Nigerian Economic Policy Dispute Hinders Chances of Recovery

LAGOS, Capital Markets in Africa: A dispute between Nigeria’s monetary and fiscal policy makers over how to lift the economy out of its worst slump in more than two decades may delay a recovery in Africa’s most populous country.

Central bank Governor Godwin Emefiele last week ignored calls by Finance Minister Kemi Adeosun to cut borrowing costs and kept the key interest rate unchanged at 14 percent, hours after she said in a television interview looser policy is necessary to stimulate the economy. Emefiele also called out the government for its inadequate efforts to boost growth, saying monetary policy alone can’t get the economy out of stagflation and that “complementary fiscal policies” are needed to resuscitate output and consumption.

Gross domestic product contracted in the first half of the year as the effects of a 15-month currency peg, fuel and power shortages and lower oil prices and production weighed on output. The economy is forecast to shrink this year for the first time since 1991. The delayed approval of a 6.1 trillion-naira ($19.3 billion) budget has stalled the government’s efforts to stimulate economic activity and the naira’s slump since the removal of the 197-199 per dollar peg on June 20 has fueled inflation to the highest in more than a decade, extending the decline in consumer spending.

“The problem is that neither the government nor the central bank have a ‘grand strategy’ to fix Nigeria’s economic woes,” Malte Liewerscheidt, an Africa analyst at Bath, U.K.-based consultant Verisk Maplecroft, said in an e-mailed response to questions. “What we have seen over the past 18 months are mostly short-sighted tactical responses to ever more pressing problems.”

Policy Dilemma
Inflation at 17.6 percent and a currency that weakened about 40 percent against the dollar since June, coupled with an economy forecast by theInternational Monetary Fund to contract by 1.8 percent, underline the policy dilemma. Adeosun said the nature of inflation is not being driven by consumer demand as it is “cost-push” and won’t respond to interest-rate increases, while Emefiele said the tightening stance has helped to lure more than $1 billion in net portfolio inflows. Cheaper borrowing would fuel demand for goods the economy can’t produce due to a lack of action to boost industrial output and increase price growth, he said.

This sort of divergence between fiscal and monetary authorities “tends to be pronounced when there are no clear best options available to policy makers,” Manji Cheto, senior vice president at Teneo Intelligence in London, said by e-mail. “Ultimately, the fiscal authority will have to realize that the heavy lifting will have to come from its own end.”

The difference in policy approaches between the government and the central bank is not new. President Muhammadu Buhari opposed the devaluation of the naira for more than a year, saying it would fuel inflation and hurt ordinary Nigerians. A shortage of foreign currency which led to rapid price growth and a slump in output eventually forced the central bank to move to a free float.

Lowering the monetary policy rate “will further fuel inflation and you will reduce the yield on fixed income at a time you want to attract foreign exchange,” former central bank Governor Muhammadu Sanusi II said in a speech on Sept. 21. “The immediate oxygen that this economy needs is foreign exchange coming into the economy and foreign investors are responsible for that. ”

The government will spend its way out of a recession, Adeosun said in an interview with broadcaster CNBC Africa on Sept. 19. Half of the planned 1.9 trillion naira of debt to help fund the fiscal gap, which widened by 30 percent this year, would come from the domestic debt market and the remainder from external sources, according to budget documents. Higher borrowing costs and the loss of almost half of the revenue projected for this year could push Nigeria’s debt service-to-revenue ratio above the projected 35 percent of GDP, according to documents from the budget and national planning ministry.

The key is not for Nigeria to to spend its way out of recession, but to “give incentives for economic activity and business to thrive,” African Development Bank President Akinwumi Adesina, who is also the nation’s former agriculture minister, said in an interview Monday in the capital, Abuja. “Interest rates in Nigeria are too high for the economy to come out of recession. They can attract foreign currency, but it’s hot money that will leave as fast as it came.”

The nation will finalize a $1 billion loan from the African Development Bank next month and may borrow more than $4 billion over the next two years to shore up its budget, according to the lender.

“The misalignment between monetary and fiscal policy will remain in the short term,” Pabina Yinkere, Lagos-based head of research at Vetiva Capital Management Ltd., said by phone. “By March, when inflationary pressures reduce, the central bank will have room to reduce interest rates and we will see monetary and fiscal policy get aligned.”

Source: Bloomberg Business News