Policy and Economic Review

The global economic environment is decidedly more risky and the chances of a second developed world financial crisis are clearly elevated! In its recent World Economic Outlook (WEO) released in September 2011, the IMF warns that “the global economy is in a dangerous new phase” due to the convergence of slower recovery in advanced economies and “a large increase in fiscal and financial uncertainty which has been particularly pronounced since August”. Uncertainty derives from sovereign debt concerns in Europe-Greece, Portugal, Ireland, Iceland and Spain initially, but concerns now include Belgium and even Italy-and worries that European banks and financial system could be affected as they hold the bonds of these countries. Only Britain and Germany are not been mentioned and even then British banks may themselves be tarred in the event of sovereign default. Meanwhile oil and commodity prices appear to have peaked since April in the case of oil, and February for some food prices. Oil prices have declined for six straight months, with OPEC basket going below $100 per barrel for the first month close since February while the FAO food price index stood at 231 points in August, down from February peak of 238. The IMF WEO reviewed global growth prospects for 2011 and 2012 down to 4% with the structure of uneven growth between developed economies (1.6% and 1.0%) and developing and emerging economies (6.4% and 6.1%) projected for the next two years. The Fund states that risks are clearly to the downside! In spite of declining oil prices, lower global growth prospects, falling foreign exchange reserves and clear pressure on our exchange rates, the federal government released the Medium Term Expenditure Framework (MTEF) for 2012-2015 in which oil prices were projected at $75 per barrel and exchange rates at N153/$ for 2012-2015. This was at a time the CBN was already selling dollars at close to N155/$! The MTEF however factored in supposedly less optimistic scenarios for oil prices at $70 and $65 per barrel. Cynics may describe the three scenarios-$75, $70 and $65 as all optimistic scenarios!!! The last time oil markets fell in 2008, they reached below $40 per barrel! In concluding that risks were to the downside, the IMF noted there would be vulnerabilities in some emerging economies-in my view Nigeria would be one clear possibility. As we were reminded in 2008, slower growth in developed economies means slower oil demand, which implies lower oil prices. The Nigerian economy remains structurally dependent on oil prices for government revenues, foreign exchange reserves and exchange rates! As oil prices fall, while oil importing nations rejoice, Nigeria experiences an oil price shock. We may be in line for another one if current oil price patterns persist! The CBN increased the Monetary Policy Rate to 9.25% on September 19 and shocked markets on October 10 with another increase, this time by 275 basis points! The CBN sticks to its stubborn (and perhaps emotional) rigidity concerning flexibility around exchange rates as it seeks to battle inflationary pressures. If CBN had taken the counsel of the IMF in terms of exchange rate flexibility and discouraging one-way bets against the Naira several months ago, perhaps the bank could have avoided its current exchange rate/interest rate quagmire! In the event, CBN has provided generous dollar subsidies to capital flight, export of corruption proceeds, currency speculation, foreigners, traders and consumption! The only worthwhile beneficiaries of this huge subsidy are manufacturers who constitute only 4% of GDP!!! Meanwhile a N15 margin has emerged between the official CBN rate and all other rates, providing an irresistible incentive to “round-tripping” and fuelling additional surge in foreign currency demand!!! The country has gone through eighteen months of extraordinarily high post-recession oil prices without a single dollar of additional savings, frittered away to the above-listed categories of lucky beneficiaries. Someday someone in CBN or the National Economic Management Team (NEMT) will recognise an unsustainable exchange rate management strategy!!! The economy however continues to grow above 7% with the star sector being telecommunications consistently over 30%; other high growth sectors include solid minerals, building and construction, hotels and restaurants, wholesale and retail trade, and real estate all between 10.4% and 12.3%. The problem remains that growth is not inclusive because of the structure of our economy (growth is dominated in weighted terms by sub-modern agriculture dependent on rainfall patterns, crude oil exports with no domestic value chain, and trading in imported goods; sectors which can generate jobs are either too small in GDP terms of growing too slow) and unemployment at 21.1% is too high. But policy appears to be rising to the challenge. The outlines of a sensible agriculture policy is emerging; power sector road map implementation appears to be proceeding; governance is beginning to look more competent; and there is leadership on the economic front. The financial sector has been a drag on private sector performance and may have boosted unemployment since industry turmoil appeared in 2009, but then resolution appears to have been achieved through nationalisations and the recently-concluded recapitalisations and mergers. We hope the industry will now be left alone to experience stability and growth, and to play its role of economic intermediation.