The International Monetary Fund (IMF) and the Central Bank of Nigeria Governor Godwin Emefiele on Tuesday gave conflicting prognoses of the Nigerian economy, with the fund forecasting that the Nigeria economy was likely to contract by 1.8 per cent this year, warning that it was heading towards recession.
Emefiele, on the other hand, during a closed-door briefing with the Senate, informed the upper legislative chamber that the economy was suffering from stagflation.
A recession is defined as a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade.
The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP); although a country’s statistical agency does not necessarily need to see this occur to call a recession.
Economic stagflation refers to a period of little or no growth in an economy (of less than 2 or 3 per cent annually) and relatively high unemployment – economic stagnation – accompanied by rising prices, or inflation, or inflation and a decline in GDP.
Nigeria’s GDP growth contracted to -0.36 per cent in the first quarter of this year (Q1 2016) compared to 2.11 per cent in Q4 of 2015 and 3.86 per cent in Q1 2015. Several economists have already forecast that the economy is likely to contract again in the second quarter of this year.
Also, the country’s Consumer Price Index (CPI), which measures inflation, rose by 0.9 per cent to an 11-year high of 16.5 per cent in June compared to 15.6 per cent in May, the National Bureau of Statistics (NBS) said Monday.
That was the fifth consecutive month that the headline index had risen. The increase in the month under review was attributed to energy prices, imported items and related products, which continued to be persistent drivers of the core sub-index.
The IMF released its forecast on Nigeria in its latest World Economic Outlook (WEO) titled: “Uncertainty in the Aftermath of the UK Referendum,” posted on its website.
The nine-page global report showed that Nigeria’s growth projection for this year was revised downwards, from the 2.3 per cent it had forecast in its April report. It also forecasts a 1.1 per cent growth for Nigeria in 2017, down from the 3.5 per cent it made in April.
“The outlook for other emerging markets and developing economies remains diverse. Growth projections were revised down substantially in sub-Saharan Africa, reflecting challenging macroeconomic conditions in its largest economies, which are adjusting to lower commodity revenues.
“In Nigeria, economic activity is now projected to contract in 2016, as the economy adjusts to foreign currency shortages as a result of lower oil receipts, low power generation, and weak investor confidence.
“These revisions for the largest low-income country are the main reason for the downgrade in growth prospects for the low-income developing countries’ group.
“In South Africa, GDP is projected to remain flat in 2016, with only a modest recovery next year. In the Middle East, oil exporters are benefiting from the recent modest recovery in oil prices while continuing fiscal consolidation in response to structurally lower oil revenues, but many countries in the region are still plagued by strife and conflict,” it explained.
The IMF also noted that before the June 23 vote in the United Kingdom in favour of leaving the European Union (EU), economic data and financial market developments suggested that the global economy was evolving broadly as forecast in the April 2016 WEO.
However, it pointed out that the outcome of the UK vote, which surprised global financial markets, implied the materialisation of an important downside risk for the world economy.
It stated that the global outlook for 2016-17 had worsened, despite the better-than-expected performance in early 2016.
This deterioration, according to the IMF, reflected the expected macroeconomic consequences of a sizable increase in uncertainty, including on the political front.
“With Brexit still very much unfolding, the extent of uncertainty complicates the already difficult task of macroeconomic forecasting. The baseline global growth forecast has been revised down modestly relative to the April 2016 WEO (by 0.1 percentage points for 2016 and 2017, as compared to a 0.1 percentage point upward revision for 2017 envisaged pre-Brexit).
“Brexit-related revisions are concentrated in advanced European economies, with a relatively muted impact elsewhere, including in the United States and China,” it added.
Furthermore, it noted that policy challenges would be more diverse across emerging market and developing economies, stating that in most cases, they could also include a need to bolster medium-term growth prospects through structural reforms.
The IMF advised policymakers to strengthen defences against protracted periods of global financial turbulence and tighter external financial conditions, stating that priorities should include reining in excess credit growth where needed, supporting healthy bank balance sheets, containing maturity and currency mismatches, and maintaining orderly market conditions.
“And policymakers need to stand ready to act more aggressively and cooperatively should the impact of financial market turbulence and higher uncertainty threaten to materially weaken the global outlook,” it added.
In the foreign exchange market, however, the naira depreciated on both the interbank and parallel FX segments of the market yesterday.
The local currency fell against the US dollar by N2.42 to close at N294.57 to a dollar yesterday, weaker than the N292.15 to a dollar from the previous day.
On the parallel market, the naira also shed N3.00 to close at N368 to a dollar yesterday, lower than the N365 to a dollar from the previous day.
Nigerian Economy in Stagflation
Meanwhile, for more than one hour, the CBN governor yesterday briefed the Senate on the state of the economy in a closed-door session presided over by Senate President Bukola Saraki.
