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ECONOMIC ADVISORY COUNCIL:Strengths, weaknesses and the bumpy road ahead

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By Emeka Anaeto, Business Editor

As the new economy egg-heads, the Economic Advisory Council, EAC, begin to settle-down to work, Financial Vanguard has been sounding out various informed opinion across the economic spectrum and not a few concerns have been raised. These are beside the politicised issues surrounding the office and the role of the Vice President, Yemi Osinbajo, who has been overseeing the economic unit of the federal government but now appears sidelined with the directive from the Presidency that the EAC should be reporting directly to President Mohammadu Buhari.

But we also have some positive thoughts on the new direction. The most significant is the signalling effect that the government intends to do something about the sustained parlous state of the nation’s economy, the outlook that the government intends to do things differently and, hopefully, better in economic management.

President Muhammadu Buhari

Without prejudice to the political colorations, most observers believe this body language may lead to renewed foreign investor interest and a flow of both foreign portfolio investment (FPI) and foreign direct investment (FDI) to the country, thereby improving capital importation and relieving the reserves of strain, and misery index.

Buhari dissolves Osinbajo led Economic Management Team(Opens in a new browser tab)

It is assumed that the best likely outcome of the Presidency’s move to institute an EAC is to rebuild confidence in the economic decision making process, but whether this is enough to turn the economic fortunes of the country around is at best wishful thinking, but not a few would like to say, ‘‘time will tell and the time is already around the corner.’’

The mountain of economic challenges the experts will need to evolve tactics and strategies to deal with is sky high and Nigerian’s, justifiably or not, are not really patient any longer in terms of timeline for results.

In the course of Financial Vanguard’s interactions with economy watchers over the EAC matter some of the issues in the front includes the following:

lIncrease employment over the next four years on a sustained basis;

lKeep inflation in check; Remove inefficiencies that have emerged from price distortions through subsidies;

lReduce the size of the fiscal deficit; Reduce the size of the public debt (now $81bn);

lReduce debt service (about 70% of recent revenues); Incentivize private sector output and productivity;

lHarmonize the foreign exchange rate markets and eliminate arbitrage;

lReduce oil sector contribution to foreign exchange earnings; lFind funds to expand critical road and public transport infrastructure;

lImprove the budget management process for efficiency and transparency; and

lIncentivize capital importation, etc.

Of course these are just a few in the really un-ending listings, but it is believed these ones set the tone for the near-term interventions that the advisory team will need to address within a narrow time frame.

The President’s new economic advisory team will have to hit the ground running as the rapid growth in population size (2.6%) and the slow pace of the Gross Domestic Product, GDP, (1.94%) is setting the stage for major socio-economic crises in the near-term, especially as youth unemployment rises above 52% and private employment opportunities shrinking in the face of declining disposable incomes and falling private consumption expenditure as  reflected by the decline in revenues of fast moving consumer goods companies (FMCGs).


 Other current pain points

Most of the observers that spoke to Financial Vanguard believe the possibility of reflating the economy in the short to medium term (one-four years) is scanty, the inflation rate at 11.02% is not likely to hold as a spike in international oil prices as a result of the recent drone attacks on Saudi Arabia’s state-owned oil company Aramco has waned without significant positives to Nigeria’s treasury. With oil prices reverting to around $60 per barrel (2019 budget benchmark) the Central Bank of Nigeria, CBN, will need to keep an eye on the national reserves as its policy of foreign exchange market stabilization around N360/$ depends delicately on oil price not going too far below the $60 mark. Even around this mark, the foreign reserves have taken a hit losing about $2billion in the first half of this year.

Expansionary fiscal policy at the moment would lead to a rise in interest rates, a fall in exchange rate, a rise in domestic prices (supply side rigidities will take a while to overcome) and only marginal upward movement in the GDP growth rate, especially since consumption, savings, and investments are currently relatively inelastic; meaning that a rise in interest rates will not affect savings, investment and consumption very much. The new economic team, therefore, have very few fiscal and monetary handle bars to manipulate.


Monetary Policy in tight corner

At the end of the September 2019 meeting last weekend, the Monetary Policy Committee (MPC) of the CBN retained all policy rates. Remarking on the import of this position, analysts at Afrinvest Securities Limited, stated: ‘‘The sentiment of members (of the MPC) towards easing monetary conditions weakened relative to the July meeting, against the recent dovish stance by Central Banks in advanced economies. There have been rate cuts in systemically important Central Banks to boost growth as a result of the slowdown in the global economy. In our opinion, the decision to hold rather than cut rate means that the CBN would continue its unconventional approach to monetary easing looms. In our opinion, there is a need to go back to convention by restoring the relevance of the MPR as a policy instrument necessary for guiding monetary policy.

‘‘The conflicting monetary policy stance of the MPC is likely to continue as the CBN seeks to ease financial conditions through credit to the real sector while also tightening in the financial market. We suspect that the need to retain and attract foreign investors to the fixed income market has prompted the tightening stance. This is important as the CBN intends to maintain exchange rate stability in the face of declining external reserves, which has been prompted by a weak current account balance and slowing portfolio flows.’’

Recent data from the CBN show that current account balance remained negative at -2.5% of GDP in Q2:2019 (vs. -2.7% in Q1:2019). Similarly, the rhetoric on Foreign Exchange demand management through restrictions to food imports has gained steam.

Afrinvest analysts concluded by saying, ‘‘The decision to maintain an overvalued exchange rate would continue to exert pressure on Nigeria’s external balance, setting the economy up for a sharp devaluation much later.’’


Other macro-economic headaches

The National Bureau of Statistics (NBS) recently published the Consumer Price Index (CPI) for August 2019. The report showed sustained disinflation across the board as consumer price pressures softened, even though the headline inflation moderated to 11.0% Year-on-Year, Y-o-Y in August 2019, as against July position of 11.1%.

The report indicated that a moderation in food inflation reflects the onset of the harvest season.

But some analysts believe that although the trend in inflation is comforting, the chance of attaining the CBN’s target range of 6.0-9.0% remains slim. Consequently, analysts at Cordros Capital Limited, stated: ‘‘In the immediate to medium-term, we expect food prices to remain elevated due to persistent insecurity in the middle-belt and the rest of Northern Nigeria.’’


Going Forward

Amidst the establishment of the EAC, the Federal Government said last week it is fine-tuning arrangements to embark on the development of a 30-year economic development plan.

Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, said the plan became imperative because Vision 20:2020 and the present administration’s Economic Recovery Growth Plan (ERGP2016-2020), would expire next year. In view of this, she explained that the nation requires a long term economic development plan to guide her activities going forward.

Perhaps the EAC may play a key role in this, although it seems they are expected to deliver results in the short to medium term.


The EAC team

As members of the President’s economic team, the erstwhile economic outsiders will now have a view from the inside, giving them a better nuanced appreciation of the economic challenges and the delicate political balance that constrain policy actions. The deeper understanding of the present difficulties in policy formulation and execution will give team members the opportunity to be creative and assertive in a new, hopefully, different policy direction.

The team is made up of mostly independent minded, private sector mindsets and internationally exposed economists. There seems to be the need for reconciling their personalities, pedigrees and backgrounds with the realities on ground, the circumstances that brought them into the fray and the established structures and authorities in both private and public sectors. These will come into play on how effective they would become in the public policy ecosystem.
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