Foreign exchange stability will cause a moderation in inflation-GTBank

By Kayode Ogunwale

 

Despite the challenges surrounding foreign exchange scarcity, inflationary pressures and negative economic growth that characterized the Nigerian economy in 2016, Guaranty Trust Bank Plc has envisaged prospects for Nigeria economic recovery and growth in 2017.

The lenders expect an improvement in foreign exchange availability and stability, coupled with base effects, saying it will cause a further moderation in inflation.

On the other hand, the bank said a continued illiquidity of foreign exchange will result in increased in inflationary pressures on the economy.

The bank believed that the present inflationary pressure is not entirely a monetary phenomenon and the use of monetary policy tools alone might be ineffective.

The lender expects the government to commence the implementation of fiscal policies that will not only augment the monetary policies in place, but also spur productivity and encourage local production.

GTBank considered two scenarios that could navigate Nigeria economic in 2017. According to the bank, “First scenario, oil prices remain circa US$57 per barrel levels and the successful resolution of the militancy attack on oil facilities in the delta region (best case). Second Scenario: Oil prices crash below US$40 per barrel and the attacks on oil facilities continues following the inability of government to resolve issues with the militants (worst case).”

It expects to see an improvement in foreign exchange earnings with attendant impact on foreign exchange supply, business activities, and economic wellbeing if first scenario plays out.

On the flip side, any further deterioration could lead to a worsening of the foreign exchange environment, a depression of business activities and protracted economic contraction, the bank said.

Guaranty Trust Bank said Nigeria has a highly fragmented FX market with over six sub-market rates mainly as a result of the foreign exchange policy in the country.

“Considering that a credible FX market is an important factor in building a thriving economy, we expect a full implementation of the terms of the flexible exchange rate policy, which will aid effective price discovery and eliminate multiplicity of rates.”

It stressed that, the combination of such policy(ies) with an improvement in foreign exchange earnings will ultimately lead to a moderation of inflation, and narrowing of the gap between the official and parallel rates.

Further delays can only create further fragmentation and escalate FX scarcity, with attendant consequences for the economy, it added.

On inflation, the lender expect inflation rate to moderate somewhat during 2017 having risen consistently through 2016.

Also on interest rates the bank said fixed income yields have risen significantly over the last year as CBN tightened the monetary policy environment in its drive to maintain price stability and encourage much needed foreign currency portfolio investment flows.

“In the absence of significant foreign currency flows, there have been calls for an easing in the monetary environment, especially with the decline in economic activities and rise in fiscal deficits and government debt servicing costs. While it is believed that the tight monetary policy environment is required, in view of rising inflation and devaluation pressures, it is not unlikely that the CBN may bow to pressure to ease by half year.”

Under our scenario 1 considerations, an increase in foreign currency receipts accruing to the government, with attendant accretion to reserves and improved exchange rate stability, will cushion fiscal deficit, ease FX illiquidity challenges and spur economic activities. This would result in a gradual decline in yields as investment shifts towards real sector economic agents.

Conversely, the downside risk of a worsening foreign currency revenue base could negate any gains from an ease in monetary policy. In addition, challenges created by FX illiquidity, FX market fragmentation and cost- pull inflation would further hurt economic activities and investor confidence, leading to higher yields, it stated.

Looking at national and sub-national borrowings, the bank however urged states government to improve their Internally Generated Revenue (IGR) to maximized dependence on the federal government.

It cited the recent incident when federal government has to bail out states government before they paid salary.

“The timeline of FG’s intervention to states revealed that N1.4 trillion has been granted to state governments as Salary Bail-out, debt restructuring and conditional support facilities between June 2015 and June 2016 following the inability of most states to pay its staffs salaries.

The federal government on the other hand, has concluded plans for the issuance of $1 billion Eurobond before the end of the first quarter of 2017 and is also finalizing proceedings to re-present the 2016-2018 borrowing plans to the National Assembly. This further underpins the government’s determination to develop infrastructure in the country in a bid to stem capital flight and FX demand.”

The bank expect the government to articulate a clear implementation strategy for the proposed borrowings and re-present it to the National Assembly for approval as the economy is in dire need of improved infrastructure.

For the country to return on the path of economic recovery and prosperity this year, Guaranty Trust Bank itemized some issues the government must address which includes, genuine liberalization of the foreign exchange market with the intention of achieving a single exchange rate should be topmost on the minds of monetary authorities and credibility of the foreign exchange policy is key to attracting investors.

The lender urged federal government must put its best foot forward in finding a lasting solution to the militancy concerns in the Niger Delta.

GTBank persuaded government, as a matter of urgency to prepare an economic blueprint detailing milestones and roadmaps with unambiguous key performance indicators regarding the attainment of economic prosperity.

Policy credibility will attract desired investment and in turn bring about sustainable and inclusive economic growth, the bank said.