Sources were reliably informed that the CBN governor intimated the senators on the parlous state of the economy, which he was quoted as describing as worrisome.
Senate sources said Emefiele told the senators at the briefing that the economy was stagnant while inflation was on the rise, describing it as economic stagflation.
According to one senator, the CBN governor said if the economy was growing, with mild inflation, the situation would have been less hopeless, but noted that a situation whereby the economy was stagnant and with inflation on the rise, was a terrible situation.
Sources also learnt that the CBN governor warned that if the current trend continues, the federal government might be unable to pay salaries from October.
He said the policies of the central bank at the moment would be focused on economic growth, adding that inflation targeting would have to be relegated temporarily so that economic activities can pick up.
He was also said to have listed the FX crisis as one of the factors militating against the economic growth of the country, adding that the situation had been worsened by poor power supply caused by continuous bombings of gas pipelines and oil installations in the Niger Delta.
“Thereafter, he answered questions from distinguished senators on some of these topical and national economic matters. Is this a true reflection of what transpired in the closed door session?” Saraki asked his colleagues, to which they chorused “yes”.
Also briefing journalists after the session with Emefiele, the deputy spokesman of the Senate, Senator Ben Bruce, said the CBN governor presented a comprehensive account of the performance of the Nigerian economy in the last one year.
According to him, Emefiele’s presentation began with the current global economic conditions, which has been characterised by external shocks, including a sharp decline in commodity prices among other things.
He also said that Emefiele disclosed that the current challenges in the country were due partly to over 70 per cent decline in oil prices from about $116 per barrel in June 2014 to about $30 per barrel earlier in 2016.
“We were impressed with his presentation. He explained to us about the difficulties we have with commodity prices, the drop in oil prices and decline in growth for two quarters in a row.
“This means officially that we are in a recession and we need to spend our way out of the recession, and hopefully, that is what is going to happen.
“We are optimistic that the economy will get better. Tomorrow, we are going to have the Minister of Finance; she will explain to us what percentage of the budget we have implemented and so forth,” he said.
Explaining why the CBN governor was not allowed to make his presentation during plenary, Bruce said: “Some information could become too explosive if it is in the public domain.
“I think you have to understand the confidentiality of some information but what the governor kept emphasising was to start buying Nigerian products.
“We need to stop importing. We are in the mess already and everybody is part of it but to solve this problem, we need to buy made-in-Nigeria goods.”
A statement issued later by the Senate on the session with the CBN governor, went further to state the meeting was in compliance with Section 8 of the CBN Act, which authorises the CBN governor to provide to the National Assembly periodic updates on activities of the bank as well as the performance of the economy.
According to the Senate, the briefing by the CBN governor gave it an insight into the economic challenges confronting the nation, admitting that these were trying times for Nigeria.
The Senate also acknowledged the pains being endured by Nigerians, noting that the situation called for the co-operation of all and sundry instead of pointing accusing fingers at anyone.
The statement read: “The governor’s presentation also gave us an insight into the Bank’s decisions in the foreign exchange market, and the rationale underlying the recent re-introduction of a flexible exchange rate mechanism in Nigeria.
“He also delved into the health of the financial system and discussed the Bank’s detailed examinations of financial institutions as well as its zero tolerance for insider dealings by boards and management of deposit money banks.
“In sum, the governor declared that the strategic health of Nigeria’s financial system is still strong at this time.
“After the presentation, many Distinguished Senators asked a host of pertinent questions and raised issues concerning the banking system, the slippage in economic growth in the first quarter of 2016, the gradual rise in inflation, fall in foreign exchange reserves, and policy coordination between the fiscal and monetary authorities.
“Following an exhaustive response by both the governor and his team, the Senate acknowledged that these are indeed difficult times all over the world and not just in Nigeria.
“The Senate also acknowledged the pains that many people may be facing at this time, especially in light of increases in the price of electricity and fuel.
“But having carefully considered the policies of the CBN, the Senate would like to commend and support these policies, because they are mostly geared towards increasing local production, creating jobs here in Nigeria, safeguarding our commonwealth, and expanding economic opportunities and growth in Nigeria.
“It is critical that we all join hands to seek long term solutions to our underlying problem of non-diversification of foreign exchange earnings, rather than pointing fingers or apportioning blames.
“The Senate believes strongly in the resilience of the Nigerian economy and the ingenuity of the Nigerian people and as such, we are confident that we will all pull through these difficulties and come out as a much better, equitable, and prosperous nation.”
In view of Emefiele’s presentation, the Minister of Finance, Mrs. Kemi Adeosun, was invited to appear before the Senate for further briefing on the economy.