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Buhari begins second year with economic recession

.CBN indicates a helpless situation, absolves self
.GDP decline projected at -1.5% by June
.Inflation to exceed 15% for May

By Emeka Anaeto, Economy Editor

There are indications that further negative trend awaits the economy in the horizon as President Mohammadu Buhari enters his second year in office as a democratically elected president this week. Already economic reports have pointed to stagflation and recession as present realities. Stagflation is in place when inflation comes with stagnation, and Nigeria’s inflation trend has been in the up-tick for several months now hitting 13.7 per cent last month, while economic activities have stagnated across virtually all sectors over the period.

buhari-NairaOn the other hand recession is when an economy records negative growth in two consecutive quarters.

Nigeria’s growth rate had slowed down steadily in the past six quarters sliding into negative of   -4 per cent in the first quarter of 2016 while analysts including monetary authorities are projecting further slide both in the current quarter and through to year end.

CBN helpless

The indications are coming from quarters as high as the Central Bank of Nigeria, CBN, and some reputable financial institutions and economic research companies. On the heels of its landmark Monetary Policy Committee, MPC, decisions last week, the apex bank’s committee members’ submissions on individual basis point to a near helplessness on key issues distressing the economy.

The apex bank’s committee members were said to have plans to effect necessary changes in the monetary rates during the last week’s meeting but were forced to backtrack following the gross domestic product, GDP, report released by the National Bureau of Statistics, NBS, just the weekend before the MPC meeting last Monday.

The GDP report which, at -4 per cent, showed a steep slide towards recession, Vanguard learnt, totally unsettled the apex bank’s calculations on growth rates. Consequently, instead of upping the Monetary Policy Rate, MPR, to match inflationary position of 13.7 per cent and hence move interest rates to positive end, the apex bank was forced to remain negative at 12 per cent.

The MPC details also indicated that the apex bank had found itself in a tight corner with an aspect of its report saying that “its options were limited in a period of stagflation,” just as it also indicated that the committee has had little influence over adverse macroeconomic development, although it did warn of a possible recession as far back as July 2015.

Summing up the fears about the future, the apex bank attributed the contraction in GDP to what the committee viewed as legacy issues which are mostly structural beyond its control. It sees further GDP contraction in the second quarter, Q2 2016, a forecast most analysts have extended to year end.

Another concern in the MPC details was the blunt position that the fiscal shortcomings of the federal government led to the contraction, citing recurring delays in budget passage and sign-off. This, according to some observers, indicates CBN has lost patience with fiscal policy, suggesting in the MPC details “that it has waited and waited for the harmonisation of fiscal with monetary policy”, adding that it (CBN) has almost become powerless in its view, and singled out the habitual delays in the passage of the 2016 budget.

Although the president has now signed the budget, CBN observed that ministries, departments and agencies (MDAs) must prepare their procurement contracts before the release of funds for capital programmes, signaling another round of delay.

Inflation seen up 15.5%

On the inflationary pressures analysts at FBN Quest, the research arm of First Bank Group, noted that “rather than respond to the surge in domestic inflation, we now see monetary policy on hold this year in the face of declining output”. The MPC details stilled hoped on inflationary band of between 6.0 per cent and 9.0 per cent year-on-year. But as at last month inflation had reached 13.7 per cent, with strong increases in both food and non-food items.

Again MPC would absolve the apex bank of responsibility in this on grounds that structural and supply-side factors were responsible for the surge in recent months, citing fuel and power shortages, lower food output, and the pass-through from foreign exchange market.

“While we do not consider that it is a structural factor, there is little the MPC could have done, given the huge gap between forex supply and demand”, FBN Quest stated, adding, “we see headline inflation at 15.5 per cent at end-2016”. According to financial analysts, the challenges of inflationary pressures was mainly the pass-through effect of the mal-structured foreign exchange market. The committee recalled its “mandate of maintaining a stable naira exchange-rate”.

The MPC had agreed upon the imperative of reform at its last two meetings and has now asked the CBN to work out the modalities for what is effectively a second official window. Absolving itself of the future headaches, however, though the committee still looks to reverse the low foreign exchange earnings of the economy while insisting that there is “no easy and quick fix” at hand, it stated it does not influence the international oil market and is not responsible for security in the Niger Delta.

Growth to decline further by -1.5%

At the backdrop of the MPC cold positions on some of the economic challenges facing the nation presently, the analysts at FBN Quest stated, “we now go further and see contraction of the economy for the year as a whole at -1.5 per cent y-o-y.

“The only bright spots are some capital releases by the FGN in H2 2016, further expansion of the CBN balance sheet with new credit initiatives and some impact from the new second forex window. The global economy is not supportive.  “For 2017, we have penciled in modest growth of just 2.5 per cent”.

 


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