Economic Indicators: Moving Forward Slowly

Wednesday, January 23, 2019 06:30AM /Proshare Research

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With oil prices sliding steadily and public revenues plunging, albeit mildly, coupled with global trade activity shrinking on the back of a bitter disagreement between the world’s largest trading partners, the United States of America (USA) and China, Nigeria’s economic fortunes for 2019 appear uncertain.

Inflation rate-a slowly burning fire

Inflation figures trended downwards in 2018 as the Central Bank of Nigeria (CBN) held a tight fist over domestic money supply. The CBN’s desire to see domestic inflation rate at between 6% and 9% per annum may drive a restrictive monetary policy in 2019. The first quarter of 2019 may see inflation slide to between 10.98% and 11.12% as the monetary regulator retains Monetary Policy Rate (MPR) at 14% for H1 2019. 

Chart 1 Nigeria Inflation Rate 2018

Source: National Bureau of Statistics (NBS)

Interest rates-no reprieve yet for manufacturers

Domestic interest rates, especially lending rates remained high in 2018.  The CBN’s indicative monetary policy rate (MPR) stayed at 14% per annum for twenty four months, serving as a floor from which bank lenders have placed a premium to cover default risks. According to CBN statistics, lending rates have hovered between a high of 17.71% in December 2017 and a low of 16.53% in October 2018. The falling official figures contradict the experience of manufacturers and commercial retailers who still groan under the pressure of lending rates as high as 25% per annum; indeed prime lending rates although lower than the 17.7% posted in December 2017 is still  as high as 17.08%.

Chart 2 Nigeria Lending Rate 2018

Source: Central Bank of Nigeria (CBN)

Money supply-CBN’s slippery chokehold

The CBN aggressively controlled money supply in the last twelve months to hold down growth in domestic cash and it’s near substitutes in addition to demand deposits (M2) while it mopped up what it considered excess liquidity. The effort saw M2 increase by only 7% between December 2017 and October 2018, growing from N24.0 trillion in December 2017 to N25.6 trillion in October 2018. In other words, the CBN ensured that M2 grew by a compound monthly average rate of 0.65%. With fiscal revenues likely to fall in the first half of 2019 (as oil prices tumble) money supply growth can also be expected to fall.

Money supply-CBN’s slippery chokehold

Source: Central Bank of Nigeria (CBN)

Unemployment: a problem that just keeps getting worse

Nigeria’s unemployment problem has so far been an official nightmare. The need to keep inflation in check and control an already staggering fiscal deficit has left the government with little room to manoeuver GDP expansion to increase job creation. The unemployment rate based on recently released figures by the NBS stands at 23.1% or 4% lower than South Africa’s Q3 2018 jobless rate of 27.5%. 

Chart 4 Nigeria’s unemployment Rate (2014-2018)

Source: Nigerian Bureau of Statistics (NBS)

Fiscal policy: Between the devil and deep blue sea

Nigeria’s fiscal policy in 2018 has been trapped between loose budgetary expansion and rising public sector debt. The fiscal authorities have tried to spend the economy into growth but have unfortunately, failed and been weighed down by huge recurrent expenditures and wildly swinging international oil prices. The key outlook points include:

• Recent agitation for a minimum wage increase may worsen the country’s fiscal balance further in 2019, as a huge N160billion has been set aside to accommodate the rise in public sector wage bill.
• The increase in recurrent expenditure is expected to adversely affect capital project expenditure in the year. 
• A more practical growth outlook for GDP in 2019 would be between 1.89% and 2.2% as against the 2019 budget forecast of 3.5%.
• The squeeze between a higher public wage bill and lower public revenue will crush plans to reduce debt service and force the country’s debt service- to-revenue ratio up (it currently stands at 60%).  

Chart 5 Nigeria GDP Quarterly Growth Rate 2019 (Projections)

Source: Financial Derivatives Company (FDC), Lagos Business School (LBS)

External reserves- gentle slide baits hard crash

Nigeria’s external reserves have bounced forward over the last three and a half years rising from just under $30billion in 2015 to $42 billion as at the end of the third quarter of 2018. This means that:

• On a year-on-year compound average annual basis, external reserves have grown by roughly 11.87%. 

• The strong rise in foreign reserves may see reversals over the first half (H1) of 2019 if oil prices continue to stumble and dip below $60 per barrel as the CBN attempts to ‘defend’ the N/$ exchange rate.  

Chart 6 Nigeria External Reserves 2018

Source: Central Bank of Nigeria (CBN)

External trade- Oil still the elephant in the shop

Even though the sector contributes only 10% to Gross Domestic Product (GDP), Nigeria’s petroleum sector is responsible for over 90% of exports and 80% of foreign exchange earnings. This means that any adverse disruption to the sectors price and sales dynamics translates into a rapid deterioration of the fiscal budget for the year. This may show up as a major concern in 2019 as oil prices, by general consensus, may head south on the shoulders of shale oil manufacturers increasing oil supplies as cash-strapped and debt-plagued oil economies such as Venezuela, Iran and Libya continue to increase sales volume to ease their  stifling debt service obligations.

Nigerian non-oil exports have not shown significant improvement in 2018 because of a number of inhibiting factors which include:

• Falling agricultural commodity output resulting from a rise in local insurgency in the North east and North central states and heavy flooding of rice plains in the North Central region of the country
• Weak institutional structures for domestic export processing, storage, transportation and distribution still constitute major challenges
• Relatively poor local power production; distribution at an inadequate 4,000 MW (compared to South Africa’s  MW)
• High domestic cost of finance; prime lending rate is hooked at a towering 17%p.a.

Table 1 Nigerian Exports by Sectors and Regions 2018

Source: National Bureau of Statistics (NBS)

Nigerian Economic Indicators 2018 – Nigeria’s Foreign Reserves Improves to N43.19bn

Nigeria’s economic performance has been patchy in recent times. Inflation rate which fell from 15.13% in January 2018 to 11.14% in July rose again to 11.28% in September and later dropped to 11.26% in November 2018. The seesaw has built in inflation rate uncertainty thereby increasing the domestic cost of funds. 

Nigeria’s GDP growth which was +2.11% in Q4 2017 is currently at +1.81% at Q3’18. Also, the unemployment rate of 18.8% as at Q3 2017 rose to 23.1% in Q3 2018.

However, the country’s foreign reserves which stumbled to US$38.91bn at the beginning of 2018 recently saw some improvements. As at December 28, 2018, reserves stood at $43.19bn.

Below is a table of Nigeria’ major economic indicators in 2018:

Do feel free to share your opinions/observations and feedback with us vide content@proshareng.com and/or research@proshareng.com

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