Rising inflation to halt MPC’s pro growth direction
ERGP targets becoming unachievable —Experts
By Babajide Komolafe
AHEAD of today’s release of the data on Nigeria’s Gross Domestic Product ,GDP, for the first quarter of 2019 (Q1’19), by the Nigeria Bureau of Statistics (NBS), analysts forecasts indicate that the pattern of weak economic growth performance, recorded in 2018, continued in Q1’19, with GDP growth rate of around 2.05 percent, as inconsistent government spending, budget delay and election hiccups undermined impact of high crude oil price, increased foreign exchange inflows and marginal monetary easing during the quarter.
Meanwhile, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may be forced to abandon its pro-growth direction, following the resurgence of inflationary pressures reflected by the increase in the inflation rate in April, which is projected to persist in the coming months.
While Nigeria recovered from economic recession in thre second quarter of 2017 (Q2’17), economic growth had remained persistently weak below 2.0 percent and far from the Economic Recovery and Growth Plan (ERGP) target of seven percent by 2020. Furthermore, the average of growth forecast by the World Bank (2.2 percent), the International Monetary Fund, IMF, (2.0 percent), and the CBN (2.74 percent) indicate annual growth rate of 2.3 percent for the nation’s economy in 2019.
Against this background, economic operators and analysts, especially members of the MPC, are looking forward with high expectation, to the data on the nation’s GDP in Q1’19 to be released by the NBS today.
However, Financial Vanguard survey of analysts forecast showed GDP growth rate ranging from 1.9 percent to 2.52 percent for Q1’19 with average forecast of 2.05 percent.
Analysts also projected that economic growth was driven by the non-oil sector in Q1’19, helped by increase in foreign exchange inflows due to attractive yields in the fixed income market and some light manufacturing and construction activities which stimulated demand for raw materials from agriculture and construction. They, however, cited the fiscal activities of the federal government as the main constraint to economic growth in Q1’19.
Speaking for Vetiva Capital Management Limited, Ifedayo Olowoporoku, said: “We project a 2.5 percent to 2.7 percent, year-on-year, GDP growth for Q1’19 as major parts of the economy continues to trudge along at low single digit levels even as inconsistent government spending has resulted in inconsequential fiscal stimulus.”
Explaining the basis for the 2.48 percent GDP growth rate for Q1’19 forecast by FSDH Merchant Bank, Ajike Taiwo said: “Drivers of the expected growth include: Higher crude oil price in Q1 2019, will stimulate investment in the oil and gas sector; a successful election, has allayed fears of uncertainties in continuity of government; increase in foreign exchange inflows due to attractive yields in the fixed income market; monetary policy easing and lower yields, leading to lower financing cost for corporate and government; some light manufacturing/construction activities have also taken place – stimulating demand for raw materials from agriculture and construction”
Sounding optimistic, Bunmi Asaolu Head of Equity Research at FBNQuest Capital, said: “Our Q1 GDP forecast is 1.9 percent y/y with non-oil sector as the main driver as usual. We are assuming growth will pick up through the rest of the year since Q1 is usually the softest for non-oil.”
Rising inflation to halt MPC pro-growth direction
Analysts forecasts also indicate that the MPC meeting holding from today till tomorrow will be concluded with a decision to retain benchmark policy rates due to renewed inflationary threat. This will be in sharp contrast to the outcome of the last meeting of the MPC held in March when it signalled its preference for pro-economic growth policy, by reducing the Monetary Policy Rate (MPR) by 50 basis points (bpts) to 13.5 percent, while retaining the Cash Reserve Ratio at 22.5 percent and the Liquidity Ratio at 30 percent
Explaining the rationale for the MPC decision, CBN Governor, Mr. Godwin Emefiele in the communiqué issued at the end of the meeting, said: “In its consideration of the best monetary policy option, the Committee noted the need for all agencies of Government to work hard, not only in consolidating the growth so far achieved, but also in ensuring that appropriate policies are put in place and implemented to create jobs on a mass scale and diversify the economy in a proper direction.
“In doing this, the policy options facing the MPC at this meeting are a decision between retention of the current stance of monetary policy or a slight loosening of the policy rate, backed by the substantial stability of the major macroeconomic indicators. The Committee felt that given the relative stability in the key macroeconomic variables, there is the need to signal a new direction that is pro-growth.”
But the relative macroeconomic stability cited by the MPC came under threat in April as the inflation rate rose for the first time in four months to 11.37 in April, following three months of decline from 11.44 percent in December 2018 to 11.25 percent March 2019.
This sudden rise in the inflation rate, according to analysts, will persist in the coming months, and may compel the MPC to halt its pro-growth policy direction.
According to analysts at Financial Derivatives Company (FDC) Limited: “The rise in inflation is expected to be sustained in May and June. This would be driven by both demand-pull and cost-push inflation factors. The commencement of planting season will result in food supply shortages while the minimum wage implementation and the Ramadan fast would increase consumer demand. All things being equal, the confluence of supply shortages and increased demand would exert pressure on prices.
“The re-emergence of inflationary pressures increases the probability of the MPC members adopting a more hawkish monetary policy stance at its May meeting.”
Corroborating this position, Olowoporoku of Vetival Capital said: “Despite the new dovish stance of the Monetary Policy Committee, we expect most members will vote to keep all policy levers unchanged in the upcoming meeting. Given that the committee voted on a rate cut in its last meeting, we expect members to tread prudently more so given the recent reversal in inflation figures in April – rose from 11.25 percent to 11.37 percent y/y – and expected additional inflationary pressures in the coming months.
