Hesitant leadership dogs Nigerian outlook
AN extreme level of policy uncertainty continues to weigh heavily on economic growth prospects in Nigeria. Granted, the falling oil price has hit the economy hard, but so too has the government’s unwillingness to devalue the naira and remove restrictions on imports.
At the last policy meeting of the Central Bank of Nigeria, the bank had the opportunity to provide guidance on monetary and exchange rate policy, but opted not to. Markets have remained on tenterhooks since, but rumours about potential naira devaluation have been disappointed.
Instead, the government decided to allow banks and businesses to conclude transactions in yuan. As a result, a significant portion of Nigeria’s foreign exchange reserves will be converted to yuan.
This may offer a temporary boost to the economy and alleviate pressure on the naira in the short term, but it is not enough to avoid naira devaluation.
Aside from increased doubts about monetary policy issues, the government is struggling to finalise the budget. Although the National Assembly has approved the budget with adjustments to allocations, President Muhammadu Buhari refuses to sign it into law. Still, the recently passed budget envisions a 6.1-trillion naira spending plan that explains most of the projected budget deficit of 2.2% of GDP. However, uncertainty remains over the government’s ability to find ways of funding its expansionary plans.
While still very short on detail, it appears Nigeria has opted for cheaper sources of funding and plans to issue a $6-billion (about R87-billion) yuan-denominated bond that will finance some of its infrastructure projects. Officials also alluded to the possibility of selling samurai bonds.
Fitch highlighted concerns around the adoption of policies that may be detrimental to economic growth and has accordingly flagged the possibility of a downgrade.
Along with policy uncertainty and exchange rate restrictions, global growth is unlikely to rescue the economy. Although consumers in various developed and emerging economies will still enjoy a boost to disposable income due to low oil prices, the state of the global oil market will weigh on the country’s near-term growth prospects.
The negative impact of these local and global headwinds was evident in the most recent economic growth numbers released late last year.
The pace of expansion of Nigeria’s economy slowed yet again in the fourth quarter, registering 2.1%, down from 2.8% in the third quarter. For the year, the economy grew by only 2.8%, from 6.2% in 2014. It is telling that the weakness stemmed mainly from the non-oil sector — the largest contributor to economic activity. If one considers the restrictions the Central Bank of Nigeria has placed on imports of goods, this outcome is unsurprising.
A significant amount of Nigeria’s imports consist of intermediate goods that are essential for the manufacturing sector.
Even more pressing is the severe dollar shortage, which, if not addressed soon, will see increased company defaults and closures, leading to more unemployment and, ultimately, even weaker economic growth. An overvalued naira is also keeping export growth constrained.
Against a backdrop where the impediments to growth such as low oil prices, policy uncertainty, an overvalued naira and trade balance constraints are unlikely to dissipate any time soon, the growth outlook for this year remains dismal.
This expectation is supported by leading indicators such as the purchasing managers’ index, which dropped to 45.5 in February from 47.2 in January. Inflation has been above the central bank’s target of 6% to 9% for a few months, and it should continue to do so for a while as the bank’s import restrictions and currency policies create product shortages and high exchange rates in the parallel market.
The bank’s decision to hike interest rates in response to the elevated inflation rate is a step in the right direction, but is not enough to address the underlying issues. Nxedlana is FNB chief economist