Twin Global Shocks, Dual Policy Response, and Nigeria's Economic Outlook

Abstract

Since July 2014, after a remarkably favourable half year in which oil price reached a peak of US$115 per barrel and equity market capitalization touched an historic peak of N14 trillion, the Nigerian economy has been buffeted by the twin shocks of global commodity price slump and global liquidity volatility that have translated to dwindling of income and net capital inflows for the county. Oil price bottomed at US$78 dollars per barrel in November, defining a four year low, just as market capitalization dropped to N11 trillion, and external reserves dipped to US$38 billion.After hoping against hope for five months that the tide will turn, the Nigerian government responded with a series of fiscal and monetary policy pronouncements by the end of November. These have put a lot of new angles on the shape of things. Far from resolving the puzzles posed by the twin shocks from abroad, the pronouncements have added two more puzzles at home - a fiscal puzzle and a monetary policy puzzle - triggering a debate about which is more damaging to the outlook: the twin global shocks, or the dual policy response. Watchers of Nigeria’s economic evolution thus face a yearend challenge of resolving four puzzles about Nigeria’s economic outlook!The twin shocks from abroad had inflicted five months of income and spending losses on households, businesses, banks, government and the central bank. A robust response by Nigeria required a methodical evaluation of the plights of each of these units for a holistic intervention. The dual policy response sought to address only the last two units largely by aggravating the negative impact of the external shocks on the first three units, thus compounding their woes, and further dimming the overall outlook of the economy for the coming year.Both the finance ministry and the CBN now urgently need to develop the capacity to think about the requirements of the health of the wider economy - households, businesses, and banks - and learn to use the budget and monetary policy instruments to provide those requirements. Until this is done, Nigeria’s economic outlook is bleak. Not so much because of the twin global shocks, as sensible policy responses can mitigate the adverse effects of those, but much more because of the mediocre dual policy response.