April 2020 Economic Update - the pre COVID-19 Edition
In this update we look at balance of payments data for 2019, updates on the CBN OMO and LDR policies, 2019 government revenue data, and what this all means for our readiness to handle the dual shocks
Hello everyone and welcome to this monthly update. I tagged it the pre-corona edition because it is based of a slew of newly available data that mostly describes conditions up until the end of 2019, before COVID-19 was even declared a pandemic. In this update we look at balance of payments data for 2019, updates on the CBN OMO and LDR policies, 2019 government revenue data, and what this all means for our readiness to handle the dual shock of the COVID-19 shutdowns and the collapse in oil prices.
Balance of Payments update
A good place to start is with the newly released balance of payments data. If you recall, I have long since argued that the currency was grossly overvalued. One consequence of that overvaluation is a current account deficit. Last month we saw an actual trade in goods deficit which was the first we have seen in a long time. So, I was not really surprised to see the large current account deficit. Especially since we typically run a very large services deficit.
At $6.9bn in Q4 2019 this is the largest quarterly current account deficit we have had since we started collecting such data. Even on an annual basis it was larger ($17bn) than the worst year of the last oil crisis in 2015.
Even if you compare it to GDP it has not been this bad since the Abacha years. And the Abacha years were really bad.
If you drill down to the various components you cannot really pinpoint the deficit on anything. There was no oil price crash in 2019 as in 2015. Total exports, including for crude oil, were marginally higher in 2019 compared to previous years. Services exports declined marginally but were already small to begin with. But if you look at imports of both goods and services then it becomes obvious that this is not a shock issue but a trend issue. Structurally you can see the problem. Outflows from Imports continues to grow while inflows exports are somewhat flat. A classic exchange rate misalignment problem.
And remember, all this is before the latest round of oil price shocks and before COVID -19.
Foreign Reserves and Mystery Gold
As you would expect the foreign reserves declined significantly. There would be no point to showing yet another graph of the decline but there is new data on foreign holdings of CBN bills. Recall that the strategy of the CBN since 2017 has been to entice foreign portfolio inflows. We now have the amount of those FPI OMO holdings up until the end of 2019.
As you can see, the drop in reserves in not really because of the exit of FPIs. At least not directly. They may have been repatriating profits of course but on average the trend of FPI holdings is up. This of course means that the feared “quick reversal of capital flows risk” was still there, at least up until the end of 2019. From my rough calculations, FPIs help near $15bn worth of OMO bills as the end of 2019. The equivalent of 39 percent of the foreign reserves. If you deduct that from the reserves and recompute the reserves in terms of months of import cover then as at 2019, we had only about 3.5 months of import cover from in the reserves. Dangerous territory by any definition.
As a last note on the foreign reserves, a friend pointed out a curious observation in the data. The value of gold holdings of the CBN jumped up in the December of 2019. By roughly a billion dollars. If anyone knows why that happened please let me know. #EvilEmoji.
The other interesting thing worth noting is the evolution of the CBNs decision to kick some participants out of its OMO window. The new data allows us to see how that has evolved. In terms of the overall value of CBN Bills in circulation, it has declined significantly.
This decline is not really due to FPIs or banks. So, it means, at least in terms of the objectives, the exit of pension funds and individuals from that market is not really being replaced by more FPIs or larger banks holdings. This of course means that system liquidity must be building up. Or must have been.
The chart above shows the growth rate of M2 and M3 and you can see the reversal towards strong growth. This probably explains why the monetary policy committee opted to act so swiftly by raising the CRR. Especially given that inflation has been trending upwards too.
All this is inconsistent. Very inconsistent. Tightening and Easing and holding and lending. Hmmm.
Finally, we have an update on the impact of the CBNs LDR policy. Bank lending continues to grow at least up until the end of 2019.
In terms of which sectors are the beneficiaries, it seems to be spread across the economy, although the manufacturing sector has definitely been one of the key beneficiaries. Agriculture has also seen its share of overall credit go up, but that trend already looked to be happening before the LDR policy
Still, the big risk with this policy is with the performance of those loans. We will need to watch that closely over the coming months. The disruptions from the pandemic are likely to obfuscate any measurement of the impact of the LDR on banks non-performing loans ratios anyway.
Fiscal Struggles Continue
The new trove of data also allows us to observe the finances of government. One word describes this: precarious. If you recall we have been putting a lot of effort into growing non-oil revenue in the last decade. How well have we done? Well not so well.
There is a slow upward trend in gross non-oil revenues that looks to have increased in 2016. But overall revenues are still largely driven by crude oil inflows.
The share of crude oil revenues of course collapses when there is a collapse in crude oil prices but once prices go up then its back to the status quo. Importantly, if you look at non-oil inflows in dollars then it is obvious, we are not making that much progress.
Non-oil tax revenues in dollars are roughly lower than they were between 2010 and 2014. Yeah, even after all the effort.
Even as a share of GDP, we are still way worse off than we were pre-2014. The task of increasing taxes is difficult one. Technically, these are gross revenues flowing into the federation account and do not include taxes collected directly by states or local governments. I will look into including that in the data to see what the trends are like.
Taxes are not growing fast enough. That is clear. But as we know, the federal government never really stops spending. In fact, expenditure has been growing at a faster pace than revenue has been growing. According to CBN data the outcome of this is deficits that are ballooning.
On average the federal government deficit is climbing.
It is more obvious if you look at it on an annual basis. We have a fiscal responsibility act that is supposed to limit these kinds of excesses from the executive. That act sets a deficit ceiling of three percent of GDP.
According to CBNs data, we broke that limit in 2019. And if word coming out from the ministry of finance is to be believed, it looks like we will break it again in 2020. Of course, extenuating circumstances will be used as an excuse and there are extenuating circumstances. But the behavioural patterns were firmly in place before COVID-19 showed up.
The silver lining, if there is any, is that states were getting better over the last few years. The overall state fiscal deficit has been slowing. Although this new collapse in revenue might but the kibosh on that. Still it is worth noting that not everyone has been as fiscally irresponsible as the federal government. The CBN also published local government deficits but I don’t think that is particularly useful as I doubt anyone knows the fiscal positions in LGAs
Monetary Financing Continues.
The increasing deficits, as I have pointed out in previous updates, is typically larger than the budget approved deficits. And, as I have pointed out, this “net deficit” has typically been financed by the central bank. Based on the latest data, that trend had continued. At least until the end of 2019. No one should be surprised. Once you start doing something it is difficult to stop.
That is all for this month’s update. As this new trove of data suggests, the conditions both on the fiscal and monetary side were already very difficult, even before the double whammy of COVID-19 and the oil price collapse hit. Things are changing very quickly, and I will try to write something on the policy changes that have taken place over the last week. Until then, stay safe (and at home for those of you under lockdown), listen to the authorities, and wash your hands.