Nigeria’s economy: Inflation and other economic indicators

 By Emek Chiakwelu     strategist@afripol.org

Nigeria’s economy is churning along after the problems of liquidity and banking sector meltdown that nearly crushed the financial market. The economy is progressively in recovery and it looks like the confidence of Nigerian consumer is gradually rebounding.  But we cannot say for sure the exact figure because quantification of confidence has not been documented nor recorded. All the economic indicators are pointing in affirmative and right direction. Therefore the economy can be say to be relatively healthy, the key economic indicators including the inflation rate is at 11% in the month of May.  The increasing inflationary pressure which subsided from 12.5% to 11% year-on-year is a good response and these recent indices were documented by Nigeria’s National Bureau of Statistics (NBS). The food price inflation also came down in the second quarter from 14.3% in to 12.3, a sign that the gripping hands of inflation around the economy is waning.   

Without doubt the monetary policy coming from Sanusi’s Central Bank of Nigeria (CBN) has a positive outlook on the economy which has been growing at the rate 7.3% and attracting investments mostly in petroleum sector. The “revised estimate for real Gross Domestic Product (GDP) by the National Bureau of Statistics (NBS) indicates that the economy grew by 7.23 percent first quarter of 2010 as against 6.7 percent it had earlier projected for the quarter.” This is impressive compares to the world economy that has been expected to be growing at the rate 3.9 % in 2010 as result of the global recession.

Nigerian economy “dip from 7.44 percent recorded in the fourth quarter of 2009, however, it is an increase from 4.50 percent in the corresponding quarter of last year. NBS attributes the 2.73 percentage point increase in Real GDP to expansion in oil production following relative peace in the Niger Delta region, although the non-oil sector remained key driver of growth. The Bureau in the latest report on GDP estimates that the economy on nominal basis expanded to N6, 399,716.09 first quarter of 2010 up from N5, 004,850.00 recorded during the corresponding quarter of 2009, indicating an increase of N994, 866.09.” Nigerian government can greatly strengthen the impressive growth by provision of social infrastructures particularly social security and steady electric power.

The economy growing at 7.3% in the second quarter of the year is beyond the projected expectation from the Nigerian reserve bank and economic forecasters. The experts did not anticipate the economy to be growing at a a fast pace with the lingering effects of the credit crunch and failed banks.  Sanusi’s Central Bank of Nigeria (CBN) easing of the credit crunch by lowering the interest rate benchmark was a pragmatic move that ameliorated the dryness of the credits; together with recapitalization of financial market with over $3.9 billion that refurbished the failed banks. The confidence generated by the CBN policy was apparent for it strengthened the confidence of the lenders and borrowers in the financial market. The infusion of fund and lower interest rate were impressive which brought about the stimulating of the economy and became the turning point for the economy.

 CBN was not worried about the danger of over liquefying the capital market with cheap money and by the lowering of the interest rate benchmark which could trigger higher inflation. Executive Governor Lamido Sanusi of Central Bank of Nigeria was reported saying that he can live with slightly increased inflation than with a depressed market.  But in such a scenario the watchdogs at the CBN must be in constant watch of the economy to make sure that inflation will not get out of control. They can control the situation by tinkering with monetary policy and control of cheap money. Even the executive arm of the government might intervene with a well thought fiscal policy in order to cool the economy in case of escalating inflationary trends.

The structural imbalance of Nigerian economy is still a major concern. Nigeria’s economy is wholly one commodity based economy which is based on the export of crude oil. The lack of diversification of the economy hampers the flourishing of domestic economy, together with enhanced specialization can transformed an economy to arrays of commodities exporting economy other than oil. The export of crude provides foreign reserve that has become a war chest in the maintenance of fairly and relatively strong naira. With diversified economy the problem of unemployment in Nigeria can be ameliorated.

Nigeria is running a big deficit with China of about US$5.48 billion and China is a growing major business partner with Nigeria. The only way Nigeria can close the gap is to export more goods to China other than oil but Nigerian economy with its fundamental problem cannot be able to do that in the nearest future. It must be noted that Nigeria has trade surplus with many western countries including United States at the tune of $5.5 billion. 

The executive arm of the government must work hard to rectify the inability to successfully implement the federal budget as it was written. As a result of shortfalls from oil revenue, Nigeria proposed issuing bonds of about N867.5 billion to finance its deficit. On the financing of budget deficit including the 2010 current expenditure the Director General of the Debt Management Office (DMO), Dr. Abraham Nwankwo reminded Nigerians that government is now borrowing from the capital market and particularly by issuing bonds to raise money. On borrowing Dr. Nwankwo did emphasis that: “Borrowing is a normal feature of all economies. Nigeria is currently one of the lowest in terms of ratio of debt to GDP (Gross Domestic Products). This does not mean Nigeria is doing well, as what is more important is whether the proceeds is being used judiciously.” Therefore it is imperative that borrowed money or any money allotted for the budget is prudently utilized in its implementation.

President Jonathan reaffirmed the deficit issue on the letter he wrote to the lawmakers:  "Specifically, recent revenue developments indicate significant shortfalls in both oil and non-oil revenue which may well continue for the rest of the fiscal year with adverse implications for the financing of the budget. Consequently, given the recent drop in international oil prices from over US$80 per barrel to under US$70 per barrel; it is prudent to revise the oil bench mark price to a more realistic level." He further states that, “The 2010 budget was predicated on a revenue benchmark of $67 per barrel of crude oil. But in his letter to the Senate, President Jonathan asked it to "revise downwards the aggregate level of expenditure from the N4.608billion approved in the 2010 Appropriation Act and adjust the budget details accordingly."

 Daily Trust editorial, added: “In a bid to balance the budget, the federal government has also resolved to borrow from domestic and foreign sources. The 2010 budget will receive $500 million USD (N75 billion) from international bonds and has projected to borrow N897.3 billion from an already ailing domestic financial system. Several banks in the country have for several months survived on life line provided by the Central Bank of Nigeria (CBN) but the federal government still expects to suck such huge amount to finance the budget deficit.”

The greatest threat to Nigeria’s standard of living other than inflation is unemployment; even with progressively growing economy at the rate of 7.3% the economy is not producing enough jobs to make a reasonable impact on employment.  The Finance Minister Olusegun Aganga stated that unemployment in Nigeria was about 19.7% but financial and economic experts at Afripol Organization quantified that the real unemployment figure might be higher when rural and urban joblessness among the Nigerian youths are factored into equation. The collecting of data on employment will be probably cumbersome, if not difficult in rural areas where modern technology is scare and out of reach.

The manufacturing sector recorded a lower output from “7.03 percent in 2009 to 6.43 percent in 2010” due to lack of electric power and paucity of credit. Nigerian manufacturers do import a reasonable amount of raw materials from abroad and foreign exchange becomes an impediment to free flow of raw materials coupled with the government higher tariffs.

Emeka Chiakwelu is the Principal Policy Strategist at Afripol Organization.  Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.     www.afripol.org