As Nigeria strives through one of the toughest times in its recent economic history, all eyes are on the public policy executives entrusted with the responsibility to shepherd the system and drive the ship to a safe anchor.
The Central Bank of Nigeria, CBN, appears to be at the center of the storm, though it was responsible for just the monetary policy, probably because it has trusted itself forth unto its development finance roles.
In the tempest of Coronavirus (COVID-19) pandemic fiscal and monetary policies are now put to the strictest litmus test; how and when shall the much-desired respite come?
The macroeconomic pain points are inflation (which reflects the cost of living); general economic output captured in Gross Domestic Product, GDP; Real sector growth in the face of the monetary, infrastructure, and structural challenges.
The macroeconomic indicators are not looking good presently but the outlooks are seen by many optimists as brighter than the gloom earlier envisaged in the onset of the COVID-19 impact reports, especially those focusing on the country’s economic mainstay, the oil sector.
According to the National Bureau of Statistics, NBS, inflation accelerated by 40 basis points (bps) to 13.22% Year-on-Year (YoY) in August as against July level of 12.82% YoY. The current reading was ahead of most analysts’ forecasts which averaged 13.00%.
On a month-on-month basis, the headline inflation advanced by 9.0 bps from 1.25% in July 2020 to 1.34% in August 2020.
Besides the significant uptick what appeared to be most worrisome is that the rise is attributed to supply-side factors, particularly relating to constraints in the supply of food. The numbers reflected significant increases in both the food (+52 bps to 16.00% YoY) and core baskets (+42 bps to 10.52%) of the consumer price index. This indicates the hardships the low-income earners would have been passing through just to stay alive.
Compounding the problem now is the recent increase in the basic cost of living, electricity, and petrol (transportation). Financial Vanguard findings show that average electricity tariff (across residential and commercial customers) could rise by over 50% for consumers receiving a minimum of 12 hours of electricity.
This surge in electricity cost compares to the 41-45% tariff hike in February 2016, which coincided with a jump in Month-on-Month, MoM, core inflation to 2.72% (vs 0.84% in January 2016).
Even though the electricity price increase is not structured to be broad-based, customers who appear seemingly exempted from the hike may still be impacted its pass-through to the prices of other goods and services. Thus, further inflationary pressure has been ignited.
Much earlier last month, Nigeria’s GDP for the second quarter, 2020, Q2’20 figures show the economy declined by -6.01% YoY. Oil and Non-Oil GDP both declined by -7% and -6%, respectively. The decline represented the economy’s first GDP decline after 12 consecutive quarters of (weak) growth.
The major sectors that contributed to the overall economic decline were Trade, Oil, Construction, Real Estate, and Food, Beverages & Tobacco sectors. However, the Telecommunications & Information Services sector, Financial Institutions, and Crop Production sectors grew by 18%, 28%, and 1%, respectively.
But then the most recent Manufacturing Performance Index, PMI, for August 2020 stood at 48.5 index points, which implies that the economy contracted during the month, the fourth consecutive contraction.
Similarly, the Non-Manufacturing PMI stood at 44.7 points in August 2020, also implying a decline. Of the 17 surveyed sub-sectors, only the utility subsector reported the same level while others declined.
The foreign exchange market has relatively been volatile. Although the exchange rate was relatively stable in the past one month at N386/$1 at the Investors & Exporters (I&E) FX window, the exchange rate rose as high as N470/$1 at the parallel markets owing to lower supply relative to demand.
The challenge of physical infrastructure has remained intractable, and the pressure it piles on the cost of production in the economy remains a nightmare to operators in the key sectors.
These are some of the issues the CBN has been battling in a near lone journey to economic recovery. The apex bank had already started implementing a battery of economic stimulus package with the support of the Bankers’ Committee. About N3.5 trillion has been earmarked for the programs.
Under the program, the CBN would support critical sectors of the economy with an N1.1 trillion intervention fund. According to the CBN Governor, Mr. Godwin Emefiele, the bulk of the money would be used to support the local manufacturing sector as well as boost import substitution. Special attention would also be given to small and medium enterprises funding.
