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19September2017

Nigerian economic performance variables should focus on human development indicators


Whenever there is need to compare living standards that cut across borders, the barometer that first comes to mind is per capita income. However, the heterogeneity of the socio-economic structure and income inequality of most economies, especially the developing ones, questions how suitable it is as a benchmark. If we annualise the 2013 third quarter GDP figure released by the National Bureau of Statistics (NBS), the estimated 2013 per capita income for Nigeria is N253,814.77 (US$1,616.65). This implies that an average Nigerian earns, produces or spends about US$1,616.65 per annum and US$4.4 per day which is within the threshold of the living standard of citizens of other emerging economies. However, the huge income disparity that subsists amongst the citizenry suggests the existence of significantly pronounced classes and makes this figure misleading.

 

High poverty incidence and unemployment despite growing per capita income

In its report on the poverty incidence for 2010 and forecast for 2011, the National Bureau of Statistics (NBS) opined that the incidence of poverty in Nigeria worsened between 2004 and 2010. The number of Nigerians living below poverty line grew from 68.7m to 112.5m (increase of 63.7% in poverty incidence) during the period while the population grew from 139.2m to 158.6m (13.9% growth in population) over the same period.Unemployment figures earlier reported by the NBS corroborated this situation as Nigeria’s unemployment rate grew from 12.3% in 2006 to 23.9% in 2011. Conversely, during the same period, Nigeria’s economy grew strongly at an average annual growth rate in excess of 6.6% making the country the 5th fastest growing economy in the world in 2010 with a 7.87% real growth rate.

The above represents the enigma of growth in the face of high poverty incidence. This is not in line with traditional economic and social theories as well as historical trends. It highlights vividly the structural disequilibrium in the Nigerian economy which has sustained the key productive and high employment sectors below potential while supporting consumerism and rent-seeking.

 

Growing per capita income amid widening Gini coefficient

The real per capita income of Nigerians has trended upward, rising from US$559 or N57,073.9 in 2004 (based on 2000 price and exchange rate level) to an estimated US$1,616.65 or N253,814.77 (annualized real GDP figure as at September 2013), representing a CAGR of 18% in Naira term (13% in US$ term) during the period. At this time, the average population growth rate was 2.6%. At purchasing power parity and assuming the wealth of the nation is distributed equally, the real per capital income figures above suggest that an average Nigerian earns US$4.4 per day in 2013, well above the globally acceptable poverty line. This is however not the case as huge income inequality exists amongst the populace. Nigeria’s Gini coefficient, the barometer used to measure income inequality, is estimated by the World Bank in 2010 to be 48.8%. The fact that 60.77% of the population lived on less than US$1 per day despite the implied value of US$4.4 by the per capita income figure, gives more credence to the estimate above.

A number of reasons could be adduced for the paradox above. Population, which is the denominator in the quotient used to measure per capita income, hides the prevalent income class structure in the per capita income calculation. While the income class layers could be more than two, the 60.77% a-dollar-a-day poverty incidence suggests that less than 40% of Nigerian population consumes over 86% of the national income estimated in 2013. The remaining over 60% shares the balance.

 

Human development indicators may provide better information for policy making

Undoubtedly, using the trends in indicators like GDP per capita, hospitals per capita, food intake per capita amongst others are a good gauge for measuring the development of the overall economy especially as they are about the least subjective barometer for international comparison. However, these statistics may hide the real economic situation of countries and could give provide misleading impression about the wellbeing of a nation.

Focusing on other human development indicators (HDIs) such as the poverty level, access to drinkable water, unemployment rate, and health access indicators would help policy makers at targeting reforms. These measures do not only expand the inclusiveness of strong growth, they suggest sustainable capacity to keep growing while closing the gaps within the classes in the society.

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Budget impasse is part of democracy but breaching the debt ceiling should be avoided


On October 1 2013, the government of the United State of America (USA) was shut down due to the failure of the Congress to enact regular appropriations for the 2014 fiscal year. More than 700,000 non-essential employees were indefinitely furloughed without pay while another 1.3 million were required to report to work without immediate pay. Many services were also suspended.

