationalise more borrowing. Although debt to GDP ratio is still well below International threshold of 56 percent, the high debt service to revenue ratio, a superior debt burden indicator, at over 60 percent is choking out government expenditure on critical infrastructure”, he added.
As a solution, Uwaleke advised the government to pay heed to the alarm being raised by the CBN and urgently prioritize the economy over politics at this time by paying closer attention to the ERGP.
“There should be vigorous implementation of the capital components of the 2018 budget. Furthermore, the government should take advantage of the rising oil price 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 proactively.
“Finally, it goes without saying that focus on external borrowings should be on concessional loans which must be tied to self-liquidating projects in critical sectors of the economy”, he said.
The Executive Chairman, Federal Inland Revenue Service (FIRS), Tunde Fowler, said the government was gradually weaning itself of over-independence on oil by focusing on non-oil revenue generating sources like taxes.
He said the Service has generated over N13 billion from Nigerian billionaires, even though it has not yet realised the $1 billion target from the Voluntary Asset Income Declaration Scheme (VAIDS).
He added that various revenue generating agencies were investing heavily in ICT to ensure they improve the money injected into government’s coffers for economic development.
In his submission, a Developmental Economist Mr. Odilim Enwagbara, urged the government to invest wisely to record the right harvests.
“Economic development is like sowing a seed and after months of taking care it, you harvest. Again, you expect more harvest if you have done so more than previous years. So, it is what we sow that we expect to harvest from. Without investing in the critical growth driving sectors of the economy, it will be impossible to expect sudden growth”, he said
Overall, experts have advised the fiscal and monetary authorities to close ranks and work hard towards giving Nigerians a better economy in 2018, to soothe them from the excruciating pains they have continually experienced since the coming of the Buhari administration.
Another economic analyst, Dr Ayo Teriba, at a forum in Lagos cautioned that Nigeria must strengthen its reserve buffers to insulate the economy from cyclical shocks that tend to adversely affect economic indicators and the well-being of Nigerians.
According to him, the nation’s fragile recovery from recession in 2017 was more cyclical than policy-driven. This means that the improved conditions of the international crude oil price (Over $60 per barrel at that time) and oil production (Over 2 million barrels per day), facilitated Nigeria’s current growth.
He expressed concern that with another scenario of a weak international crude oil price regime, the economy might still come under severe pressure due to the lack of sufficient reserves and buffers.
Teriba gave a comparison of Saudi Arabia which with reserves of over $400 billion was able to manage the shocks of the crude oil price decline from late 2014, while Nigeria struggled with the same experience because of a reserve of under $40 billion.
“Nigeria’s economy needs to live above cyclical swings in the global commodity market.” He advised that depressing commodity prices has thrown commodity based economies into a tailspin.
Teriba advocated a robust fiscal plan from the government to manage cyclical swings.
For his part, Rislanudeen Muhammad, former Managing Director of Unity Bank Plc, said MPC ‘s warning on imminent recession was valid especially when viewed against the backdrop that inflation that made a surprise northward trajectory to 11.23 per cent in August and GDP growth rate has slowed down to 1.5 per cent in Q2 against 1.95 per cent in Q1 2018 largely due to slow growth in oil sector due to reduced output.
“Agriculture traditionally having 20 per cent minimum of GDP, slowed down to 1.19 per cent in Q2 2018 against 3 per cent in Q1 2018 with threat of food inflation imminent unless issue of flooding and farmers/ herders crisis as well as flooding are dealt with expeditiously. Even with ERGP which is a very good initiative, most SMES are still not operating optimally due to exorbitant interest rate charged for loans.
“The decision by MPC to retain rates is not surprising. Stimulating the economy by fast tracking EGRP initiatives is imperative. The importance of creating an atmosphere for supporting the growth of real sector that will have an immediate impact on propelling growth and employment generation given the current elevated unemployment rate of 18.8 per cent and youths unemployment/ underemployment rate of 52.65 per cent according to National bureau of statistics data cannot be over emphasised”, he stated.
However, in the absence of new policies, analysts say the near-term outlook remains challenging. They listed the risks to the outlook to include possible lower oil prices, tighter external market conditions, heightened security issues and delayed policy responses.
They called for measures to contain vulnerabilities and achieve growth rates that could make a significant impact in reducing poverty and unemployment, which required a comprehensive set of policy measures.
On the fiscal front, the IMF welcomed the recent tax reforms aimed at improving tax administration, planned increases in excises, and latest steps taken to lower debt servicing costs and lengthen maturities.
“However, with oil prices expected to remain lower than in the past, upfront actions to mobilise non-oil revenues, including through reforming the VAT and removing exemptions, are needed while safeguarding priority expenditures, including scaling up social safety nets and infrastructure investment.
“Fiscal consolidation should be accompanied by a monetary policy stance that remains tight to further reduce inflation and anchor inflation expectations.
“Moving toward a unified and market-based exchange rate as soon as possible while continuing to strengthen external buffers would be necessary to increase confidence and reduce potential risks from capital flow reversals”, it said.
There are also grave concerns over Nigeria’s debt stock that increased by 3% from the N21.68 trillion recorded in December 2017 to N22.4 trillion ($73.21 billion) at the end of June 2018, as many fear the nation was being boxed into a debt trap.
However, the Director General of the Debt Management Office, Patience Oniha has repeatedly assured Nigerians that was really no cause for agitation because the Nigerian government accesses capital from several sources – multilaterals, such as the World Bank and the African Development Bank, as well as, Bilateral loans from various countries such as France (through the Agence Francaise de Development -AFD), Germany (KfW), Japan (Japan International Cooperation Agency – JICA), India (India Development Bank) and China (China Export-Import Bank – EXIM) for its external borrowings.
“The public should be assured that Nigeria’s public debt is being managed under statutory provisions and international best practice, and there is no risk of default on any loan, including the Chinese loans. Thus, the possibility of a takeover of assets by a lender does not exist. For the avoidance of doubt, the government’s borrowing in the domestic and external markets, including Chinese loans are all backed by the full faith and credit of the government, rather than a pledge of the government’s assets.
“These loans from multilateral and bilateral lenders are typically used to finance specific capital projects across the country. The International Capital Market is another source of capital.
“One of the reasons why Nigeria would raise capital from multilateral and bilateral sources is because they are concessional, which means that they are cheaper in terms of costs, and more convenient to service because they are usually of long tenors with grace periods. Prudent management of the public debt implies that, the government should avail itself of the opportunity to access concessional loans which deliver twin benefits of being more cost efficient and supporting infrastructural development.
“Loans from concessional lenders have limits in terms of the amounts that they can provide to each country. This makes it necessary for Nigeria to have several sources for accessing concessional capital to increase the total amount available and also, to avoid undue dependence on only a few sources of concessional funds.
“Finally, borrowing from China should not be seen from a negative perspective as they are being used to finance Nigeria’s infrastructural development at concessional terms. Moreover, China Exim Loans are only one of the sources of multilateral and bilateral loans accessed by Nigeria and represented only about 8.5% of Nigeria’s External Debt as at June 30, 2018”, the DMO boss stated at a recent press briefing.
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