“They may be tempted to cut again (significant major of members wanted to cut last time) given the commentary on “pro growth” but they may just wait a little to give some time for the last 50bp cut to make an impact/and hopefully measure it. Two cuts in a row having not done anything in 2.5 percent GDP growth years would be a little surprising”, said Asaolu of FBNQuest.
In their outlook for the outcome of the MPC meeting, FSDH Merchant Bank analysts cited uncertain global economic outlook and possibility of capital flight as other factors that may compel MPC members to halt its pro-growth direction. They said: “Given the recent positive developments in Nigeria, namely crude price above $70 per barrel, stable foreign exchange rate, rising external reserves; the MPC members may consider reducing policy rates.
“However, FSDH Research believes the short-term outlook of the global economy remains uncertain and may not sustain strong growth in crude oil prices. Other issues that may affect the choice of monetary policy implementation in the short term are: an indication of inflationary pressure (the inflation rate went up for the first time in 2019 in April), the possibility of capital flight if fixed income rates drop further and the fiscal deficit in the 2019 proposed budget.
“Therefore, considering the current situation, a cautious approach to the conduct of monetary policy is appropriate. As a result, we expect that the MPC will adopt a ‘wait and see’ approach and hold the current rates at its May 20-21, 2019 meeting.”
ERGP targets becoming ‘unachievable’
Meanwhile, analysts assessment indicates that the targets of the two year old Economic Recovery and Growth Plan (ERGP) of the federal government are gradually becoming unachievable. The targets include real GDP growth rate of 7.0 percent and inflation rate of 9.9 percent by year 2020. Others are unemployment rate of 11.23 percent and crude oil production of 2.5 million barrels per day by year 2020.
In a report titled “Economic Recovery and Growth Plan: What has Nigeria achieved? Analysts at Financial Derivatives Company Limited noted that,“With less than one year to go, the targets set in the ERGP are looking more and more unachievable by the day. It has become highly unlikely that a seven percent growth rate (from 1.9 percent in 2018) will be achieved. Nor does a single-digit inflation rate, from its current level of 11.37 per cent, nor an unemployment rate of 11.23 percent, from 23.1 percent, seem likely in less than 12 months. Even if the right tools and policies are deployed, the time frame is unrealistic.”
On the GDP growth target, the report stated: “The objective to restore growth does not appear to have materialized. According to the ERGP blueprint, economic growth in 2017 and 2018 should have been 2.19 percent and 4.80 percent respectively. However, in reality Nigeria’s economy grew only 0.82 percent in 2017 and 1.9 percent in 2018. The inability to meet the targets in the first two years of the framework threatens the federal government’s ability to meet its growth targets of 4.5 percent in 2019 and seven percent in 2020. Output constraints, such as herdsmen conflicts, flooding, and high interest rates, have stunted growth at a sub-optimal level of 1.9 percent, below the population growth rate of 2.6 percent.”
While noting efforts to achieve the second objective of investing in the Nigerian people through strategies such as social inclusion, job creation and youth empowerment has been mixed, vis-a-vis social intervention programmes, such as Trader Moni and N-Power, have been launched in a bid to empower Nigerian youth and alleviate poverty, the report observed that, “unemployment increased from 20.4 percent in 2017 to 23.1 percent in 2018. Youth unemployment increased from 26.58 percent in 2017 to 29.72 percent in 2018. In addition, two years after the inception of the framework, Nigeria has overtaken India as the poorest country in the world with 87 million citizens living below the poverty line of $1.90 per day.”
The report also noted that the Federal Government is still far from achieving the objective of a global competitive economy, via elevation to top 100 in the World Bank’s Doing Business Report by 2020, stating, “Thirdly, the objective of building a globally competitive economy has achieved some fair progress within the first two years of the plan. While Nigeria’s ease of doing business rank dropped one place from 145 in 2017 to 146 in 2018, the launch of the Presidential Enabling Business Environment Council (PEBEC) has impacted positively on the Nigerian business environment. PEBEC has successfully launched business initiatives, such as starting a business, registering property, getting electricity, getting credit and paying taxes. The aim of the government, through this initiative, is to elevate the economy to top 100 in the World Bank’s Doing Business Report by 2020. Nigeria is currently 46 places away from this target.”
The way forward
Against this background, and to ensure attainment of the targets of the ERGP, FDC analysts recommended review of the time frame as well as the establishment of a monitoring and evaluation committee. “We suggest a review of the time frame for achieving the set targets of the ERGP. An extension of the framework would allow the federal government more time to execute and implement the right policy tools to meeting its objectives. A medium to long-term period, five to ten year, would also encourage policy continuation of administrations.
“Policies established by a ruling administration are often known to be discontinued by the next administration. An extension of the period and policy continuation should be complemented by tough game-changing decisions by the government to achieve transformational growth in the near to long term.
“One such choice is to provide incentives for both domestic and international investment to achieve a growth rate of 7.0 percent or higher. Currently, Nigeria’s gross fixed investment accounts for only 14 percent ($66.3 billion) of GDP. Increased investment would have a multiplier effect on consumption and aggregate demand.
“A second way to achieve the set targets of the ERGP is through increased state cooperation. States across the Federation can emulate the example set by the federal government by formulating laid out objectives and strategies to achieve improved growth and development.
“For instance, Kaduna state has launched its Infrastructure Master Plan, which is expected to run between 2018-2050. The 32-year framework is aimed at restoring the state to its former glory as the business and industrial hub of the nation through infrastructure development. If all states work towards the common goal of accelerated growth, the targets of the ERGP could be achieved within the new time frame.
“The federal government should also consider setting up a monitoring and evaluation committee for the ERGP initiative. The function of the committee would be to perform regular and thorough observations of the targets and the progress of each stakeholder in achieving said objectives and to report the results.”