Monday, 2 November 2015

#MustRead: Worries Mount Over Tottering Economy

Inflation Ahead
A plethora of headwinds may have hit the nation’s economy, with ominous signs about growth prospects just as analysts warn against further delay in addressing issues assailing productive activities in the country.

Already, President Muhammadu Buhari, on the sidelines of the India-Africa summit in New Delhi last week, admitted that the economy was in dire straits, with grave consequences for the fulfillment of recurrent expenditure obligations.

Specifically, the rising inflation, currently put at 9.4 per cent has defied measures like liquidity tightening till date, amid rising unemployment.

Besides, non-release of 2015 capital vote, expected to complement monetary policy measures, in order to boost the economy; non-activity in the Open Market Operations (OMO) in the last four weeks; may have sent a signal to the banks that tougher times may be in the offing.

Also as the crude oil prices fell to $44.3 per barrel, the stakeholders in the oil and gas sector have expressed worry over its effect on national earnings, especially as the funding deficit has been put at $2 billion yearly.

Within the period under review, the directive by Buhari, which kicked off the full implementation of the Treasury Single Account (TSA), tightened liquidity in the financial system, jerking up interbank money market rates as it reached year highs of over 100 per cent before easing off.

The Central Bank of Nigeria (CBN), had at the last Monetary Policy Committee meeting, raised concerns over the slowing economic growth, which hit 2.35 per cent in the second quarter and weak consumer and investment spending, due to government’s non fiscal support.

The Economic Researcher and Programme Officer at the Centre for Social Justice, Donald Ikenna Ofoegbu, while assessing the state of the economy, noted that there are inadvertently, too many policy reversals and inconsistencies in the last nine months.
“We have monetary policy running without fiscal policy. We now have custom bosses running fiscal policies as if appointed the minister of finance. It’s sad and not the way to run an economy with the hope to attract foreign investors.
“It is hard to explain how in the entire 2015 financial year, no sum has been released for capital projects across the federation. Construction companies have retrenched workers, suppliers are suffering loss in stock value and customers cannot afford purchase prices. This means that we are some steps backward now” he said.
He pointed out that given global conditions- technological advancements, political issues and economic considerations, oil price uncertainty will continue and the 75 per cent dependence oil revenue by Nigeria will soon vanish into thin air, leaving us with nothing but dilapidated infrastructure, rising unemployment, illiquidity, and huge debt burden.
“There may be increased hunger, poverty in the land and aggravated insecurity, a resurge in corruption and credit crunch. It is hard to deny that we have not arrived at this point for now, but the handwriting has always been there and we have Nigeria only pretended to be blind to the truth.”
A capital market operator, who confided in The Guardian over the weekend, said that the measure was a tactical approach by the government and CBN to push banks to perform their primary role of lending, rather than invest the little real sector loanable funds in the less risky instruments.

This may also show that clamour to mop up excess liquidity in the economy using the OMO auctions have not always been for money management issues, but that of the promoters’ interest.

The Head of Research at Afrinvest Securities Limited, Ayodeji Eboh, told The Guardian that inflation in recent times has been driven by high cost of production (not demand pressure) and that the increase in liquidity in circulation will not pressure consumer prices.

Indeed, the high liquidity levels, money market rates have declined, with average NIBOR rate falling to 12.8 per cent from 16.2 per cent recorded the day before the September MPC meeting was concluded.

Treasuries and bonds have also rallied with majority of the benchmark FGN bonds currently trading above their par value, while average bond and treasuries yields across all tenors have fallen 100bps and 521bps to berth at 14.1 per cent and 8.4 per cent respectively.
“We expect high monetary and funding liquidity to translate into low rates in the credit markets and possible buoy loan growth to the real sector in the 4th quarter of 2015.
“However, in the absence of clear-cut fiscal economic policy direction to complement the monetary stimulus, risk appetite of investors and banks will remain weak relative to potential.
Meanwhile, the Society of Petroleum Engineers (SPE) Nigeria Council, in a communique after the Nigeria Annual International Conference and Exhibition (NAICE) said drop in crude oil earnings from low oil price presents a yearly underfunding of $1.8 – $2.0 billion to the Federal Government.

It therefore noted that the crude oil market dislocation from the United States destination requires strategic realignment geographically to seek alternative markets in Europe and Asia.

The communique signed by its Chairman, Emeka Ene , among other highlights stressed that gas is the future of Nigeria, the key to unlocking economic potential of Nigeria and increasing the living standards of the average Nigerian.


Credit: Chijioke Nelson/Sulaiman Salau/The Guardian

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