As is the practice in most democratic economies (including Nigeria), the U.S. Constitution requires that all expenditures of federal funds be authorized by Congress with the approval of the President of the United States. The U.S. federal government and the federal budget process operate on a fiscal year cycle running from October 1 to midnight September 30. If Congress fails to pass all of the spending bills comprising the annual federal budget or "continuing resolutions" extending spending beyond the end of the fiscal year; or if the president fails to sign or vetoes any of the individual spending bills, certain non-essential functions of the government may be forced to cease due to a lack of congressionally-authorized funding.

 

Flimsy reason for shutdown

The US government shutdown occurred when the Republican-led House of Representatives included language delaying or defunding the Patient Protection and Affordable Care Act (commonly known as "Obamacare") in their approved budget while the Democratic-led Senate approved continuing funding at current sequester levels with no additional conditions. Political bickering on this and other issues between the House Republican on one side and President Barack Obama and the Senate Democrats on the other led to the budget impasse which threatens massive disruption.

Fighting over an adjustment to an Act that has been passed by the Congress, upheld by the Supreme Court and supported by majority of Americans through a national election appears very flimsy. Countries experience budget impasse from time to time and Nigeria is quite familiar with disagreements between the Presidency and the National Assembly, usually over revenue benchmark and appropriations. However, the reason for the current impasse makes the US look ordinary and not a global benchmark for governance that the country is considered to be.

 

Breaching the debt ceiling is undesirable

As disruptive as the shutdown is for America, breaching the debt ceiling would be catastrophic for the whole world. The US Dollars is the world’s reserve currency; hence its debt is considered as safe instrument and a significant portion of the world’s financial transactions is collaterised by the US government debt instruments. Most sovereign debts are refinanced through the issue of new debt to redeem a mature one. Unfortunately, by October 17, 2013, the US government would have reached its legal borrowing limit and unless the Congress raises that limit, the US government would be unable to refinance its maturing debt and may thus default on the repayment of its debt. This would affect America’s credit worthiness and lower the quality of US government debt as collateral for financial transactions and increase bond yields.

The implication would be dire for countries (especially developing countries) and businesses globally whose borrowing rates are benchmarked on the US government treasuries and debt. Borrowing would become expensive for businesses and economies alike, putting further strain on the global recovery and probably pushing some economies into the deeper end of financial crisis.

 

Step back and fight another day

As advised by “The Economist”, ‘the House Republicans need to get their priorities straight’. Unnecessary political gridlock does not fit American politics and the Republicans should know this, if they want to win the presidency in 2016. They should pass the budget without any unnecessary fight and raise the debt ceiling for the long term (if they can’t remove it completely). And a temporary and short term increase in the borrowing limit will only prolong the uncertainty with implications for global economic growth.

Obamacare is a different approach to the failing health care management system in the US and it is good option to try out. However if Obamacare eventually turn out to be a failure, it would become glaring to the American people and the Republicans could easily repeal it if they win the presidency and the Senate in 2016. For now, the GOP appears to be fighting a lost battle.

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MPC retains policy indicators

The monetary policy committee (MPC) kept the key monetary policy indicators unchanged at the just concluded MPC meeting which was held on Jan 21, 2012 in Abuja, Nigeria. Expectedly, key factor in the decision to keep the benchmark interest rate unchanged include the perceived double hedged sword of risk due from the adopted oil price benchmark in the 2013 appropriation, in addition to the conflicting signals of the global economic outlook in the short term.  

 

 

Key Decisions:

MPR:     retained at 12% with the 200bsp corridor

CRR: retained at 12%

Liquidity Ratio: retained at 30%

The committee found the current level of MPR at 12% appropriate in the light of the stability achieved with inflation, which averaged 12.4% in the last 12 months.

While the committee considered a reduction in the MPR because of the benign inflation outlook and depressing growth prospects, the threat that fiscal stance poses are considered overwhelming. The increased sub-national government spending and Federal Government high expenditure in 2013, the higher benchmark oil price in the 2013 budget and the US debt ceiling with possible impact on commodity prices could destabilise the price objective of the monetary authority.

