A crucial week for Nigeria’s economy by Anthony Osae-Brown

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This week could be described as a turning-point week for the Nigerian economy. This is because of the significant decisions and events that are expected to take place locally and international which would impact on economic direction going forward.

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First on the card is the expected release of 2017 first quarter GDP growth figures by the National Bureau of Statistics (NBS). The expectation is that the NBS will confirm that the country’s economy is finally on its way out of a recession after contracting by -1.5 percent in 2016.

Since February, the Central Bank of Nigeria (CBN) has significantly boosted foreign exchange supply in the economy, which has also had a positive impact on productive activities especially in the manufacturing sector. The Purchasing Managers Index (PMI) as measured by both FBNQuest and CBN has both been indicating that the production activities are picking up in the manufacturing sector.

Attacks on oil assets in the Niger Delta have also died down allowing crude oil production to pick up above similar levels in 2016. First quarter financial results from listed companies have also been significantly healthier than the position in the first quarter of 2016.

All these signals that the economy has most likely bottomed and is on the way up. Some analysts are forecasting a GDP growth rate of about 0.5 percent in the first quarter, which would confirm that the country is finally out of its worst recession in three decades.

This is also the week that the Monetary Policy Committee (MPC) of the CBN meets to decide the benchmark Monetary Policy Rate (MPR). This would be the third meeting of the MPC this year but the conditions under which they are meeting are significantly more positive than their last meeting in March.

Since their last meeting, the exchange rate in the black market has seen significant appreciation from close to N500 to the US$ to about an average of N380 to the US$ now. Inflation has also been on a downward trend, even though food inflation has remained stubbornly high.

But the CBN will be happy that both headline and core inflation are both trending downwards. The expectation is that the CBN will still retain the MPR at 14 percent despite the declining inflation trend.

Two factors will influence the decision of the CBN. The need to keep interest rates high enough to attract portfolio investors and also the fear that the naira will come under pressure if interest rates are cut.  At 14 percent, and April inflation rate at 17.2 percent, real interest rates are already negative and any further cut could discourage investments in government securities at a time the government is yet to meet its N1.2 trillion borrowing target in the domestic market.

So the expectation is that the MPC will decide to keep interest rates on hold for now, even though the government side still wants to see a reduction in interest rates so that they and businesses can borrow at cheaper rates. For now, that is not going to happen.

Also, to look forward to this week, is the expected signing of the 2017 budget by Acting President Yemi Osinbajo. The “Presidency” received advanced copies of the N7.44 trillion expenditure plan on Friday and the expectation is that after due consideration and feedback, the Acting President will put his signature to the budget this week and open room for significant cash inflow into the economy.

Ahead of signing the budget, the Acting President signed three different executive orders on 19 May, one of which compels government agencies to buy “Made in Nigeria” goods and services. This order mandates that agencies must direct a minimum of 40 percent of their purchases to local producers.

This order would have a significant impact on local manufacturing and have a positive impact on small and medium scale enterprises. The order takes effect immediately and so once the budget is signed, there is an assurance that a minimum of 40 percent of the value will flow into the hands of local manufacturers of goods and services.

The multiplier impact on the economy will be positive and, for the first time, will turn the budget into a tool for real economic growth.

In the international scene, a policy-setting gathering of Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC ministers are meeting on 25 May to decide on whether to extend the cut in crude oil supply reached in December 2016. There is consensus that the cut will be extended for a minimum of six months and even for as long as nine months in a bid to rebalance the crude oil market and ensure that crude oil prices remain high. Both Saudi Arabia and Russia, two of the biggest crude oil producers have already expressed support for an extension and this is most likely to happen.

But what is not certain is if Nigeria will get any further concession not to cut its production as it was granted when the December deal was reached. At the time of the December deal, Nigeria’s crude oil production averaged about 1.4 million barrels per day but currently, the country is boasting of production levels of about two million barrels per day, with the chance that we will touch 2.2 million barrels per day if the Forcados export terminal is finally restored.

Even if Nigeria is mandated to cut its production by about 300,000 barrels per day from its OPEC quota, Nigeria’s subsequent average production of 1.9 million barrels per day will still be significantly higher than the average of 1.4 million barrels per day in 2016. The 1.9 million barrels per day would also be sold at a far higher price than what the lower volumes were sold in 2016 if the deal is enforced and results in higher crude oil prices in the international markets.

So far this year, crude oil prices have largely stayed above the US$50 mark, and Nigerian would want it to stay above that level for the rest of the year.

Nigerians have an interesting week ahead to look out for on the economic front with the outcomes of most decisions critical to the health of the economy going forward.

 

 Anthony Osae-Brown is the Editor, BusinessDay Newspapers

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