… Set to confront stagflation
By Emeka Anaeto, Business Editor
The Central Bank of Nigeria, CBN, is set to sustain the positive developments in the Nigerian economic growth performance amidst the threats of stagflation.
Governor of CBN, Godwin Emefiele, who gave this hint at the last Monetary Policy Committee Meeting, MPC, of the apex bank earlier this week, also indicated that it’s pro-growth policy strategy would be sustained despite the inflationary pressures.
The pro-growth strategy of the apex bank entailed expansionary monetary policy which encouraged supply of capital to the economy especially the real sector.
The apex bank had, at the wake of the COVID-19 pandemic established a battery of intervention financial facilities to spur economic activities against the adverse impact of the pandemic which had forced Nigeria’s economy into recession in the third quarter of 2020 after two consecutive quarters of negative growth.
The economy made a surprise bounce back exiting the recession faster than projected, with a modest 0.1percent growth in the fourth quarter of 2020, Q4’20.
Moreover, the first quarter 2021, Q1’21, gross domestic product, GDP, numbers released by the National Bureau of Statistics, NBS, earlier this week indicated a sustained recovery at 0.51 percent.
Most heart-warming is the non-oil sector lead in the GDP recovery profile despite the sustained downside effect of non-economic factors, principally, the overburdening insecurity across the country.
The positive development, though still tepid, portended a positive outcome of the CBN’s economic intervention programmes in the past one year.
But the apex bank is also facing the downside implication of its pro-growth strategy which principally resonated in the inflation numbers, thus leading to a state of stagflation.
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may stagnate growth while exacerbating unemployment.
It was against this backdrop that the CBN’s Monetary Policy Committee, MPC, yesterday decided to retain the Monetary Policy Rate (MPR) at 11.5 per cent, along with all other parameters with the Asymmetric Corridor at +100/-700 basis points around the MPR; Cash Reserve Ratio (CRR) at 27.5 percent; and the Liquidity Ratio at 30 percent.
Taking this position at the end of the MPC meeting in Abuja yesterday, Emefiele, however, said his team was determined to make a significant change through the various interventions of the apex bank.
His words, “Nigeria is one country that is in a situation that is out of the ordinary. Out of the ordinary because we find Nigeria being one country that is challenged by stagflation. Stagflation is a situation where inflation is high, prices are running high and at the same time, output growth, in this case the GDP, is contracting and if you understand how this works, you would know that as an MPC, your core responsibility is to rein in inflation by ensuring that you keep the price and monetary stability mandate.
“On the other hand, the economy is confronted by a contracting output, where growth is negative. The normal way to recover from a contracting economy is by easing and injecting liquidity into the economy to stimulate consumption and investments and increase government expenditure.
‘‘We are in a situation in which the objectives or goals are moving in opposite directions. What do we do? We will remain, as much as possible, pro-growth but at the same time, we will keep our eyes on whatever can be done to rein in inflation.”
According to him, the result indicated the success of the various interventions by the bank and fiscal authorities.
He said that about N856 billion has been given out to manufacturers out of the N1 trillion Real Sector Facility, in addition to the targeted Household and Small and Medium Enterprises Facilities which was increased from N100 billion to N300 billion, following the COVID-19 pandemic.
Reacting to the negative impact of insecurity on the various interventions by the CBN in order to stimulate output growth, the governor said that the MPC was very concerned about the insecurity in the food producing zones of the country, which has resulted in the shortfall in food supply with its attendant high food prices.
He, however, expressed optimism that with the efforts of the federal government to tackle insecurity across the country, the situation would soon improve.
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Engendering economic growth remains at the front burner of the MPC considerations, after acknowledging that output growth has remained fragile and in need of sustained support. The Committee also applauded the progress recorded with the CBN’s targeted credit facilities, which the apex bank continues to deploy to support households, the agricultural and manufacturing sectors.
