Macroeconomic Report & Economic Updates

Following the Central Bank of Nigeria’s (CBN) restriction of the Open Market Operations (OMO) purchase by individuals and small businesses, there has been a decline in interest rates to an 18-month low of 13.03%1. Primary market interest rates (particularly the treasury bill market) has also fallen into single digits as recent auctions saw rates as low as 7.7%2. While the restrictive policy resulting in lower interest rates can help reduce government’s borrowing costs, it could have adverse effect on investor confidence -- ultimately leading to a reduction in capital flows, external reserves and thus exchange rate. Although the CBN reassures investors that it would be a buyer of last resort where investors do not find buyers in the secondary market, there may be need to minimize regulator interference. This is on the basis that investors tend to avoid a market structure with over-interference by the regulators.

Crude oil prices declined in October 2019 and is expected to fall further in 2020. The price of Nigeria’s bonny light decreased by 4 percent from $64.02 per barrel in September 2019 to $61.45 per barrel in October 2019.5 The fall in crude oil price can be attributed to rising US crude oil stocks and reduction in crude oil supply disruption. Crude oil price is projected to average $60 per barrel in 2019 and further weaken to $58 per barrel in 2020.6 The downward revision in oil prices is linked to weaker global growth forecast and consequently, weaker oil demand. This has adverse implications for Nigeria’s trade, revenue and overall economy; and emphasizes the need for modernising agriculture, developing tourism, and  promoting entrepreneurship in manufacturing, among other initiatives.

Total transaction at the national bourse increased by 15.95 percent from ₦121.9 billion in August 2019 to ₦141.45 billion in September 2019.1 The increase in total transaction is attributable to a 47.81 percent increase in foreign transactions which outweighed the decrease in the domestic transaction (19.09 percent). We expect foreign portfolio investment (FPI) to continue to drive investment inflows into Nigeria. However, FPI could be a challenge in the near term, especially as external reserve decline and investors become wary of exchange rate stability and political uncertainties. Ongoing efforts to improve the business environment, such as tax relief for foreign investors and higher lending requirements to private sector, should be sustained. In addition, the capital market should be deepened through the introduction of derivatives to shore up investment and reserves.

External/foreign reserves depleted by 0.6% to $40.7 billon for the week in review from $41.04 billion, the lowest since January 2018.³ The reserve has steadily plunged since the last week of July, losing about $5 billion in the last 4 months. The depletion in external reserve is attributable to the Central Bank of Nigeria (CBN) intervention in the foreign exchange market to prevent depression arising from capital flight.⁴  This capital flight has been largely driven by rising uncertainties in the Nigerian economy, in addition to lower but expected increase in the United States’ interest rate. While the monetary authorities have maintained foreign exchange stability at the expense of foreign reserves, there is need for fiscal authorities to supplement efforts to sustain reserves. Social, economic and political uncertainties –arising from the recent border closure for instance – are disincentives to investment that should be tackled to boost investors' confidence and shore up external reserves.

Consumer prices for the month of September 2019 increased by 0.22 percentage points. Specifically, inflation rate increased from 11.02 percent in August to 11.24 percent in September 2019.¹ The rise in inflation rate is attributed to an increase in both core and food components which rose by 0.34 percent and 0.26 percent respectively. The Inflation Attitudes Survey conducted by the Central Bank of Nigeria in 2019 Q3 suggests that 52.9 percent of respondents believe that the economy would end up weaker if prices rise faster than they do now.² Respondents also indicated that they will prefer higher interest rates to higher consumer prices. This continuous rise in the prices of goods and services leaves households and firms with less disposable income and profit respectively. Going forward, we expect demand-pull inflation to rise stemming from the soon-to-be implemented minimum wage, and cost-push inflation emanating from increase in energy and food prices as we approach the festive season.