The Central Bank of Nigeria’s (CBN) rate-setting body (the Monetary Policy Committee – MPC) meets today and tomorrow, to agree policy responses to domestic monetary conditions. And it could be argued that the macroeconomic conditions prevalent in the run up to a meeting of the MPC have not been as good, of late, as is the backdrop to this meeting.
Yes, the economy shrank last year. However, a detailed look will reveal that not only did the economy shrink much more slowly towards the end of the year. But major indices now appear to have turned a bend. The trade gap was clearly narrowing, as government revenue (and thus spending) improved. Thus, the expectations of a mild recovery this year. Naysayers, of course, will remind you that none of these upsides to a near-shambolic economy is the result of concerted effort by the Buhari government to turn the economy around. For the most part, the economy is benefitting from being able to produce more of and sell its main export product (crude oil) at higher prices in the global market.
Whatever the drivers may be (and potential candidates are all over the place, especially OPEC’s quota fixing, a recovery in the global appetite for commodities, etc.), higher oil prices have supported accretions to the country’s foreign reserve balances that have pushed the latter up by 10% since the MPC last met. Supported by a heftier war chest, the CBN has taken to intervening more regularly at the retail end of the domestic foreign exchange markets, successfully driving up the naira’s exchange rate. Even then, a “stronger” local currency scarcely obviates the need for discussion about the opportunity cost of the balance on the reserve account. Especially when a softening naira may have helped the trade accounts by increasing the cost of imports.
Equally positive for the economy’s near-term outlook was the successful raising by the government of a US$1billion Eurobond. Given that after a first issue in 2011, Nigeria last raised funds from the international financial markets in July 2013, the fact that the issue (upon the economy’s return to the markets) was 8 times oversubscribed speaks to external confidence in the economy’s long term fortunes — the issue matures in February, 2032. There are those who would say that at a coupon of 7.875%, the issue was pricey. But at this point, that would be caviling needlessly.
More good news remain. Complimenting this improvement in the external price of the naira was the release by the National Bureau of Statistics (NBS) of inflation numbers for February, 2017. At 17.78%, headline inflation last month was down 0.94% points on the 18.72% recorded the previous month. More importantly, the NBS reports that February’s inflation measure “represents the first time in 15 months that the headline CPI has declined on year on year basis….” We also, thus, have seen the domestic price of the naira improve.
Again, those pesky doubters. The trick to understanding the inflation trajectory over the next few months will be to focus on the “base effects”, a phenomenon with which the NBS explained February’s falling headline rate. One explanation of this phenomenon describes it as relating “to inflation in the corresponding period of the previous year, if the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the price index will arithmetically give a high rate of inflation now. On the other hand, if the price index had risen at a high rate in the corresponding period of the previous year and recorded high inflation rate, a similar absolute increase in the price index now will show a lower inflation rate now.”
In February 2016, headline inflation, on a year-on-year basis, was 11.4%. It had risen by 176 basis points above the March count, and was the highest such monthly count over the previous 42 months. This spike always meant that the year-on-year inflation count for February 2017 was always going to be relatively lower. In other words, despite the lower inflation figure for last month, we do well to be worried by rising domestic prices.
Worse, is that despite the deceleration in headline inflation, food inflation was up 18.53% last month. Inflation hurts the poor most because food is such a large component of their daily spend. Add to this the fact that even though we are already in March, no major planting activity has commenced in the states in the nation’s breadbasket. Then there are reports to the effect that army worms may have infested 22 states in the north of the country. Consequently, the outlook for food inflation looks dire.
Conversely, the U.S. Fed’s decision to increase its benchmark interest rate by 0.25% (to between 0.75% and 1%) is an even darker cloud. On one hand, it pushes the yield on dollar-denominated assets up, forcing global fund managers to rebalance their portfolios out of emerging markets and developing economies. In addition, it is almost a given that we would be raising new funds externally at much higher coupon rates. You only need know how burdensome debt service costs are already to figure out how much of a difficulty this is. On the other hand, traditionally, a firmer dollar (as yields rise in the U.S.) has meant falling oil prices. Worse, in the period between OPEC’s agreement last year to stitch up crude oil production in support of higher prices, 168 new wells have been opened by shale oil producers in the U.S. Such that the U.S. currently produces 9.1 million barrels of oil daily. Accordingly, oil prices fell 10%, last week, returning to levels last seen just before OPEC agreed to fix production late last year.
In terms, then, of what the MPC must do, the only certainty is the agreement amongst financial markets’ talking heads that it has so far failed in its price stability remit. Domestic prices have moved in spite and because of the apex bank’s riot of policy prescriptions for the economy. And now, although shoots of an economic recovery might be discernible, the heatwave from the last adverse weather event is yet to lift. In this circumstance, the MPC could do no worse by, first, doing no wrong: keep its gunpowder dry while we get a hang on the economy’s new direction.