The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) will announce their last interest rate decision of the year today.
But analysts say the decision on whether to reduce, raise or leave interest rates unchanged would not be an easy one for the MPC, following the announcement yesterday that Nigeria has fallen deeper into a recession, the complications in international global markets with the imminent ascension of Donald Trump as President of the United States of America (USA) and the rising inflation rate in the country.
The National Bureau of Statistics (NBS) said on Monday that Nigeria’s Gross Domestic Product (GDP), which measures economic activity level in the country, contracted 2.24 percent for the third quarter ended September 2016 compared to the 2.84 percent growth recorded in the same period of 2015.
Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) had expressed the hope, ahead of the meeting that the MPC would not vote for a cut in interest rate due to the higher inflation rate of 18.3 percent as at October. But with the country falling into deeper recession, other members of the committee may see a need to cut interest rates to boost economic growth in a bid to pull the country out of recession.
Yemi Kale, Statistician-General of the Federation notes that the 2.24 percent contraction of the economy in the third quarter means that the Nigerian economy has now contracted by an average of 1.58 percent this year and would need to grow by a minimum of 4.32 percent in the last three months of 2016 for the country to avoid recording negative full year growth.
The data from the NBS shows that the oil sector remains Nigeria’s most troubled sector, with growth declining for the third consecutive quarter in the period under review, by -22 percent from -17.48 percent in the second quarter and 1.06 percent, relative to the third quarter of 2015, according to the NBS.
However, the non-oil sector, which includes manufacturing, banking and agriculture, crawled into positive territory for the first time this year, growing 0.03 percent in the third quarter, from -0.38 percent and -0.18 percent in the first and second quarters respectively, as deduced from NBS data.
“The non-oil sector may not have recorded significant growth, but that it is out of recession is a good trend,” Kyari Bukar, chairman of private sector think-thank, the Nigerian Economic Summit Group (NESG), said by phone.
“I think the fourth quarter will be much better, as government spending begins to weigh on the economy, but the growth may be flat,” Bukar added.
Aurelien Mali, Moody’s senior analytical adviser for Africa, also forecast flat growth in the fourth quarter, but says Nigeria’s economy can expand by 2.5 percent next year, if it can keep oil output at 2.2 million barrels per day.
But analysts at FSDH Merchant Bank say, “With the latest GDP contraction, it would be difficult for the Monetary Policy Committee (MPC) of the CBN to justify an increase in interest rate.
“The rising inflation rate will also make interest rate cut a difficult policy option. We reiterate that a HOLD decision is the most appropriate policy option under the current economic developments in the country,” FSDH added.
Also, the imminent presidency of Donald Trump in the United States of America, is expected to influence the outcome of the last meeting of Nigeria’s MPC.
Since the last MPC meeting held in September, the global risk landscape and policy outlook have changed, underlined by the emergence of Trump as the President-elect of the United States and the resultant shockwaves in the global bonds market, resulting in reduction in the appetite for Emerging Markets assets.
According to analysts at Afrinvest, the global fund managers have interpreted the victory of Trump to imply a domestic pro-growth and expansionary fiscal policy agenda in the US and high probability of lower trade relations with emerging markets.
“With these, investors are buying more of US equities (with the S&P index reaching a new all-time high), repricing bond yields higher, while cutting their exposure to Emerging Markets assets – currencies, bonds and equities,” Afrinvest analysts say.
They further argue that the emergence of the entrepreneurial Trump could possibly influence the decision of the December Federal Reserve meeting with the resultant hike in rate, which could further heighten currency volatility and foreign direct investment reversals.
“In its December-2016 meeting, the US Federal Reserve, equivalent of Nigeria’s Central Bank, is expected to hike rate to counteract prospect of an expansionary fiscal policy, which has raised inflation expectation and also to protect its credibility, having raised the possibility of rate hike in 2016.
“The impact of these macroeconomic policy adjustments in the US and uncertainty regarding trade policies could have a definitive impact on global funds flow in subsequent months, putting emerging and developing countries at the risk of further flow reversals and currency volatility,” they added.
But assessing the MPC in the last one year, Razia Khan, managing director, chief economist, Africa global research, said on Monday that “With frequent changes in the monetary policy stance, it is not clear that there is an overall agreement on the kind of policy measures needed to tackle Nigeria’s economic challenges.”
According to Khan, “The key issue is what to do about inflation, which is accelerating. The seasonal moderation in the monthly rate of inflation counts for very little. It is the big picture that matters. Absence of a more robust framework for tackling foreign exchange liquidity issues, inflation will continue to be a problem.”
The CBN hiked rates for the first time this year in July, pushing it by 200 basis points to 14 percent from 12 percent the previous month, as it sought to take down rising inflation.
Inflation blasted past required thresholds this year, breaking into double digits in February to 11.4 percent from 9.6 percent in January and has been striding on since then.
Nigeria’s government had said in October that it expected the economy to expand by 0.35 percent in 2016 from 2.8 percent in 2015, because of a bumper rice harvest, even as the International Monetary Fund forecast a contraction of 1.7 percent, the first full-year contraction since 1991.
Such an optimistic target on the part of government, according to economist and CEO of Time Economics, Ogho Okiti, would require a minimum growth of 1 percent in the third and fourth quarters.
Nigeria’s budget office also sees expansion of 3.02 percent in 2017, even as the IMF cut its forecast to 0.6 percent from 1.1 percent previously.
“With a realistic currency policy, GDP can grow again in 2017 as the IMF and others assume,” said Robertson.
Nigeria may have liberalised its market in June to trigger autonomous dollar inflows, but its currency market has run out of the euphoria of the big devaluation, which saw the naira shed more than half its value, as investors frown at the CBN’s damage control of the market.
The naira was down 0.06% to N315.47 from N315.64, as at 2:00pm in Lagos, according to Bloomberg data. At this level, the naira is down 59.8 percent, compared to pre-devaluation rate of N197/$.
John Omachonu & LOLADE AKINMURELE
