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NIGERIA AUGUST ECONOMIC REPORT - Little To Cheer As Election Season Looms

Little to cheer as election season looms                                                                              

Data released in August showed the frail state of the economy. Nigeria’s economy grew by just 1.5% y/y in Q2’18, below Vetiva and Consensus estimates of 1.6% and 2.0% respectively, dragged by a slump in agriculture output. The sector grew at just 1.2% y/y in the quarter, the slowest in 25 years, hinting at the economic repercussions of the violence in the Middle Belt which worsened at the turn of the year. The inflation picture was likewise underwhelming as consumer prices rose 11.1% y/y in July, down slightly from 11.2% y/y in June following strong month-on-month food inflation of 1.4%. Without a coherent plan to tackle the scourge in the nation’s primary source of food or resettle affected groups, the threat of food insecurity will become more pronounced. Meanwhile, the electioneering wheels are kicking into gear, with September likely to be an active month ahead of major party primaries scheduled for September and October.                                                                           

The Central Bank of Nigeria (CBN) enacted a differentiated cash reserve ratio regime (CDRR) where deposit money banks (DMBs) can request a refund of a portion of the CRR to provide credit facilities for greenfield and brownfield projects in agriculture and manufacturing. The objective of the scheme is to incentivize banks to lend to agriculture and manufacturing firms, who currently receive just 3% and 13% of bank loans despite accounting for 23% and 9% of the economy and employing 48% and 7% of Nigeria’s labour force. According to the CBN, loans granted under the scheme must have a minimum tenor of seven years, a maximum size of ₦10 billion and cannot be for the purpose of refinancing existing loans. Crucially, the interest rate on the loan cannot exceed 9%. In our view, this is a clever method of directing credit to critical sectors of the economy but we stress the need to ensure proper risk management and oversight given the dangers of extending credit to riskier economic groups at low interest rates.