Q1 GDP to plunge over lingering cash crunch

BY EMEKA EJERE

There are strong indications that the present slowdown in economic activities occasioned by the lingering naira scarcity will lead to a significant drop in Nigeria’s gross domestic product (GDP) growth in the first quarter of 2023.

Following the redesign of N200, N500 and N1,000 units of the national currency and the withdrawal of the old notes, there has been scarcity of cash running into two months. The Central Bank of Nigeria (CBN) initially gave Nigerians up to January 31 to deposit the old notes into their bank accounts, and later extended the deadline to February 10.

The resultant cash scarcity has forced many small businesses, which depend on cash transactions, to shut down while citizens are faced with difficulty accessing cash for their daily expenses.

An analysis of the currency in circulation between October 2022 and January 2023 revealed that while the banks had mopped up cash in circulation outside the banking system, they were yet to progress in replacing the cash in the economy. Data from Central Bank of Nigeria (CBN) revealed that N3.23 trillion was circulating in the economy within this period.

From October to December 2022, N2.7 trillion of the, amount was in the hands of various households, and in circulation outside the supervision of the banks. Thus, 83.59 percent of the money in circulation within this period was outside the banking system, while the banks controlled only 16.41 percent.

However, towards the initial deadline of January 31, 2023, the cash ratio changed, as money in the hands of households dropped to N900 billion. This represents a 66.7 percent decrease in currency outside the bank.

That is, the cash mopped-up by the banking system increased from N500 billion at the initial stages to N2.4 trillion in the later stages. This shows a 380 percent increase in the monies controlled by the banks.

The inability to access the new notes has affected virtually all aspects of the economy, especially the micro, small and medium scale enterprises (MSMEs). This category of businesses has been the livewire of the Nigerian economy, accounting for 96 percent of the businesses in the country and employing 84 percent of the total labour force. Also, the activities of MSMEs contribute 48 percent of the nation’s total GDP figure.

Falling PMI

According to the Purchasing Managers’ Index (PMI) released by S&P Global last week, business activities driven by the private sector slumped for the first time in almost three years as companies reduced output and cut jobs due to cash and fuel shortages in February.

The PMI is a measure of the prevailing direction of economic trends in the manufacturing and service sectors. According to the S&P PMI, business activities fell to 44.7 in February from 53.5 the month before, being the worst reading since the height of the coronavirus pandemic in June 2020.

The report added that the February PMI data indicated that cash shortages across the Nigerian economy had a severe impact on the private sector midway through the first quarter of the year.

It noted that substantial declines were seen in both output and new orders while firms scaled back their purchasing activities and employment. Usually, PMI readings above 50.0 signal an improvement in business conditions the previous month, while readings below 50.0 show a deterioration.

“The headline PMI dropped below the 50.0 no-change mark in February, posting 44.7 from 53.5 in January. Business conditions deteriorated markedly ending a 31-month sequence of expansion.

“The decline in operating conditions was the sharpest since the survey began in January 2014, excluding the opening wave of the COVID-19 pandemic in the second quarter of 2020.

“The most severe impacts of cash shortages were seen with regards to output and new orders which both fell substantially as customers were often unable to secure the funds to commit to spending.

“The decline in new orders was the first since June 2020, while the fall in output ended a seven-month sequence of growth. In both cases, the reductions were the most pronounced in the survey’s history, apart from during the opening wave of the COVID-19 pandemic,” the report stated.

The slump in PMI shows that while the central bank has managed to reduce the amount of cash held outside the banking system to a record low, it has come at a cost to the economy.

Heavy toll

Speaking on the impact, the Head of Equity Research for West Africa at Stanbic IBTC Bank, Muyiwa Oni, said: “This quarter the lingering cash shortages will likely continue to dampen economic activities and could depress economic growth.

“Furthermore, persistent fuel shortages from the beginning of the year saw petrol pump prices increase, which both increased production cost for firms and led to supplier delivery delays.

“Sure, the lingering cash shortages will likely continue to dampen economic activities and could depress economic growth in Q1:23.”
Expressing similar concerns, the Founder of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said the cash crunch is slowing down economic activities and taking a heavy toll on small businesses.

“One had expected that the situation would improve after the presidential election, but that has not happened. It has continued to slow down economic activities and it is taking a very heavy toll on the small businesses, on those in the rural areas, and it is also taking a huge toll on the agricultural sector”, Yusuf said.

According to him, these are very huge and strategic constituents of the economy, because of their contributions to job creation, economic inclusion and economic diversification.

Yusuf said the cost of the policy to the economy and the welfare of the people is enormous and it will drag down the gross domestic product (GDP), leading to the contraction of the economy and job losses. He said the damage is far higher than whatever benefit people might want to ascribe to it, noting that the CBN cannot arbitrarily cut the amount of cash in the economy.

“It has to be based on clear economic principles and empirical study. You have to relate the amount of cash to the size of your economy as well as the total money supply. Those two variables are very important. That is the way to manage an economy”, Yusuf said.

Recently, an economic expert, Bismarck Rewane, projected a three-to-five-per cent drop in the gross domestic product (GDP) of Q1 2023 as a direct result of the naira redesign policy of the CBN.

Sharing some insights into the CBN policy’s effects on Nigerians and the economy in an interview on Channels Television, Rewane, who is the CEO of Financial Derivatives Company Limited, stated that the situation Nigerians face owing to the government’s policy showed the future is bleak.

“The impact at the end of the day is that it will affect GDP this quarter, conservatively, by three per cent, and aggressively it could reduce GDP in this quarter by five per cent if nothing is done in a hurry,” he stated

“Indigestion has come out and the country is now constipated. So, we should be looking for a laxative to take care of this problem.”
Meanwhile, the Manufacturers Association of Nigeria (MAN) has said that the current scarcity of naira notes has negatively impacted business activities by disrupting the proper flow of goods.

The president of the association, Otunba Francis Meshioye, who stated this during an interaction with journalists in Lagos, said the current naira scarcity and the pressure the cash crunch has put on online transactions have negatively affected the free flow of goods.

He said, “I want to assume that this is a very short-term problem. It is general. Even if you want to do e-banking, there are some things you cannot do at the moment. We have problems, PoS is not working.

“There is no way any scarcity of something that is essential to the consumer will not affect the producer. We feel it because it hinders the proper flow of our goods to the end user. What effect is that going to have? It means we will pile stock and when we pile stock, it means cash is trapped. We pay high interest rates and they won’t yield good returns and investments go to where returns come regularly.

“No investor wants to play with his money. This is a very big issue in the economy now. If you put all these together, you will agree with me that we are really facing a critical time as manufacturers.”

In its latest global economic prospects report, the World Bank cut Nigeria’s 2023 growth forecast to 2.9 per cent from a forecast of 3.1 per cent last year. Although the International Monetary Fund (IMF’s) economic growth forecast for Nigeria in 2023 is 2.9 per cent, there are concerns that this may be reversed downwards soon because of sluggish growth driven by rising inflation and debts, especially Ways & Means advances from the CBN, among other factors.

Already, Moody’s and Fitch, two renowned rating agencies have recently downgraded Nigeria to ‘B’- outlook, from ‘B’ even though they believe that the economic outlook remains stable. Listed as key triggers for the gloomy economic outlook are Nigeria’s foreign exchange instability, high poverty rate, low oil producing level, expensive petrol subsidy, low domestic non-oil revenue generation and insecurity.