Year 2014 will be a Struggle between Prudence and Stimulus

The year 2014 is one the country should require an even tighter monetary policy because the United States of America is expected to off-load lots of its crude oil into the international market. The implication is that crude oil prices will come down and Nigeria’s income, which is mostly from crude oil will be threatened.
It will be further threatened if Iran went ahead ahead as expected to increase crude production. 
There are so many other reasons why prudence should be a wise choice. But unfortunately, the 2015 general elections will be won and lost in 2014.
The implication is that, whether there is need for prudence or not, money must be spent, protocols must be broken.
In line with the expectations of many analysts, the Nigerian economy ends 2013 with a tight monetary policy stance and somewhat manageable fiscal spending. 
These policies aided a benign inflation rate, stable exchange rate, and moderate GDP growth rate. With the election year close at hand, we believe monetary and fiscal policy will be more difficult to manage in 2014. 
Bismarck Rewane, chief executive officer of Financial Derivatives Company (FDC) Limited however said the possibility of a downturn in oil prices and the commencement of the US tapering, begs for a tight fiscal and monetary policy stance; fiscal spending is bound to increase astronomically in preparation for the eletions. 
He added that the change in central bank governor and some MPC members is also expected to change the dynamics of monetary policy.
The question is that, with the harsh expectations in 2014, can the same policy measures be adopted in 2014?
The EIU forecasts a decline in Brent oil price to $104.48pb in 2014 from the current average of $110pb, mainly due to growing oil supply from the US. Already the price hovers around $98pb as at the end of 2013. This downward trend poses significant implications on government revenue and external reserves; a problem that can be managed if there is fiscal prudency and a contractionary monetary policy, in order to withstand any external shocks.
Another important factor to consider is the proposed QE tapering in the US, which commences in January 2014. Nigeria benefited from QE via increased capital flows as a result of its attractive in- terest rates. Though tapering would be gradual, we expect a re- versal of capital flows. In the wake of a massive capital flight, Ni- geria’s external reserves level is at risk of severe erosion, with attending risks to the local currency value.
Declining investment will negatively affect the exchange rate and stock market, as was the case in May 2013 after the FED’s first announcement of QE tapering. This also calls for fiscal prudency and a tightening of the monetary policy stance so that Nigeria can retain some of the investment.
Despite the above concerns, it will be unwise to disregard the as- sociated increase in spending that usually occurs when govern- ment elections are at hand. After the 2011 elections, the Independent National Electoral Commission (INEC) reported that Nigeria spent N122.9 billion to conduct the elections. This amount does not take into account the monies spent unofficially by politicians to fund their campaigns. Furthermore, violence associated with elections is likely to spring up in several states, which will require increased spending on security intervention. Note that increased government spending has a downside effect on inflation and the exchange rate. Nevertheless, fiscal prudency is almost implausible in 2014.
As a result of the above considerations, monetary policy is anticipated to remain contractionary, with a high likelihood of further tightening, to maintain price and currency stability, even though this implies that individual real growth will continue to suffer due to high borrowing costs. However, this depends on the leanings of the new CBN Governor and 5 new members of the MPC.
The President has the authority to appoint another CBN Governor and three out of the 5 new members of the MPC. If the CBN Gov ernor and the 3 members appointed by the President have some affiliations with the government, then it is likely that monetary policy may be less restrictive to provide more room for government spending. However, if the new appointees are truly independent, then policy may depend on whether their preference for growth comes before price and exchange rate stability. Whatever the case may be, it is more likely that a balance will be found so as to accommodate the pressing concerns of QE tapering, a possi- ble downturn in oil prices, and increased fiscal spending.
In sum, monetary and fiscal policy decisions in 2013 went according to plan as policy makers were able to manage disruptions. However, the policy decision in 2014 will likely be more difficult to manage considering the preparations for government elections, the possibility of a downturn in oil prices, QE tapering in the US, as well as a change in MPC membership.

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