Recession would only end if 85% of budget implemented – Prof Ekpo
What is your projection for the year 2017 for the economy and financial sectors? The year 2017 would remain bleak up to the second quarter. However, if the 2016 budget as well as the 2017 recovery and growth programmes of the government are fully implemented then there would be sluggish growth indicating the easing of […]
What is your projection for the year 2017 for the economy and financial sectors?
The year 2017 would remain bleak up to the second quarter. However, if the 2016 budget as well as the 2017 recovery and growth programmes of the government are fully implemented then there would be sluggish growth indicating the easing of the recession. If the lending rates remain high (about 25%) then it would be very difficult to diversify the economy. Marginal increases in the price of oil should not allow government to deviate from the policy of changing the structure of the economy from that of merely consumption to production. It is only structural and fiscal policies that can get the economy of the recession. Monetary policy would be ineffective. However, as soon as recovery sets in then monetary policy must be pursued to stimulate growth, that is, more of quantitative easing. It is expected that in 2017, there would be better co-ordination between fiscal and monetary policies. The Central Bank must continue to manage the foreign exchange market in the interest of the productive sector of the economy.
Are you convinced that the parameters presented by the President, such as the exchange rate of 305/$1, oil production of 2.2m/d, and the oil price of $42.5/b will work?
For me the oil benchmark of $42.5 per barrel is realistic because in forecasting it is better to take a conservative or pessimistic position and I am convinced that work was done to arrive at that benchmark. However, the exchange rate is not realistic. The official and/or inter-bank rate of 305/$ would only give government more domestic currency (Naira) given the inflow of foreign currency through the sale of oil. However, in terms of other critical sectors of the economy, the exchange rate assumption is far from being realistic. The parallel rate is about N484/$ hence the misalignment is just too wide. It would have been safe to use the average of the inter-bank and parallel rates which should be around N395/$. The projection of 2.2m/d production depends on the activities in the Niger Delta. If the Avengers keep blowing up oil pipelines then there would be decreased production. Let us hope that peace would return to the region. However, OPEC was gracious in not reducing Nigeria’s quota but we do not know how long that would continue.
The president assures Nigerians that the 2017 budget will end recession. What is your take on that?
The 2017 budget may end the recession towards the 4th quarter of 2017 if 85% of the budget is implemented and there are no negative external shocks. This is contingent on the cooperation of all arms of government and proper macroeconomic management of the economy. The economy would exit the recession only if fiscal and structural policies are implemented up to 85%. The reason is that government’s 2017 recovery and growth budget has all the ingredients to take the economy out of the recession. Timely passing and implementation of the budget are crucial.
Inflation rate keeps going up throughout 2016, what do you think will happen in 2017?
The efforts by all tiers of government to spend and reverse the recession coupled with the distortions in the foreign exchange market would result in rates of inflation. However, depending on the country’s inflationary threshold, nothing wrong in sacrificing some inflation for growth particularly when the economy is in a recession. However, if food production increases then the increase in prices would be moderate.
The exchange rate is still not stable despite the introduction of the flexible policy by CBN, what are the factors that will stabilise the exchange rate in 2017? Is Naira going to regain some value this year due to the increase in the FX earnings?
The problem in the exchange rate market is supply induced. The demand for foreign exchange exceeds the supply. The major source of earning forex is oil sales hence once the price of oil declines sharply then reserves are affected. Central Bank may not have enough reserves to support the Naira. Consequently, the economy must earn foreign exchange through various sources. The real sector must grow through policies to diversify the economy. Again, we cannot run away from the matter of high lending rates. Any point on the supply of loanable funds curve is a price hence banks can determine which rate is applicable to a client. After-all, the intervention funds of the CBN in various sectors of the economy can be assessed at below 10%. Let us not forget that the Naira is not a convertible currency therefore even when the economy thinks it has enough, it is only provisional. Naira must be converted in dollars or pound sterling for transactions abroad. The initiative to patronize and buy made in Nigeria goods is in the right direction. However, a complete strategy is needed and sustained to alter the structure of the economy. The economy must be industrialized and must manufacture certain goods and services and/or add value to ensure growth, create employment and make life better for the citizens. When you have a productive economy, the domestic currency would find its level.
The interest rate benchmark at 14% is what the CBN adopted in the last MPC meeting, what impact will that make in this year?
The 14% MPR of the CBN had no impact on the lending rate; however, it has some impact on the inter-bank rate. I do not know what the CBN would do next year. But the last MPC was right to leave the rates the way they were because in a recession only fiscal policy works. In Nigeria’s recession which affects both the demand and supply side of the economy, structural policies are also important.
We have seen price of oil appreciate by about 15 percent since the agreement by OPEC to cut production, commencing from today, are we likely to see the price of oil rebound to $80 per barrel this year or otherwise?
While we need oil money to diversify the economy with the oil sector inclusive, the economy should begin to think outside oil. Even if the oil price hits $80 or $100, oil is a wasting asset and no right-thinking government should see it as permanent. This is a commodity which the price and output are outside the control of the domestic economy. The volatility of its price further complicates the matter. Why should an economy depend on an exogenous source of revenue to finance its development? At any point in time, we should see the oil revenue as a windfall and manage it as such.
There are mixed reactions on the likelihood of famine this year or not, from your view, are we self-sufficient with the last harvest season? And the export of the grains to neighbouring countries is it a good or bad to the farmers?
Farmers are part of the economy; they have families and they spend on items like all economic agents. Hence, if they can earn more income by exporting to neighbouring countries I do not see anything wrong. Farmers should be supported to produce enough for the domestic market and export any surplus to earn forex. The high food import bill suggest that we are not self- sufficient. There is a difference between food adequacy and food self-sufficiency. When the domestic market is met then the economy is adequate in food production; self-sufficiency implies that you can export the surplus after satisfying the domestic market. The country’s agricultural production should not depend on nature alone (rainfall and increased acreage) but should also rely on yield and interaction effects (science and technology). The present government has realized the importance of this sector in Nigeria’s development calculus and the present programmes are in the right direction. Once you introduce science and technology into agriculture then the challenge of famine can be addressed.