The Monetary Policy Committee of the Central bank of Nigeria (CBN) is holding their first meeting in 2017 in a world that has changed significantly. The most significant change since their last meeting in December 2016 is that Barrack Obama is no longer President of the United State of America. In his place, is President Donald Trump, a man whose rhetoric about “Making America Great Again” signal a high level of uncertainty for the rest of the World.
We are now in a world where China is preaching free trade and America is now preaching protectionism. We are also looking at a world where it looks like two of the most powerful of nations in the World, USA and Russia are going to be really good friends.
There have also been significant changes in another global power, the United Kingdom. Theresa May, the prime minister on 17 January delivered a speech indicating that Britain will be opting for hard exit from the European Union. This means a complete break with the EU resulting in UK having to renegotiate trade agreements with EU and other countries.
The EU exit negotiation process, which is yet to be triggered, is expected to last two years. This creates a lot of uncertainty in the euro area, still struggling with low economic growth. The uncertainty will feed into emerging markets like Nigeria in terms of both portfolio and non-portfolio investment inflows as both EU and UK companies could be distracted over the next two years trying to redefine their future in a separated Europe.
But the uncertainty in Europe and America is countered by strong economic growth figures coming out of China. China’s fourth quarter growth figures came in a stronger than expected beating in the expectations of many analysts. China announced on 20 January that its economy grew 6.8 percent in the last quarter of 2016, fuelled by higher spending of its increasingly affluent population. China’s economic growth is good news for Nigeria since it translates into higher demand for crude oil to power its huge economy.
Domestically, the CBN MPC meeting is also coming at a time when there are signals that the high pace growth in inflation is slowing down. Data from the National Bureau of Statistics (NBS) shows inflation closed at 18.55% in December. January inflation figures are expected to be lower due to the higher inflation figures already seen in 2016. This gives the MPC some room to start tweaking with the benchmark monetary policy rate, which stands at 14 percent.
There is also the good news that the country’s external reserves has been on a steady rise since November adding almost US$2 billion to date to close last week at US$27.3 billion. This means that the CBN dollar war chest has grown bigger and gives it more room to continue its dollar defence strategy. Even though, it is also likely that the CBN’s dollar war chest will start depleting again immediately it starts intervening in the interbank market to sell dollars at its preferred N305 to the US$ exchange rate to meet up with the significant pent up demand in the market.
But on the negative side in the domestic front is the continuous growth in the number of unemployed Nigerians. The NBS put the unemployment rate at 13.9 percent in the third quarter of 2016 while underemployment rate stands at 19.7 percent. Analysts at Financial Derivative Company forecast unemployment rate in the fourth quarter of 2016 could have risen to 14.5 percent. Lack of access to dollar have been blamed for the rising unemployment as it has led to many companies, especially in the manufacturing forced to cut down on manufacturing capacity with capacity utilization now estimated having averaged 44 percent in 2016.
Analysts at FDC estimate Nigeria’s misery index now stands at an all time high of 53.35 percent, indicating a consistent rise in the last six quarters, pushing Nigeria’s into one of most miserable countries in Africa currently. A rising misery index simply means that more Nigerians are getting poorer and can no longer afford the basic things of life. Not surprisingly, default rates in rented apartment in Lagos is now estimated at 71 percent, showing the pain many families are going through currently.
The rising poverty in the country poses significant challenge for members of the MPC who meet today and whose biggest task will be taking the best decision that will stimulate economic growth and reverse the rising prices of goods and services. The most obvious decision could be to cut interest rates and hope that it will increase lending to the private sector, which could stimulate economic growth. But with the federal government’s N1.2 trillion domestic borrowing plans in 2017, whatever reduction in interest rates is likely to benefit the government than the private sector.
Also a reduction in interest rates at a time interest rates in the US are expected to rise could also mean that Nigeria would become less attractive for foreign portfolio investors when the country needs significant autonomous inflows of dollars to help support the low supplies in the official market.
Raising interest rates is most likely ruled out considering that the country is hoping to get out of recession latest in the second quarter of this year.
But the elephant in the room remains the exchange rate. And the question remains to float or not to float? And that answer lies more with the presidency than the CBN, all indications have shown.
With Trump as real as he can be, the world has changed and the CBN definitely has some very tough decisions ahead of it this year to make.