He added that about N100 billion would be used to support the health sector to ensure laboratories, researchers, and innovators work with global scientists to patent and produce vaccines and test kits in Nigeria.
With the implementation of the stimulus package, many analysts see light at the end of the dark tunnel. Early signs include the August PMI reports which, although still shows negative, the contraction was an improvement relative to the previous month. Similarly, the 44.7 index points contraction recorded in non-Manufacturing PMI showed improvement relative to the previous month.
Meanwhile, to address an aspect of the forex crises the CBN resumed the sale of the USD to the Bureau De Changes, BDCs, to fill the existing demand gap in the market.
Sector pain points
President, Manufacturers Association of Nigeria, MAN, Engr. Mansur Ahmed appears to have articulated the way forward for public policy executives in addressing the economic pain points.
He said the manufacturing sector is in need of a comprehensive and concerted support system from the government.
Going by his submissions the CBN should ensure the reduction of the financial pressure on companies occasioned by COVID-19 by compensating manufacturing concerns that are forced to shut down with 60 percent of employees’ salaries for at least three months to prevent laying offs of employees and massive unemployment.
The apex bank could also engineer support for manufacturing concerns with existing loan facilities by reviewing the terms, especially reducing interest rates to 5 percent with 2 years moratorium. Manufacturers that are investing in order to scale up production should be granted loans at a 5 percent interest rate for a period of 5 to 7 years.
The apex bank can also get the federal government to re-open the nation’s closed land borders to ease the plight of manufacturers that have lost export opportunities due to the closure.
Ahmed had stated in connection to this, “We have recognized that the border closure will not be a sustainable solution, rather we should take the opportunity to improve our trade facilitation infrastructure for import and export. This would enable us to key into the African Continental Free Trade Area (AfCFTA) agreement.’’
Reopening the borders should happen not only because it is not good for sustainable trade within the region if it remains closed Nigeria will not be able to participate in the Africa One Single Market in 2021.
The Director-General, MAN, Mr. Segun Ajayi-Kadir, recommended that government should: “Encourage CBN to work out the modalities for a specialized single digits interest loans for businesses involved in production activities; Simplify the terms and conditions for accessing funds from development banks and; Facilitate the implementation of the approved gas price for the manufacturing sector.”
Economy analysts at CardinalStone Finance paint a picture of the horizon, pointing at some watchpoints. They stated: ‘‘PMS price is becoming more flexible as the FG weans off its subsidy regime and moves closer to full deregulation. We expect subsidy removal to allow for more efficient resource allocation but note that the dynamics could increase the volatilities of energy-related core inflation components such as transport and housing, water, energy, & other fuels (HWEGOF).
‘‘Food inflationary pressures are also likely to be impacted via pass-through from higher transport cost.
‘‘Similarly, the decision to implement an electricity tariff increase in September 2020 (vs the previous timeline of March 2021) presents considerable risk to price stability in the near term.
‘‘All in, EIA oil price forecasts of $43/bbl (vs $42 currently) over the next four months suggests that the vagaries from PMS price fluctuations may be less dire compared to the potential electricity pass-through.
‘‘Mostly mindful of the latter, we now expect headline inflation to hit 15.00% YoY by year-end and average 13.2% (vs 12.8% previously) over the full year.’’
Analysts at WSTC Securities Ltd stated: ‘‘In our view, the improvement in August PMI contraction suggests a gradual rise in economic activities
‘‘In our view, some factors behind the sticky food inflation include the border closure policy, low productivity, climatic conditions, poor transportation network, and inefficient storage.
‘‘Our outlook for the Nigerian economy remains unchanged. We expect to see a continued recovery. While the economy might not avoid an economic recession in Q3’20, we believe that the decline will be moderated relative to the economic performance in Q2’20.
‘‘The monetary policy authorities continue to squeeze liquidity in the fixed income markets. The latest regulation on a lower minimum interest on savings deposit further emphasizes the policy direction of the CBN to drive aggregate consumption and by extension economic growth.
‘‘Although we believe that the current economic fundamentals do not support a low-yield environment, we posit that the CBN will continue to implement its policies through unorthodox approaches. ‘‘As a result, we think that the low-yield environment will be sustained in the near to medium term.’’