2021 Economy Outlook And CBN’s Solutions
The year 2021 is literally here. Suddenly it has become the year for a magic which was initially expected for 2020, but which disappointed due, obviously, to the public health crises of COVID-19 that practically pressured all economies, including Nigeria’s.
Most economies, even corporates and individuals, have moved all the 2020 expectations to 2021; All the losses of 2020 are expected to be recovered in 2021, all things being equal.
In Nigeria’s economy, headline recovery issues include, growth, albeit, exit from recession, inflationary deceleration and general recovery from many macroeconomic headaches that came or escalated with COVID-19.
The Central Bank of Nigeria, CBN, which had played lead role in the combat against the ravaging economic fallouts from COVID-19, appears set for good showing in the coming year while already counting gains of its multiple-faced measures.
However, persisting weakness in the nation’s revenue profile, soaring global debt, inflationary pressures and high unemployment persist.
The Nigerian economy slid into recession in the third quarter of 2020, following a second consecutive quarter of contraction in output.
Data from the National Bureau of Statistics (NBS) showed that real Gross Domestic Product (GDP) contracted by -3.62 per cent in Q3 2020. It had contracted -6.63 per cent in the previous quarter. The oil sector contracted further by -13.89 per cent in Q3 2020 from -6.63 per cent in the previous quarter, while the non-oil sector contracted by -2.51 per cent in Q3 2020, compared with -6.05 per cent in the preceding quarter.
The persisting weak performance was mainly attributed to the lull in economic activities associated with the low price in the oil market as well as the lingering effects of the Coronavirus Pandemic.
Inflationary pressure had seen the headline index at the fourteenth consecutive month rise in October, as headline inflation (year-on-year) moved up to 14.23 per cent from 13.71 per cent in September 2020.
Foreign reserves have been under pressures while exchange rate stability compass has not seen fair weather.
Counting The Gains
However, a few green shoots have been emerging recently in the current quarter. Manufacturing and Non-Manufacturing Purchasing Managers’ Indices (PMIs) rose to 50.2 and 47.6 index points, respectively, in November 2020, compared with 49.4 and 46.8 index points in October 2020. This development signposts an increase in economic activities, driven by growth in new orders, improved supply delivery time, rising production levels and new export orders.
The employment level index component of the manufacturing and non-manufacturing PMIs also improved in November 2020 to 47.3 index points and 46.7 index points, respectively, compared with 46.0 index points and 44.2 index points in October 2020.
These were coming against the backdrop of global economic warm-ups accentuated by the progress in the COVID-19 vaccine. Oil prices have rebounded hitting USD50 per barrel last weekend.
But in Nigeria economy analysts still see the likely downside risk to growth of the recent #EndSARS unrest in the country, warning that this may adversely impact economic recovery in the near term.
Also the escalating insecurity in the agricultural belt may be stocking food inflation in the months ahead. The 2020 inflationary pressures has been attributed to the increase in both food and core inflation, which rose to 17.38 and 11.14 per cent in October 2020 from 16.66 and 10.58 per cent in September 2020, respectively. But in addition to insecurity the inflationary pressures have also been attributed to the lingering structural deficiencies impacting the logistics of moving food items to urban areas such as poor road networks, unstable power supply and a host of other infrastructural deficiencies. Other factors include the persisting impact of coronavirus-induced supply disruptions, recent hikes in the price of energy products (PMS and electricity) and weak crude oil prices.
All these factors are completely beyond the macroeconomic responsibilities of the CBN.
But a recent position of the apex bank indicated that with some of its development finance activities especially the funding interventionist schemes, the rise in inflation will likely abate in the medium term.
The Monetary Policy Committe, MPC, of the apex bank said last month that the monetary and fiscal policies are also expected to continue their broad-based stimulus support towards full recovery of the real sector to reign in on inflation.
However, this will still involve fiscal measures to reduce unemployment, provide an enabling environment for private sector investment and necessary support to the health sector to cushion the impact of the coronavirus pandemic.
In addition, the CBN is expected to sustain its various intervention measures to boost consumer spending and support the recovery.