The Committee noted the persistent security crisis especially in major food producing regions of the country and the severe toll on food supply and prices. The Committee also noted the slight moderation in inflation due to the unrelenting effort of the CBN in supporting the agricultural sector in a bid to boost food supply.
Experts’ positions
In a critical examination of the NBS’ Q1’21 GDP report, economics at Meristem Securities Limited, a Lagos based investment house, said, ‘‘The economy recorded another quarter of expansion (the second quarter in a row) in Q1:2021, consolidating on the fragile exit from recession in Q4:2020.
‘‘Driven largely by growth in the non-oil sector, the 0.51% Year-on-Year, YoY, expansion in real GDP points partly to positive results from CBN initiatives and fiscal support amid the gradual move towards pre-pandemic levels of economic activity.
‘‘Although Purchasing Managers Index, PMI, statistics at 49 points in April suggest that activities still trail the expansion threshold (50 points), it nonetheless shows a significant improvement from the trough (48 points) witnessed in March 2020.’’
Key growth segments in the manufacturing sector include the Cement, Food Beverage and Tobacco as well as the Chemical and Pharmaceutical product subsectors. These were the focus sector in the CBN’s financial intervention programmes in the past one year.
Meanwhile, the manufacturing sector rebounded from a recession with a 3.40% YoY (vs -1.51% YoY in Q4:2020) for the first time since Q2:2020. Improvements in Cement (+11.20% YoY) as well as Food, beverage, and Tobacco subsectors (+7.11% YoY) were key drivers, while the oil refining subsector contracted by 57.05% YoY. Also, agricultural output grew by 2.28% YoY, supported by growth across all subsectors (crop production, forestry, fishing, and livestock).
Meristem economists concluded: ‘‘In our view, improved demand and the apex bank’s effort at supplying credit were key tailwinds. In arriving at its decision, the Committee noted the downside risk posed by the prevailing security challenges but expressed optimism on the growth potential of coordinated public-private partnership. Therefore, we expect the hold decision to have a muted impact on the level of real sector output.
‘‘The growth in the manufacturing and agricultural sectors during the quarter is attributable to eased lockdown restrictions and sustained real sector intervention by the CBN through improved access to low-cost credit and loan forbearance by the banking sector. ‘‘Although access to FX and heightened insecurity continue to challenge the real sector, the outlook for both sectors is positive.
‘‘PMI data show an increase from 44.90 points in January 2021 to 49.02 points in April 2021. Similarly, the employment index edged up marginally to 46.50% from 45.60% within the same period.’’
GDP and the challenges
Insecurity is undermining the non-oil economy’s recovery. The slowdown in Nigeria’s non-oil economy’s YoY growth to 0.8% in Q1’21, from 1.7% in the preceding quarter, suggests a fragile recovery. This is worrisome as the non-oil sector accounts for over 90% of the economy, which implies its performance has meaningful implications for GDP growth.
The non-oil economy’s recovery is being held back by the wholesale & retail sector – Nigeria’s second-biggest economic sector – which declined by 2.4% YoY in Q1’21.
What is driving growth? The sectors driving Nigeria’s recovery, albeit weak, are telcos, crop production, manufacturing of food and beverages, real estate, cement production and construction.
Telcos and crop production’s YoY growth may have slowed to 7.7% and 2.3%, respectively, from 9.7% and 2.4% a year earlier, but they have a pronounced impact on GDP growth because they are two of the three biggest economic sectors in Nigeria.
Manufacturing’s recovery was led by the acceleration in YoY growth of its biggest subsector, food and beverages, to 7.1% in Q1’21, from 1.1% a year earlier.
Another of manufacturing’s subsectors, cement production, saw its YoY growth jump to 11% in Q1’21, from 2% a year earlier. This may indicate a strong increase in demand for building materials, but it has yet to reflect in construction, which grew by 1.4% YoY in Q1’21, a moderation from 1.7% YoY a year earlier.
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