How Nigeria's Higher Economic Growth, Low Inflation will Shape CBN's Decision On MPC

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As members of the Central Bank of Nigeria’s Monetary Policy Committee converge on Abuja for the final edition of the committee meeting for the year, there seems to be a consensus among financial market analysts that the current regime of higher growth rate and low inflation will be a game changer at the meeting, reports Festus Akanbi

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At last data suggesting that the Nigerian economy might have begun to pick up have started to trickle into the market through the office of the National Bureau of Statistics (NBS).
For the first time this year, while the inflation figure has started coming down, the GDP is showing some signs of improvement.
It is a relief to the nation’s economy managers and watchers considering the fact that Nigeria, like other oil dependent nations have been battling with devastating effects of the unabated plunge in the price of crude oil for over a year.  A barrel was sold for $43.66 as at the weekend whereas the same quantity attracted $111 in 2014. Nigeria’s case was even made grimmer by a combination of declined output and economic sabotage that hallmarked the previous administration.
For a country, which had been experiencing arithmetical progression in inflation figure since the beginning of the year, last week’s announcement of a marginal decline in the figure of the month of October, put at 9.3 per cent as against last month’s figure of 9.4 per cent could be a source of inspiration that better days are here.
Although the current threshold is still above the Central Bank of Nigeria’s target upper limit of 9 per cent, the initial reaction of economic experts was that the current figure is a sign of good things to come.

Declining Inflation
According to the NBS, the Composite Price Index (CPI) report, which measures the prices of goods and services indicated that the Headline index decreased slightly as a result of lower increases in most divisions, which contribute to the index with the exceptions being Transport, Recreation and Culture divisions.
The Bureau reported further that food prices also edged lower in the month under review, with the Food sub-index increasing by 10.1 per cent from 10.2 per cent recorded in September.
It stated that the sub-index was weighted upon as a result of a slower increase in the bread and cereals; milk, egg and cheese; and potatoes, yams and other tuber groups, the latter that has increased at a slower pace for five consecutive months
Similarly, the agency noted that the increases in the “All Items less Farm Produce” or Core sub-index also eased for the second consecutive month in October, with the Core sub-index increasing by 8.7 per cent in the month on year-on-year, representing 0.2 percentage points lower from rates recorded in the preceding month.

Higher GDP
Nigerians were still busy digesting the news of lower inflation for the month of October when the NBS reeled out another batch of figures suggesting that the Nigerian economy grew by 2.84 per cent in the third quarter of the year (Q3 2015) compared with 2.35 per cent in the previous quarter.
According to the GDP third quarter report released last week by the statistical agency, the country’s growth rate for Q3 was higher by 0.49 per cent compared to the previous quarter but lower by 3.38 per cent in the corresponding quarter of 2014.
Quarter-on-quarter, the real GDP increased by 9.19 per cent, according to NBS.
Nominal GDP at basic prices increased to N24.31 trillion compared to N22.85 trillion in Q2 and N21.04 trillion in the first quarter.
Compared to the N22.93 trillion recorded in Q3 2014, nominal GDP increased by 6.02 per cent.
Nominal growth was also higher relative to the growth recorded in Q1 2015 by 0.85 per cent.
Crude oil production in Q3 also increased by 0.17 million barrels per day (mbpd) to 2.17 mbpd from 2.15 mbpd in Q2 2015.
According to NBS, real growth of the oil sector increased by 1.06 per cent (year-on-year) in Q3 2015, higher by 4.65 per cent compared to the corresponding quarter of 2014, and higher than the second quarter when growth declined by 6.79 per cent.