With two members of the committee voting for outright reduction of the MPR by 25 basis points amidst sustained clamour for the reversal of the monetary tightening, it is arguable that the monetary authority is moving closer to it. In this respect, market response to unchanged posture of the monetary authority at this meeting is likely to be read as such with key indicators maintaining trend. We are likely to see a sustained bond yield contraction as FPI keeps coming. Short term interest rates are likely to also remain either flat or decrease mildly on the average in the short term on the back of tenacious systemic liquidity surfeit regardless of CBN Treasury operation. The stability of the Naira exchange rate is also expected to be sustained by the strong FPI outlook in the short term. 

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Nigeria’s MPC retains benchmark interest rate at 12%


At the last Monetary Policy Committee meeting, the committee found the current level of MPR at 12% appropriate in the light of the stability achieved with inflation which averaged 12.4% in the last 12 months. The decision has short term implications on the bond, equities and money markets. The expected stability in the FX market despite the threat of hot monies shows that interest is likely to go down in the short term.

Risk return characteristic of the bond market remains competitive

The inclusion of Nigeria government debt in the Barclay’s global bond index will further expand the exposure of the Nigerian debt market to global investors. And at the current yield level, which is perhaps the highest currently globally with the exception of Greece and Pakistan and other smaller African economies, Nigeria’s market is likely to remain competitive as a global portfolio investment destination with positive risk-return characteristics. With Japan joining the group of countries using massive quantitative easing to reflate their economies more aggressively, global cheap funds chasing carry trade opportunities could expand disproportionately. And the likely fall in inflation rate in the first quarter of the year, is expected to push real yield back into the positive region. In other words, there is nothing in the shorter horizon that suggests either a dry up or a reversal of FPI inflow into the economy.

Hence, we expect further yield contraction on the average in the short term even at negative real yield based on the average inflation rate of 12.4% in 2012. The duration trade along the curve in expectation of a fall in benchmark rate in the near future is expected to affect the shape of the curve.

Monetary Policy may matter less at determining the stock market direction

Despite the continued tightening of monetary environment, the stock market will continue to benefit from sustained portfolio inflow on the back of impressive valuation and corporate performance of listed blue-chip companies. The on-going reforms of the market including the market making initiatives which would support increased block sales to big global institutional investors; the reduced costs of transactions; and perhaps more advanced trading dynamics supported by new technologies would continue to encourage such inflow in the short term.

Tenacious systemic liquidity would remain impactful on money market rates

Short term interest rates are likely to decline further on the average on the back of tenacious systemic liquidity surplus regardless of CBN Treasury operation. While the short term outlook of the retail credit market is unchanged, it is not unlikely that the potential reduction in trading securities income, occasioned by yield contraction and fall in short term interest rates could push banks to expand the supply of credit. Savings and term deposit rates are not likely to change their present declining course as banks continue see increased liquidity in the short term.

Risks from hot monies- pro-cyclical monetary policy could tip the scale over in the medium term

The stability of the Naira exchange rate is also expected to be sustained by the strong FPI outlook in the short term. This is not to downplay the potential risk that the hot monies pose to macroeconomic stability. Although the current sovereign rating of the Nigeria economy complements the competitiveness of the yield structure currently, this could change if the current growth challenge persists. The rating revision could be triggered by a heightened fiscal sustainability challenge in the face of sustained decline in growth. And the current monetary tightening is pro-cyclical, which alongside the myriads of structural challenges, could help push growth further down to the point where a rating reversal could be inevitable.

Beyond that, the volatility of hot monies relies on sentiments. If crude oil price drop precipitously below the budget oil benchmark and fiscal sustainability is threatened, the ensuing flight to safety would destabilise the economy significantly. This threat is not impossible in the short term on the back of the US oil demand dynamics and increasing global supply.

The MPC threatens an ‘appropriate response’ if public spending goes overboard

On the fiscal policy for 2013, the committee expressed worry over the downside risk that the adopted US$79 per barrel budget benchmark poses to the inflation objective and the effectiveness of monetary policy in 2013. The committee pointed out the risk of complacency over government revenue especially in the face of the uncertainty in global demand for crude oil and weakening performance of non-oil sector. It sustained its threat to act appropriately if public spending in 2013 adds to inflationary pressure. If the ‘appropriate response’ means non-accommodating monetary policy, then we must brace up for further tightening during the year. This is particularly so because, the perceived threat to inflation from increased sub-national government expenditure in 2013 due to the higher benchmark oil price is the major reason why policy indicators were kept unchanged so as to monitor developments until the next MPC meeting in March.

