One of the more risible aspects of the recent re-basing of domestic economic output numbers was the attempt by pro-Jonathan administration types to pass the higher GDP numbers, which emerged, from the exercise, off as the result of the incumbent administration’s “transformation” efforts. Politics may have played a part in this attempt. After all, if this narrative redounded to the central government’s advantage, it could not have come too soon; what with general elections down the next fork in the nation’s path. Still, a more probable impulse for this strange tale is supplied by the acknowledgement that an inadequate grasp of basic economics has contributed much to the improper management of the country — at least, since oil became the major contributor to public finances.
It is not surprising, therefore, that this reading of the economy ignores the lag between any cause and its effects. Proper accounting for this lag would suggest that the more likely cause of the larger output numbers date back to the slew of reforms that the Obasanjo administration put in place after 2003. Nonetheless, the consequences of the euphoria from the wrong reading may not all have been benign. Recent data on the economy would seem to indicate that enthused by this exaggeration of its own performance, government might have taken the foot of the gas pedal (of a vehicle that was not moving at any real pace before).
By one reckoning, headline inflation may have reached 8.7% in August. If government’s bean counters confirm this, then this would be the seventh consecutive monthly increase since February, this year, when the year-on-year (%) change in the all items price index stood at 7.7%. At 8.3% (July’s headline inflation count), we were just within the monetary authority’s target range (9%) for headline inflation for this year. So we ought not to worry? Except that all the prognoses I have come across, thus far, are for headline inflation closing the year at a little over 10%.
Of greater weight, however, is the rise (from 7.2% in February, this year! to 8.1% in June) in, and volatility (then back to 7.1% in July) of the core inflation count. All of these have implication for monetary policy. They speak to the need for further tightening of monetary conditions, even when the consensus is that the fiscal side of macroeconomic policy should now bear the bigger part of future adjustments.
The central bank and its rate-setting committee may yet find small consolation in the knowledge that the naira’s exchange rate has remained relatively stable, at the official market, during this period. However, this may be because the central bank is breaking the vault (selling 11.9% more dollars in August than it did in the previous month) to keep the naira in elevated territory. More informative, though, is the naira’s trend at the parallel market, where it is exchanging for far more per dollar than at the official market.
Significantly, the bigger concern, now, is not, as a friend reminded me recently, that the arbitrage window between the official and parallel markets are a regulator’s nightmare. No! Instead, we see numbers emerging from the regulator itself that ought to give sleepless nights to even the most perfunctory watcher. Crude oil prices dropped (by 7.8% from US$108.46pb as at end-January 2014 to US$100pb by end-August 2014). Moreover, with oil production at less than the target numbers (1.9mbd in August), public finances remain under much pressure. Against this background, the CBN’s aggressive intervention in the foreign exchange markets in support of the naira looks not just odd, but unsupportable, except over the near term.
These dark clouds notwithstanding, and here comes the catch, foreign reserve numbers have been trending up since July. You do not need to be an actuary to realise that “this uncoupling of the exchange rate performance from the external reserves numbers don’t add up”, my friend reminded me. You need only look at the numbers from the Debt Management Office to realise the full extent of the problem at hand: that the central government’s appetite for borrowing is on the rise.
In all probability, we have a situation where the government at the centre may be borrowing to pay salaries on one hand, while on the other hand, dwindling disbursements from the Federal Account Allocation Committee (down 13.41% in August) may mean that conditions are no better at the provincial and municipal levels.
Should alarm bells be ringing for the economy? I would wager against this right now. On past performance, we have been closer to worse precipices; and jeremiads have been shriller. Nothing happened. Nothing would happen because of any of these, I believe. Although that should be cause enough for concern. For all we are doing burying our heads in the sand, is shunning opportunities to set the ship of state aright!
Mr. Uddin, an economic historian and finance expert, writes a monday column, and is a member of the editorial board of Premium Times