Galvanising Commercial Banks
From monetary policy perspectives, the apex bank’s credit supply measure has already spurred aggregate domestic credit which grew by 7.61 per cent in October 2020 compared with 7.35 per cent in the previous month, as a result of the Bank’s policy on Loan-to-Deposit Ratio (LDR), supported by the Bank’s interventions in the various sectors of the economy.
Total gross credit by the banking industry stood at N19.54 trillion as at 13th November 2020 compared with N19.33 trillion at end-August 2020, an increase of N290.13 billion. When compared with N15.56 trillion at the commencement of the LDR policy in May 2019, total gross credit increased by N3.97 trillion.
These loans were granted mainly to manufacturing (N738 billion), General Commerce (N874 billion), Agric and Forestry (N301 billion), Construction (N291 billion), ICT (N231 billion), just to mention a few.
In addition the policy measures engendered a reduction in interest rates on loans granted by Deposit Money Banks (DMBs). As at October 2020, 86.23 per cent of total loans granted to over one (1) million customers, by Deposit Money Banks (DMBs) were at interest rates considerably below 20 per cent. This was an improvement from 76.43 per cent as at July 2019.
Well beyond its monetary policy mandates the economy has been helped by the supportive developmental roles of the CBN towards addressing some of the structural issues in the economy. There is the optimism on the future impact of the disbursements from Agri-Business/Small and Medium Enterprise Investment Scheme (AGSMEIS) (N92.90 billion to 24,702 beneficiaries), Anchor Borrowers Program (ABP) by the sum of N164.91 billion to 954,279 beneficiaries and COVID-19 Targeted Credit Facility (TCF) to household and SMEs (N149.21 billion to 316,869 beneficiaries).
The medium-term outlook for the global economy appears hazy in the face of the huge resurgence in the second wave of COVID-19 amidst the ray of optimism following the discovery of COVID-19 vaccines.
But in the domestic economy, available data and forecasts for key macroeconomic variables suggest optimism in output growth in the fourth quarter of 2020, due to the positive outlook for most economic activities. Accordingly, the CBN is seeing the economy recover from recession by the end of 2020, while inflation is projected to moderate by the first quarter of 2021.
The apex bank considerations remained focused around tailwinds imparting upward pressure to domestic prices and key headwinds to output growth.
However, inflation may continue to be driven by supply side disruptions arising from the COVID-19 pandemic and other legacy factors. Key amongst these are: the security challenges in parts of the country; increase in food prices; and the unpredictable hike in pump price of petroleum products and electricity tariff.
In the circumstance there is the need to address structural supply side issues putting upward pressure on costs of production and unemployment.
To address the public health crisis associated with the COVID-19 pandemic, the Federal Government should make relentless effort to procure a substantial quantity of the COVID-19 vaccines to surmount the public health crisis and pave the way for a broader macroeconomic recovery.
Some perspectives including that of CBN believe that the contraction in growth had bottomed out, since it moderated significantly from -6.10 to -3.62 per cent in the third quarter of 2020. This was so because both the monetary and fiscal authorities had anticipated the impending recession and had put measures in place for its quick reversion. Some of these measures include the Economic Sustainability Programme by the Federal Government and other CBN facilities targeted at households, small and medium enterprises (SMEs), youth empowerment, and reduction of unemployment.
But one expects both the CBN and the Federal Government to maintain the initiatives targeted at reducing unemployment, particularly amongst the youths. To this end, the CBN should is duty bound to execute its various development finance initiatives to stimulate production and reduce unemployment. The Bank should intensify its efforts by increasing funding to more beneficiaries so as to boost consumer spending and accelerate recovery from recession.
Though credit to key sectors of the economy has increased it is important that the apex bank continue the credit support to employment stimulating sectors to hasten the recovery of output growth and improve employment particularly among the youths.
CBN’s engagement with relevant stakeholders, particularly in the private sector, to hasten the recovery of growth should be widened to cover more sectors. This engagement would involve collaboration towards job creation and provision of credit facilities to stimulate business activities for both corporates and individuals, particularly those who lost their goods and business premises to hoodlums, during the recent protest.