At this point, monetary easing is becoming inevitable

The outlook for the monetary policy is benign and the argument in favour of non-accommodation is getting weaker. With two members of the committee out of ten voting for outright reduction of the MPR by 25 basis points at the just concluded MPC meeting, it is arguable that the monetary authority may be moving closer to a reversal down the line. Barring the threats from hot monies, against which monetary policy action is arguably ineffective at this point, and the remote fiscal sustainability issues, all indicators point to a reversal of monetary tightening.

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Expansionary fiscal policy and risks’ outlook in 2013 pose greater challenges to Monetary Policy

The biggest challenge confronting the Nigeria’s Monetary Policy Committee (MPC) members at the upcoming Monetary Policy Committee (MPC) meeting due on Monday January 21, 2013 would not be the deluge of foreign portfolio investment (FPI) with the attendant destabilising effects should it reverse unexpectedly. Rather it is the contrasting and expansionary fiscal policy stance of the Federal Government, alongside a disturbing public revenue risk profile. The outcomes of both the expansionary fiscal outlook and the public revenue risk profile could become the triggers for the much feared sudden reversal of ‘hot monies’.

Budget 2013 may be too expansionary for monetary policy comfort

The budget 2013 as approved by the legislators appears substantially expansionary, not only at the federal government level but at the two other tiers of government in the face of potential oil market shock. The US$79 per barrel benchmark oil price and 2.53 million barrels per day (mbpd) production assumption would arguably put liquidity pressure on the economy as more funds are allocated to all levels of government while the allocation to the national buffer is reduced. Nationally, over 70% of government spending goes to recurrent expenditure.

Typically, these funds find their ways into the financial system in different manners- proper and otherwise, with the largest percentage arguably constituting a source of demand pressure on the Naira exchange rate. This happens as some of the proper portion funds government import consumption at all levels and the larger chunk of the improper portion becomes capital flights. The overall effects of this expansionary fiscal stance on systemic liquidity and foreign exchange stability could be destabilising to policy targets; and ultimately inflation rate.

United States of America may stop importing Nigeria’s oil

The second area of risk to fiscal policy in 2013 is the potential inertia (or decline) in oil price globally as America’s import declines sharply. Based on the recent forecast by US Energy Information Agency (EIA), analysts at Citigroup Global Markets predict that the US may stop importing sweet crude light from West African countries by the second quarter of 2013. US EIA forecasts the US oil import to decline to 6mbpd, roughly a third of what it uses, by 2014. Since July 2010, the U.S. has cut its Nigerian imports by half, from more than 1 million barrels a day, to 543,000 as of October 2012, the most recent data available through the EIA. Imports from Angola have dipped below 200,000 barrels a day from an average of 513,000 in 2008. Displacing West African oil from the US market will probably lower price overall due to greater competition. It is believed that US$90 per barrel might be the new cap for oil prices rather than the floor in the short to medium term.

In addition, the country’s budgeted oil production for 2013 may not be feasible

In 2012, the CBN statistics indicate that oil production fell short of the budget benchmark of 2.48mbpd by about 376,000 barrels per day on the average in the first three quarters of 2012. The shortfall in production, which is likely to remain in 2013, was caused by oil theft and vandalism. Yet the budgeted benchmark for 2013 is higher at 2.53mbpd. It is arguable that the challenges of oil theft and vandalism as well as insurgencies in the Nigeria oil production areas have not been substantially addressed; hence the probability of achieving this production target in 2013 is lower than assumed.

What happens when investors realise this risk?

The combined effect of sustained shortfall in actual production and oil price outlook as detailed above could impact on sentiments about fiscal sustainability in the course of the year with implications for exchange rate stability. A sudden realisation by investors of a potential structural deficit in government could scare them; leading to a flight to safety. No amount of interest rate hike would be helpful at that point. The liquidity challenge that the expanded fiscal policy outlook and attendant risks poses is a double hedge sword that could strike through the exchange rate channel or consumer demand and price channel. And the continued dominance of FPI in aggregate foreign capital inflows suggests the need to put in place measures against capital reversal. Balancing these odds is the biggest huddle for the Committee members at the next MPC meeting.

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