MPC’s policy dilemma as it starts 2-day meeting today

by | September 25, 2017 2:36 am

Members of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) start their two-day meeting today, to set the benchmark interest rate for the economy. It is the first meeting of the MPC since the National Bureau of Statistics (NBS) announced that the country has exited its first recession in 25 years.

Ordinarily, the fact the country has exited recession should make this meeting less of a difficult one, but there are indications that the two-day meeting is going be one of the toughest meetings of the MPC this year, as the economy sends out conflicting signals. Members of the MPC will have to decide whether it is better to cut interest rates to stimulate economic growth further away from its narrow exit from recession, or keep interest rates high, to sustain investments in government securities in a bid to keep the naira stable. It is going to be a tough call.

Even though the country has exited recession, the service sector, which contributes 53.73 percent of Nigeria’s GDP, remains stuck in recession, contracting for the sixth straight quarter in a row.

Increased crude oil output takes the credit for the narrow exit from recession, and a trade surplus in the second quarter of 2017.

The country’s exit from recession with a 0.55 percent growth in output, was substantially accounted for by the significant swing from a 15.6 percent contraction in the crude petroleum and natural gas sector in the first quarter, to a 1.64 percent growth in second quarter of 2017.

Meanwhile, rising oil exports, triggered by increased production and improved pricing, also saw the country post a trade surplus of N506.72 billion in the first six months of this year, according to the National Bureau of Statistics (NBS) as total exports rose 73 percent, compared to 2016.

The impact of government policy is conspicuously absent in Nigeria’s improving economic fortunes, analysts say, and private capital has hardly been tapped to engender the sustainable and inclusive growth required for Africa’s most populous nation, where population has been growing at an average of three percent per annum in the past decade.

“But for the 17.24 percentage point change in the crude oil and gas sector, Nigeria would have remained in recession in the second quarter of 2017,” said Opeyemi Agbaje, chief executive officer of Lagos-based RTC advisory services.

“The bottom-line is that we do not yet have a policy-driven, sustainable recovery, but one aided by events beyond our control- oil prices,” Agbaje said in his weekly column in BusinessDay last week.

The oil price rout that started late 2014 and its negative impact on net exporting countries, forced the hands of countries, from Saudi Arabia to Russia and Nigeria, to diversify their economies away from oil, that they may be better buffered as oil loses its relevance.

A raft of economic blueprints that place less emphasis on oil, have since been issued by these countries, but Nigeria’s “Economic Recovery and Growth Plan,” is perhaps the most oil-focused of the lot.
The plan aims at seven percent growth by 2020, much of which will rely on pumping crude to hit 2.5 million barrels from a current 2.2 million.

The ERGP targets a 293 percent increase in oil GDP, to N63 trillion by 2020, from N16 trillion in 2017.

The non-oil GDP is only expected to grow 18 percent, to N117 trillion, from N99 trillion, according to a presentation made by Udoma Udo-Udoma, the national planning and budget minister. The ERGP also targets 15 million new jobs and a reduction in unemployment rate to 11 percent by 2020. Unemployment rate hit a six- year high of 14 percent in the fourth quarter of 2016, according to data compiled by BusinessDay and sourced from the NBS.

The unemployment target has been criticised by analysts, pointing to the emphasis in the plan that was placed on oil, which contributes less than 10 percent to economic output and is not a labour-intensive sector, unlike agriculture and manufacturing.

“Oil will not be relevant 25 years from now, especially as countries from France to the U.K., set targets to dump petrol-driven cars for electric ones,” said Kyari Bukar, chairman of private sector think thank, the Nigerian Economic Summit Group (NESG).

“It beats me, why we cannot have some sense of urgency instilled in us, towards moving beyond oil,” Bukar said by phone.

“We should pick out areas of the economy where we have comparative advantage and court private investment to develop those sectors. Even at state level, we should see states come together to form economic partnerships that can boost growth and create jobs. These are the discussions we must be pushing,” Bukar addded.

