04 July 2016, Lagos — The Central Bank of Nigeria, CBN, on Friday reported that economic activities declined faster in June, confirming that the nation’s economy formally entered into recession in the second quarter of the year.
Economic recession is a period of general decline in economic activities and it is typically defined as a decline in GDP for two or more consecutive quarters.
Nigeria’s economy contracted in the first quarter of the year, as it recorded negative Gross Domestic Product (GDP) during the quarter. According to the National Bureau of Statistics the nation’s GDP in Q1 2016 contracted by 0.36 percent, the first negative growth in many years.
Indications that the economy suffered a contraction in the second quarter, and hence a slide into recession, emerged on Friday, as the CBN’s Purchasing Manager Index (PMI) for June revealed that economic activities decline faster in June. The decline in June represented a decline for six consecutive months.
The report revealed that in the manufacturing sector, “Production level, new orders, and employment level and raw material inventories declined at a faster rate; while supplier delivery time improved at a faster rate”.
It also stated that in the non-manufacturing sector, “Business activity, new orders and employment level declined at a faster rate while raw materials inventories declined at a slower rate”.
The CBN stated, “The Manufacturing PMI dropped to 41.9 index points in June 2016, compared to 45.8 in the preceding month. This implies that the manufacturing sector declined at a faster rate during the review period. Of the sixteen manufacturing sub-sectors, fourteen recorded decline in the review month in the following order: electrical equipment; non-metallic mineral products; furniture & related products; fabricated metal products; chemical & pharmaceutical products; printing & related support activities; paper products; food, beverage & tobacco products; cement; computer & electronic products; plastics & rubber products; textile, apparel, leather & footwear; petroleum & coal products and primary metal. The remaining two sub-sectors, however, recorded expansion in the following order: appliances & components and transportation equipment.
“The composite PMI for the non-manufacturing sector recorded decline for the sixth consecutive month. The index dropped to 42.3 points, indicating a faster decline compared to that in May 2016. Of the eighteen non-manufacturing sub-sectors, fourteen recorded decline in June 2016. Of the eighteen non-manufacturing sub-sectors, fourteen recorded decline in June 2016 in the following order: construction; professional, scientific, & technical services; management of companies; utilities; accommodation & food services; real estate, rental & leasing; electricity, gas, steam and air conditioning supply; educational services; wholesale trade; public administration; information & communication; finance & insurance; repair, maintenance/washing of motor vehicles; and arts, entertainment & recreation. The health care & social assistance subsector remained unchanged, while the remaining three subsectors recorded growth in the order: water supply, sewage & waste management; agriculture; and transportation & warehousing”
N420bn inflow crashes cost of funds
Meanwhile, the cost of funds in the interbank money market crashed last week following the inflow of N420 billion which doused the scarcity of funds that rattled the market two weeks ago. From an average of 40 percent at the beginning of the week, average cost of funds crashed four percent at the close of business on Friday.
Vanguard investigation revealed that the market received inflow of N115.03 billion from payment of matured treasury bills and another N305 billion inflow from statutory allocation funds. Consequently, the liquidity position of the market improved from minus N155.2 billion the previous week to N267 billion at the close of business on Friday. The improved liquidity also led to a decline in banks’ borrowing from the CBN, which dropped by 28.71 percent from N929 billion the previous week to N882.52 billion last week.
This is a sharp contrast with an increase of 230 percent increase recorded the previous week. On the other hand, the amount of idle funds banks deposited with CBN fell by 61.31percent to N88 billion from N227 billion the previous. The liquidity improvement in the market may not be sustained this week, as the CBN is expected to mop up N94 billion through sales of treasury bills, leading to a likely increase in the cost of funds.
Naira depreciates in all segments of forex market
Last week was an unpleasant one for the naira, as it depreciated against the dollar in all the segments of the foreign exchange market. At the interbank segment the naira depreciated by N1.36 or 0.19 percent to N282.5 per dollar from N281.14 the previous week.
Also in the bureaux de change and parallel market segment, that naira depreciated by 1.17 percent or N4 and by 2.9 percent or N10 respectively. From N343 per dollar the previous week, the BDC exchange rate rose to N347 per dollar, while the parallel market exchange rate rose from N345 to N355 per dollar.
Analysts at Cowry Assets Management Limited, a Lagos-based investment and research firm, however, expressed optimism that the naira will appreciate in the coming weeks due to increased confidence and investments by investors in the Nigerian economy and a reduction in front loading (precautionary purchase) of scarce foreign exchange.
*Babajide Komolafe – Vanguard