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Published On: Mon, Sep 22nd, 2014

Economic headwinds and policy responses

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By Ifeanyi Uddin

You do not have to be a close watcher of the Nigerian state to conclude that the short stretch of road ahead (until the next fork in February, next year) would be one of the more turbulent since we commenced this new democratic experiment in 1999. Here is to hoping that the violence traditionally associated with elections in these parts is more subdued this time around; and that the acrimony that leads up to the swearing in of political office holders is not as loud as is usually the case. Without doubt, both of these combine to delegitimise officers of government, and compromise the latter’s eventual effectiveness in office.

Yet these are but a few of the problems ahead. The more serious headwinds (to use a buzzword currently favoured by economic journalists) appear to be of an economic nature. As usual, underlining the economy’s dependence on external trade, there is a global component to this. The meeting earlier this month of the US’ Federal Reserve’s rate-setting committee did confirm that it would be winding down bond purchases (the key tool in its surprisingly successful effort to backstop the economy after the events of 2007/8) next month. Post-meeting comments by FOMC members then lent support to speculation that the interest rate trajectory in the US might turn up much earlier than the markets had factored into their models.

On the back of this, the dollar has strengthened considerably (closing Friday, last week at its strongest since July 2013). US treasuries are up, with the spread on the 10-yr bond now much higher relative to European issues than would ordinarily be supported by the prostrate nature of the euro area economies. Naturally, worries over the impact of rising yields in the developed markets on economic conditions in emerging and developing markets have returned to polite conversation.

A reversal of foreign capital inflows into emerging market economies (irrespective of the nature of such turnaround) would be more than most such economies can bear. Over the last half-a-decade, we have seen these markets run down the fiscal buffers that they built up during the boom years before the Great Recession, denying them much room for manoeuvre as the next crisis looms. Arguably, though, the bigger worry for by far the more vulnerable of the emerging markets is their failure to use the window opened up during the boom years to drive further reforms to their economic, political and social institutions.

The structural rigidities in such economies would make the adjustments that would be needed over the next decade that much more difficult to run through. By far the more worrisome of these adjustments is the one that would be heralded by the end of the commodity supercycle (a process described by a friend of mine as the “financialisation of commodities”, and that was probably supported by investors demand for much higher returns than were available through traditional investment vehicles). As the dollar has strengthened, commodities are losing their attractiveness as a store of value.

Consequently, it would seem, the price of our favourite (indeed, only) export commodity, crude oil, dropped beneath US$100 per barrel recently, with most experts predicting further falls. Besides the possibly deleterious effects of the supercycle ending, factors including projections of softer economic growth in China, and rising inventories in the US have weighed on oil prices. Production is another source of concern. Lock-downs, shut-ins, and outright theft have helped to keep domestic crude oil production at levels that cannot support our economy’s funding needs. On top of this, OPEC (our favourite cartel), is considering cutbacks in support of prices.

Arguably, it would be hard to sustain an argument for cutbacks for a country that is struggling to meet its assigned quota. Nonetheless, lower OPEC export quotas would have undeniable consequences. To the expected outflow of foreign portfolio investments, add the projected shortfall in oil export receipts, and then we could have a major crisis on our hands: how do we manage the naira’s exchange rate, thereafter?

At a more granular level, inflation has been back up since March, this year — nearing the central bank’s upper limit of 9% for the 2014 fiscal year. Okay, so the more volatile measure is the headline count; the core measure, indeed, moderated in August. Even in this, however, there is cause for worry. Rising headline inflation numbers have been largely driving by food prices — the main cause (along with energy prices) everywhere of the volatility of this price count.

Unfortunately, “food” is a major component of the spend, as you go down the social pecking order. Thus, that notorious category, the “poor and vulnerable”, bear a disproportionate share of the spending burden as food prices trend up. Stranger here is that government has touted its reforms to agriculture as delivering, over the current election cycle, more value than at any other time in the nation’s annals. If this is true, then government’s success has been at the expense of domestic economic actors’ having to pay higher prices for their spend. An unintended, but immediately obvious upshot of this government’s preferred economic tool — the ban on imports.

Thursday and Friday, last week, the central bank’s rate-setting committee met, and there were fears ahead of the meeting (at least in domestic financial circles) of a further tightening of monetary conditions, as the apex bank tries to contain the new pressure sources. Aside these other concerns, the central bank would have looked at and scratched its head over rising liquidity in the banking sector. Other commentators have fretted that maturing obligations from the Asset Management Committee (October) may further exacerbate this build up of banking sector liquidity.

There was a case then for the CBN putting its reaction in first. Thankfully, the apex bank held back. For, not only is it increasingly running out of ammunition with which to address the economy’s larger worries. But more importantly, the fiscal nature of our current economic woes lends itself more to a different set of institutions and tools.

Ifeanyi Uddin is an economic historian, finance expert, and Premium Times editorial board member.

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