France is the latest country to announce plans to ban petrol-driven vehicles as part of the commitment of becoming carbon neutral.

Similarly, Norway and the Netherlands are planning to ensure only electric-run vehicles are used in their countries by 2025.

Germany and India are also looking at 2030 towards compliance with carbon neutral environment, while the manufacturer of Volvo automobile is working towards making its cars at least partly electric by 2019.

Barau Suleiman, a member of Nigeria’s Monetary Policy Committee (MPC) also alluded to oil’s loss of relevance in coming years, while highlighting the need to seek sustainable growth without oil.

“Although oil prices have witnessed a fair rally in recent weeks, sustainability of the trend remains a serious source of concern, as oil majors in the US scaled up investment in shale exploration, while OPEC has been facing challenges in ensuring total compliance on its output cut deal,” Suleiman said in a post MPC statement published on the Central Bank of Nigeria’s (CBN) website Tuesday.

Brent crude rose 0.5 percent to $56 per barrel on Friday, according to data obtained from the Bloomberg terminal. Bloated stockpiles have been “massively drained” and OPEC members have implemented more than 100 percent of their agreed cuts, according to Mohammad Barkindo, OPEC’s secretary-general.

“From the demand side, apart from the fact that global economic recovery is yet to keep pace with the pre-global financial crisis, the concern over climate change with particular reference to the Paris Climate Accord, is shifting technology away from carbon-based energy sources.
“In a nutshell, the dynamics in crude oil markets is revealing an indicative equilibrium price at the south of US$50 per barrel,” Suleman said.

The MPC members are sitting for the fifth time this year, to attempt balancing an economy faced with high inflation and weak growth.

Inflation has continued to cool since the MPC last met in July, but at 16 percent, prices are still growing at a rate outside the 6-9 percent preferred band.

Furthermore, when stripped of base effects and with more focus on month on month trend, the recent decline in headline inflation leaves much to be desired. Even as the economy’s narrow exit from recession is far from convincing.

The preferred option would have been for the CBN to stimulate growth by cutting interest rates but a BusinessDay poll involving 15 economists’ projects a rate hold when the MPC meeting comes to a close on Tuesday.

That would mean the seventh consecutive hold of the key policy rate at 14 percent. At the last meeting, the majority of a ten-man MPC voted for rate retention, while two members, including respected economist, Doyin Salami, voted for a cut.

“It is obvious that the least challenging is the technical exit from recession. However, there is no guarantee that the economy will not slide back into recession, or that the economy will recover and grow and surpass the level of 2014,” said Garba Abdul-Ganiyu, another of Nigeria’s MPC members that would be meeting today.

“Though headline inflation is trending downwards, it is driven mainly by base effects: the month on month for imported food inflation and core inflation are higher in June than they were in May 2017,” Abdul-Ganiyu said in a statement published on the CBN’s website.

Despite perceived government failings to work the talk of diversification away from oil, some analysts are persuaded that more time would be required to move past oil.

“Diversification is not so easy,” said Pabina Yinkere, who heads institutional business at investment firm, Vetiva Capital.

“We have spent the past year trying to first get out of recession, we first had to stop the bleeding, now we need to give it time to see how things pan out over the next few years,” Yinkere said by phone.

“It is true that if anything happens to oil, we are likely to surrender the recent gains we have seen with exchange rate stability and economic growth, but now that we are out of recession we have a better structure in place to attract private capital,” Yinkere said.

The Nigerian economy, though diversified, with Agriculture as the largest contributor to GDP accounting for some 25 percent of economic output, requires a face-lift for its revenue base.

Despite contributing an average of 10 percent to GDP in the last five years, oil revenues account for 70 percent of Nigeria’s annual revenue and a mammoth 90 percent of foreign exchange earnings.
Oil still accounts for over 70 percent of total exports, as was the case in the second quarter of 2017 according to NBS data.