By Anayo Ezugwu
ROBERT Chikwendu Asogwa, member, Central Bank of Nigeria, CBN, Monetary Policy Committee, MPC, has lamented the deteriorating fiscal balance in Nigeria’s economy. But he said that the recent marginal uptick in oil prices provides some hope.
In his personal statement at the end of the MPC meeting in July, Asogwa says inflation has been sticky upwards but reflects more of temporary supply shortages and structural bottlenecks. He noted that the several support policies initiated by the Central Bank to promote lending, especially for distressed firms and households are particularly timely and may help in mitigating the supply and demand shocks, but need some tricky balancing.
Asogwa advised that future monetary policy actions should seek to deepen the recovery support policies along with dedicated monitoring to ensure quick results, and also not to worsen the domestic inflationary outlook or jeopardise the future stability of the financial sector. “The outlook of the Nigerian economy remains split between gradual recovery from the third quarters of 2020 onwards if the pandemic stabilizes, and a delay in economic recovery up to 2022 if second or successive pandemic waves occur.
“The reality, however, is those countries with stronger fiscal and monetary policy support will have smaller permanent GDP losses than for those where policy support has been limited or ineffective. For now, the initial monetary policy response in Nigeria has been quite strong. Besides, cutting policy rates in May 2020, the loan restructuring forbearance granted to banks, as well as, the targeted credit intervention for healthcare, manufacturing, creative industry, SMEs and households will be key for a reasonably strong bounce in the third and fourth quarters of 2020.
“The challenge is to ensure that these facilities are disbursed in time and are effective in accelerating consumer demand as well as firms’ survival and capacity to expand which will guarantee early economic recovery,” he said.
According to Asogwa, it is clear that the COVID-19 pandemic caused declines in economic activity in the second quarter of 2020 compared to the first quarter. He said the contraction of both the manufacturing and non-manufacturing Purchasing Managers’ Index, PMI, between April and June 2020 showed that production levels and business activities have remained low since the crisis.
“There are three key downside risks which have generally characterized Nigeria’s domestic economic outlook since the COVID-19 crisis. First, fiscal deficits have been widening as revenue declined because of the pandemic. Second, inflation rates have been sticky on the downwards side as supply disruptions affect the prices of food and non-alcoholic beverages. Third, the tightening balance of payments has been threatening the stock of foreign reserves, thus creating pressures on exchange rates. On the fiscal deficit, the depressed oil export earnings amid the COVID-19 pandemic have weighed in heavily on the fiscal revenue for 2020.
“Generation of non-oil revenue is also facing considerable challenges in 2020 because of the low level of domestic economic activities even with the recent increases in the rate of VAT from 5.0 percent to 7.5 percent before the COVID-19 pandemic. The government’s recent efforts have been to marginally reduce the expected recurrent expenditures in 2020, whilst increasing borrowing so as to maintain current capital spending.
“There is, however, concerns that increased dependence on borrowing with oil prices still at low levels will see the already elevated debt servicing costs soar in the coming years. On the inflation rate which has consistently increased month-on-month even before the COVID-19 outbreak, a key concern is the effect of a prolonged regime of negative real interest rates on the economy, especially as the recovery process evolves.
“In the coming months, we expect modest recovery, especially as oil prices pick up and the effect of government’s fiscal stimulus and various Central Bank support measures shore up consumer demand and firms’ capacity to invest. This recovery will, however, remain fragile given the high uncertainty of the pandemic and the growing possibilities of a second and even third wave of outbreaks.”
On the banking sector, Asogwa said the outlook is similar to the position at the last MPC meeting in May 2020 as the balance sheets of most banks remain strong with marginal increases in the key profitability indicators in June 2020. “CBN staff report also shows monthly successive increases in the banking industry’s deposit, credit and overall assets size, while the Non-Performing Loans ratio declined between April and June 2020.
“As I suggested in my last MPC statement of May 2020, it is necessary to have standby macro-prudential support policies which will be ideal to maintain banking sector resilience at this crisis period whilst promoting further lending by banks to support the economic recovery process,” he said.
– Aug. 14, 2020 @ 18.35 GMT |