MPC Meeting
Interestingly, these positive data were released on the eve of the Central Bank of Nigeria’s Monetary Policy Committee meeting, the last for the year which is slated for Monday and Tuesday.
The low inflation figure and the marginal improvement in the GDP growth will naturally determine the pattern and direction of voting at the MPC meeting this week. And according to a Sub-Saharan Africa Banking Analyst with Renaissance Capital, Mr. Adesoji Solanke,
“It’ll be critical to see decisions taken, particularly around providing clarification as to whether the low rate environment/QE mode is here to stay following TSA implementation.”
He believed the prevailing conditions of the Nigerian economy would raise some questions, which the MPC meeting must answer.
The two positive developments, according to him should able to influence a number of other related developments including the determination of exchange rate at the MPC meeting and of course serve as a good reason for banks to start to lend to the real sector of the economy.
“Questions on my mind: Are low rates here to fund the budget deficit? What are government’s plans for borrowing in 2016 and how could this alter the interest rate dynamics for the sector? What could the budget look like and what does this mean for the banking sector’s credit outlook? If low rates are here for longer, negative for margins? Do banks now grow loans given the weak macro environment? If so, capital implications given they need to shield profits by growing 100 per cent risk weight loans if rates remain low for longer?
THISDAY sought the opinion of industry players on the current scenario in the Nigerian economy and there seemed to be unanimity of opinion on the sustainability of the current positive trends.

Dividends of Fiscal, Monetary Interventions
According to former Managing Director of Guinness Plc, Mr. Seni Adetu, “It is interesting to see inflation going down at a time there is so much pressure on the naira; and especially for an economy that is largely import-dependent for consumer goods.
“For me, it shows that some of the fiscal and monetary interventions of the government are beginning to yield dividend. I think the delisting of some consumer items from forex accessibility may also mean that consumers are facing the reality of having to make do with local alternatives, which if well sourced and efficiently managed through the value chain should result in the type of slow down we are seeing in inflation. Is this sustainable? In the short term – yes, don’t forget that sometime in the first quarter of last year, we saw it down to; I believe about 7.8 per cent at some point. A lot depends on the policy direction of the CBN through its Monetary Policy Committee.”

Win-Win for Manufacturers and Consumers
On the implications of the current trends to the economy, the former Guinness chief said in principle the lower the inflation, the better the economy. He noted that “A reducing local inflation potentially enhances aggregate consumer demand with the result that the real sector benefits from economies of scale, and companies are able to create positive operational gearing in their businesses.

To the extent that the local manufacturers do not suffer from illegitimate imports swallowing their demand, a reduction in inflation is a win-win for consumers and manufacturers alike; and ultimately for the government with improved employment levels.”
Since all eyes are on the MPC meeting, which begins tomorrow, Adetu said we should not expect any drastic changes in decisions next week on account of the reduction in inflation. This, according to him, is because some of the recent changes have to be embedded; before a new set of rules is created.
He explained, “The biggest concern that Nigerian businesses are still deliberating over is the value of the naira. There are people that are concerned that the naira is still over valued at 199/$1 and should be allowed to stabilise at a “reasonable” rate that puts less pressure on foreign reserves and guarantees consistently good supply / accessibility to interested parties.
“As I have said before, it would be irresponsible for the CBN to allow a free fall of the naira, but at the same time, keeping it at an artificial rate for a prolonged period of time could be too costly. This is the main one observers continue to watch as the MPC manages us through this interesting economic period.”

Time to Make Strategic Choice
In his response to THISDAY enquiries, former CBN Deputy Governor and a Professor of Practice in International Business and Public Policy at The Fletcher School of Law and Diplomacy at Tufts University, Kingsley Moghalu said time has come for the CBN to make a strategic choice about monetary policy.
He said in an email response “The CBN has had an implicit inflation target for some time now, which is to keep inflation in the single digits. Inflation is a regressive tax on everyone and hurts the poor most. But price stability also has a price, which is that tight monetary policy restricts credit growth, which in turn affects GDP growth if fiscal policy is not able to pump money into capital expenditures. With revenues from oil remaining low and the federal government’s spending capability seemingly curtailed, the CBN has to make a strategic choice about monetary policy. That choice is to loosen monetary policy and spur credit growth with some inflation that may exceed the single digit range or to continue with tight monetary policy.

