The Headache of Missing Targets


Monday, January 29, 2018 03:00PM / Proshare Research 

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Executive Summary
Economies are anchored on policy goals regarding price and growth. In more precise terms such goals are spelt out in numeric targets. These numerical targets serve as the needed guide for economic agents who gauge both the wiliness and degree of response of policy makers to their touted goal. In most cases, it is interpreted as been activist or conservative to specific objective, such as maximum employment, economic prosperity and price stability. 

Evidently, numerical targets act as an integral part of signalling to economic agent, thus the Nigerian economy is not an exception to such.  Targets also serve as a platform to reappraise economic performance periodically. As much as we do agree that targets are threatened by external headwinds, at the same time the gulf between targets and actual performance points out both the resilience of the macro economy and foresight of policy makers. More importantly it provides the ample opportunity to avoid been entrenched in the “let by gone be by gone” syndrome.  Thus the danger of growing repeated undershoot to numerical targets affects the reputation of policy makers as a whole. 

In the wake of another economic horizon, this edition of Proshare Confidential takes an in-depth study into the projected economic targets over the years.  Humbling, it creates the right platform to weigh target against actual performance by so doing highlighting the performance of policy with regards to targets. Therefore back-tracking as far back as 1993, policy makers have been able to hit their inflation targets six (6) times.

The switch in monetary anchor from monetary rediscount rate to monetary policy rate strengthened the grasp on inflation, as it forced inflation to reside within the single digit territory. However, the repeated series of monetary shock combined with supply shock has increased the limitation of monetary policy rate. Thus, in recent times inflation seems to display a stickier attitude downwards, as it reflects supply constraints.

Over the years the inability to carry out reforms ranging from infrastructure, improved private participation, proper land administration, privatization, improved fiscal prudential and deregulation of the oil sector has become a negation on the mid to long, as the markets are less patient and quick at raising the sticks for committing sins of omission - such is responsible for the series of monetary shock.

Apart from committing the crime of omission, the peculiarity of the Nigerian structure feeds inflation, the relatively high chunk of the lower class which depends on cash balances with the food sub-sector as the major component of their consumption basket makes food inflation stubborn.   The money market remain relatively shallow and has an inherent captive, allocation of resources by the upper end of the middle class is difficult.

On the growth story, Nigeria has hit its target seven (7) times, as growth showed earlier reversal compared to inflation. Macro reforms as at the inception of democracy such as exchange rate, debt, fiscal rule, deregulation and elements of pro poor polices such as NEEDS and SEEDS paved the path for growth. Thus, policy was more bullish on targets as they rode on good reforms.

Though Nigeria has not hit growth levels considered to be abnormal or super normal, growth levels began to fall not as a result of diminishing returns but as a result of less predictability, rising uncertainty and gradual derailing from initial reforms.  Thus, missing growth levels became evident as policy makers found it harder to hit their target. This certainly points out the cost of political downside risk to targets such as the inability to hold monetary policy committee meeting, which underpins the uncertainty and inability to manage known knows better off.

Moreover the combination of both shrinking capital spending to GDP coupled with stunted financial deepening threatened output. For instance, in 2016 capital spending was paltry as it stood at 0.2% to gross domestic product.  Therefore the need to act on the needed reforms that supports more private capital contribution, such as providing the right legislation that protect private public enterprise have become inevitable.

In addition, the pro-poor policy in recent times has been largely uncoordinated, unfortunately restricted to hand out and anchor borrowing it has done little to address the present skewed income distribution. A more coordinate front is needed to reverse this horrible state.  The approach of enforcement that has been that has pivoted fighting corruption seems to ignore the roots. This includes social insecurity and the potent of fast vanishing social economic mobility.

In the scenarios where targets were not met both the fiscal and monetary authorities need to make it a duty to make available to economic agents the reasons why such targets were not met and the actions taken to ensure it can be met. This will further bolster accountability, credibility and trust to policy formulation.

In a cursory review, this edition also captures the global economy as we reflected on the tight labour and deviation from 2% inflation threshold in America.  Certainly, supporting interest hike, at the same time improving the wellbeing of the labour force will lead to increase remittances.  The surge in animal spirit and a more conservative strategy by shale oil producers has driven oil price to $70. In all honesty the fiscal capacity of the nation has diminished, thus additional foreign earnings will be appreciated to replenish our armoury and make the needed economic investments. 

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Previous Proshare Confidential Report (s)

  1. 2018 Outlook on the Nigerian Economy: The Need for an Even Keel – Dec 2017
  2. Nigeria External Economy and the White Noise of Import Dependency – Nov 2017
  3. States and the Rising Weight of Debt – Oct 2017
  4. Money Supply: Reeling from Policy Response – Sep 2017
  5. How Rail and Energy Will Deliver a Robust Economy for Nigeria – Aug 2017
  6. Too Big Government: The Hysteria of Developmental Quagmire – Jul 2017
  7. The Nigerian Debt Conundrum and the Need for Automatic Stabilizers – Jun 2017
  8. Article IV vs. ERGP - The Third Way – May 2017
  9. Lifting The Veil off The Financial Sector – Apr 2017
  10. Towards An Economic Model for Nigeria; Going Beyond Symptomatic Responses - The Panama Model – Mar 2017
  11. FX Utilisation in January 2017-Symptoms of An Opaque Structure – Feb 2017

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