Nigeria’s second quarter real GDP growth fell to 2.3 percent from the 6.5 percent it recorded this time last year.
This confirms that Nigeria is officially in an economic slowdown, as there was a contraction rather than growth in almost all sectors of the economy. Very few sectors managed to stay afloat.
The new GDP figures echo investor sentiment regarding recent events in the economy. Investors have been opining that the silence of the Presidency regarding the state of the economy has not done much to spur confidence, new investment and growth.
Rather, the economy has been plagued with uncertainty, made worse by the CBN’s knee-jerk reaction to events.
The NBS is now confirming this with hard cold data.
What Nigeria’s paltry 2.3% economic growth tells us…
Looking at the GDP numbers tells something:
Economic output is plunging. It is plunging because spending is not keeping up – i.e., both consumer/government spending (caused by oil-induced austerity) and investment spending (caused by lack of new investment).
The economy is suffering from shortage of new investment, because of 2 factors: policy uncertainty (caused by Buhari) and impediments to free capital flows (caused by Emefiele).
Latest data from the CBN and NBS showed that capital imported into the country in the second quarter of 2015 plunged 54 percent from its level in 2014.
Nigeria’s capital importation record this year is the most dismal since 2013, at least.
To be fair, the drop in investment was triggered by the election worries and oil price plunge. But as capital tries to find its way back, it is being impeded.
The NBS says in its report, “this new, lower level [of investment] will be maintained as long as an uncertain economic environment remains”.
Why is this the fault of the CBN?
Economic policy (The Impossible Trinity, aka the Trilemma) tells us that an internationally exposed government can only pursue 2 out of 3 central bank objectives, and it is impossible to have all three of the following at the same time:
- A stable foreign exchange rate
- Free capital movement (absence of capital controls)
- And an independent monetary policy.
Governments that have tried to simultaneously pursue all three goals have failed. And not surprisingly, Emiefele is failing spectacularly.
From the above, we know that Emiefele had to make two policy choices from a possible three. And he went with a strong/stable foreign exchange rate and an independent monetary policy, while sacrificing new investment flows into the economy.
Why are capital inflows and foreign investment so crucial to the economy?
Nigeria has a Gross National Savings rate of 18%. While that is decent, a fragmented financial intermediation system, and structurally high Monetary Policy rate ensures that savings is not fully passed on to investment. Hence foreign investment is needed to make up for the shortfall.
Every economy needs foreign investment by the way.
The NBS data (along with the theory of the Impossible Trinity) is saying unequivocally that economic growth is being sacrificed for a strong/stable currency, and monetary policy independence.