Growing Economy in an Inclusive Manner
“Now, although it has been said that inflation and economic growth are parallel lines that can never meet, bear in mind that, where a government is disciplined and strategic in its financial management, it is possible for an economy to grow in an inclusive manner even with some inflation. This is a Keynesian approach rather than the orthodox monetary philosophy that is fixated on keeping inflation low. It has happened in a number of countries in the past such as Brazil and South Korea.
“When Nigeria’ s oil price was high and CBN had concerns about excessive government recurrent expenditure a tight monetary policy was absolutely necessary. The question from the standpoint of economic strategy is whether the time has come for loose monetary policy even with some inflation, or whether tight monetary policy should continue until there are some structural changes taking place in the economy especially the establishment of internal petroleum refining capacity and increased power, both of which will change the dynamics fundamentally and make tight monetary policy completely unnecessary. This can happen within the next four years if the right things are done.”

Brace for Impact?
However, in its report last week, the finance advisory firm, Afrinvest believe the positive figures from the NBS were not enough to make the MPC contemplate rate reduction at the Monday meeting.
The company, in a report made available to THISDAY last week said, “We beam at the reality of an increased GDP growth rate in the review period which we view as a positive development, but not stellar given the economy has now recorded two consecutive sub-3.0 per cent GDP growth, the weakest since the post-rebasing exercise.

We expect Q4: 2015 growth to remain subdued at 2.9 per cent, hence lower our FY: 2015 growth projection to 3.0 per cent from 3.5 per cent.”
The research firm however, anticipated a rebound in 2016 on lower base factor and expected policies from the new economic team to prop up the non-oil sector.
“The sub-optimal level of growth may likely add to the incentives of fiscal authorities to opt for an expansionary fiscal policy in 2016. Whilst we do not expect the CBN to ease MPR at its next sitting next week, we expect committee members to back the CBN in keeping the financial system liquid in order to keep rates down in the fixed income market and stimulate credit intermediation and the economy at large. We also do not expect members to vote for a devaluation of the currency or lessening of foreign exchange restrictions given the statements credited to both fiscal and monetary authorities in the past two months that suggest little disposition of policy makers to altering the FX market dynamics. Committee members are likely to harp on more policy coordination and urge for more actions from the fiscal side,” it stated.

Consolidating Gains
In the opinion of analysts from Eczellon Capital, there is hope for Nigeria. A report issued by the research firm at the weekend said, “We see the marginal improvement in GDP as a positive development for an economy that has been faced with various macroeconomic challenges since the last quarter of 2014. Whilst the growth rate is still well below the average growth rate in the last decade, it still points to the resilience of the Nigerian economy and its inherent internal capacity to drive growth with the right set of policies and infrastructural support.”
They are of the opinion that the gradual uptick in growth may provide some form of succor to the Monetary Policy Committee (MPC) of the CBN as it converges for its last meeting for the year. “The Committee is likely to maintain status-quo on its monetary policy indices to allow the effects of its last policy adjustment fully come into force with an expectation of some policy consolidation from the just inaugurated fiscal authority of the government.

That said, we expect Q4 GDP to hover around current levels – sub 3.0 per cent – in the last quarter of the year. We however maintain a bullish outlook for the Nigerian economy in 2016 as we perceive the government is likely to pursue an expansionary fiscal drive to complement recent monetary easing by the CBN to drive the growth engines in the economy in 2016.”
In his assessment, the new Director-general of the Nigerian Economic Summit Group, Mr. Chukwuka Monye believe the positive trajectories of the Nigerian economy is sustainable.
He said “Yes it is sustainable, although with a cohesive and deliberate strategy by all agencies and ministries responsible for the economy. I believe that the federal government has been positive so far regarding the economic environment although many may disagree.

Recent comments by the Vice President indicate that the government feels the pulse of the economic sensitivities of the marketplace. A number of small businesses have shut down while others are literarily at a standstill. In a nutshell, there are concerns by many that while there is optimism based on some of the positive policies by the government, the timing of the implementation is critical.”

 

 

 

 

Thisday

Babatunde Akinsola
Babatunde Akinsolahttps://naija247news.com
Babatunde Akinsola is aNaija247news' Southwest editor. He's based in Lagos and writes on the Yoruba Nation political issues, news and investigative reports

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