Now, I am not too certain how to call this. But ahead of the meeting last week of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), few commentators shied away from calling the MPC’s outcome. So, none of the MPC’s decisions, Tuesday, took the markets by surprise. Instead, most analysts resorted to their tea leaves questing for answers to a new parameter. How much of a shift towards eventual policy easing is signaled by the MPC’s voting patterns? And how soon will this transition occur?
In terms of the quantitative indices, inflation numbers over the last four months have been a policy maker’s delight. According to data released by the National Bureau of Statistics (NBS) on the eve of the MPC’s meeting, headline inflation (year-on-year) for April (9.1%) rose 50 basis points over the 8.6% recorded in March. Food inflation, rising to 10% in April from 9.5% in March, provided the main stimulus for the rise in the headline numbers. Back out the more skittish components of the basket of goods used in the NBS’ calculation of the consumer price index, and the core measure of inflation was down in April (6.9%) on March (7.2) on a year-on-year basis.
Much of the benign inflation numbers this year owe a lot to the fact that on the back of a series of policy-induced measures last year, prices rose real fast compared with this year. In addition, prices continue to rise faster in urban locations this year than they have in rural ones. On a month-on-month basis (April on March), however, prices moderated across all the measures.
Still, despite inflation appearing to be adequately contained, the economic outlook remains mixed. GDP numbers are the main headache. These have dropped consistently over the last four years, suggesting that the reform measures deployed by the federal government in 2004 – 2007, and which were implicated in boosting the trend growth rate of the economy from the annual 3% – 4% before 2004, to a steady 7%+ since then, may have run their course. Although most commentators on the economy expect a recovery in domestic output, this year, from last year’s 6.58%, both the oil and gas, and the non-oil GDP measures are worrisome.
Pipeline vandalism, oil theft, and production shortfalls, as oil producers declare “force majeure”, have all contributed to a reduction in domestic crude oil production. At the same time, oil prices on the global markets have responded to a combination of shocks (US fuel stockpiles are apparently enough to meet summer demand, daily production in the US rose by 285,000 barrels to 9.21mbd last week, and China’s economy is not providing the boost to global output that we all were hoping for) that could have only one outcome over the medium-term: a lowering of prices. So, we confront the prospects of poor output performance in the oil and gas sector this year (maybe even worse than last year’s).
Moreover, not only have we not recovered fully from the adverse effects on agriculture of last year’s floods in some parts of the country, but, with the recent declaration of a state of emergency (and the commencement of a low intensity war) in some parts of the north, production of any kind in those places could tank. Agriculture, for so long the bulwark of our solid growth numbers, is the most vulnerable to these new realities.
Nonetheless, reading through the IMF’s report of its most recent Article IV Consultation with the country, I found this particular footnote very instructive: “Large errors and omissions in the balance of payments suggest that the current account surplus is overestimated by a significant (but unknown) amount.” Buyer beware!
With the MPC voting to retain its Monetary Policy Rate (MPR) at 12% with +/-200 basis points corridor around the mid-point; the Cash Reserve Requirement (CRR) at 12%; Liquidity ratio at 30%; and the Net Open Position at 1.0%, what should we then expect over the remainder of this budget cycle?
Arguably, the much hyped “base effect” should see further weakening in inflation numbers through the remaining part of the year, especially by holding the CPI (y-o-y) down in the single digit range through to the end of the year. But poor oil sector numbers will weigh heavily on public revenue. Already we have seen the federal government take US$1bn out of the excess crude account in April to support shortfalls in its budget. And ought we to be worried (and by how much) by the central bank’s estimates of the net growth in domestic credit to government in the four months to end-April at N2tn?
The fear is that on current trends, both the naira’s exchange rate, and the nation’s external reserves will come under major downward pressure this year.