Experts Warn On Parameters Driving GDP Growth

Despite some recovery in headline Gross Domestic Product (GDP) to 6.28 per cent and decline in inflation, analysts have issued fresh warnings that the so-called growth in the nation’s economy is rooted precariously on shaky fundamentals that could swing otherwise any moment.

They  warned the Central Bank of Nigeria’s Monetary Policy Committee (MPC) not to contemplate slowing interest rates based on  government statement that inflation has reduced and growth was recorded in the second quarter of 2012. 

Razia Khan, Regional Head of Research, Africa Global Research, Standard Chartered Bank, London said, “Despite some recovery in headline GDP, to 6.28 per cent year-on-year (y/y) in the second quarter of 2012 from 6.17 per cent in first quarter, non-oil GDP continues to slow, rising only 7.5 per cent y/y from 7.93 per cent in first quarter 2012 and 8.85 per cent in second quarter of 2011”.

Growth in the nation’s economy was mostly driven by the non-oil sector. Although the oil sector accounts for much of the revenues accruable to government, its contribution to economic growth is far less than that of agriculture for instance. During the period under review, the oil sector contributed about 16.26 per cent only to real GDP, while agriculture contributed over 42 per cent. Khan argued that, although the worst of the volatility in the interbank market appeared to have settled, this did not necessarily imply that easing would be imminent.

“Despite Nigeria’s potential index inclusion, which has led to strong inflows allowing the currency to strengthen, global risks remain.  Any downside shock to oil prices would still leave Nigeria vulnerable. Plus oil output seems to have disappointed further in Q2 – according to the GDP data.  We expect the emphasis on rebuilding foreign exchange reserves to more comfortable levels to remain in place”, she said.

On why interest rates should not be lowered today by the MPC, she argued that, while it would be nice to imagine a transmission mechanism that does not exist, the fact is, there is not much evidence that cutting interest rates now will do much to lift real sector prospects – at least, not nearly fast enough.

“As far as influencing the interest rate decision, the weakness of current GDP growth is a non-argument.  There may be room for easier monetary policy eventually – when the authorities are more comfortable with evidence of a sustained downward trend in inflation, when core inflation on a twelve-month basis suggests that there is room for easing (currently, it does not), when foreign exchange reserves are higher and external vulnerabilities have been reduced and sustained, naira strength is more certain.

“We don’t believe we have reached that point just yet, and therefore see little need for any imminent adjustment to either the Cash Reserve Ratio (CRR) or Monetary Policy Rate (MPR)”, Khan said.

Samir Gadio, analyst with Standard Bank, London, is concerned about the fiscal policy. He said fiscal policy still remains a cause for concern. Gadio said though the gross Excess Crude Account (ECA) balance allegedly recently rose to $8.0 billion (3.1 per cent of GDP), it is meagre compared with a median fiscal savings-to-GDP ratio of around 65 per cent among major oil exporting nations.

“Yet the authorities’ ability to accumulate significant oil savings remains questionable in the absence of a comprehensive and effective oil fiscal rule. Currently there are few signs of a solution to the Sovereign Wealth Fund (SWF) imbroglio since the ECA will probably remain a separate entity for some time.

“Besides, long-term risks to Nigeria’s macroeconomic position stem from the substantial fiscal expansion at the federally consolidated level, despite early signs of budgetary consolidation in the Federal Government tier”, said Gadio.

In a related development, Jide Solanke, analyst and strategist with FSDH Securities in Lagos notes that an analysis of the consumer prices monitored across the country in August shows that price of tubers and vegetables dropped due to the harvest season, especially coming from yam and its impact on other tubers.

Solanke expressed reservation about the sustainability of lower inflation rate, saying the price of rice monitored showed an increase of about 2.04 percent between July and August 2012.

“It is worthy to note that, rice accounts for about nine percent of total household expenditure in Nigeria. Prices of maize and wheat also increased over July figures, while price of bread remained the same”, Solanke said. The price of bread has however shot up significantly in September.