As a result of the fall in aggregate demand, the 6.3 per cent growth rate figure released by the National Bureau of Statistics for the first quarter of 2009, may no longer be sustained, analysts at Sterling Capital have said.

The analysts, who said this in their report for the economy in the second quarter noted that given the shrinking aggregate demand caused by recessionary pressures and the cut back in lending by Nigerian banks, it is unlikely that the growth rate figure will be sustained.

They argued that considering the three per cent growth rate projection for the economy by the International Monetary Fund as well as the fall in oil revenue, it will be difficult to sustain the 6.3 per cent projection.

According to them, ”The Bureau of Statistics reported an aggregate growth figure of 6.32 per cent for the first quarter, which was driven mainly by agricultural activities.

“It is unlikely that the growth trend will be maintained given the shrinking aggregate demand in the wake of the recessionary pressures and the cut back in lending by Nigerian banks. Projections by IMF and other external bodies put the Gross Domestic Product growth in Nigeria at around three per cent in 2009.”

On their outlook for the money market, they said that the challenges of financing the planned deficit, estimated at about N1.3tn, will further put pressure on liquidity thereby crowding out the private sector.

They said, ”The challenge of monetary policy will be how to harmonise the various macro-economic objectives of low inflation, low interest rates and appropriate Naira value, while ensuring the safety, soundness and stability of the financial system. The Central Bank of Nigeria has already resorted to administrative fixing of interest rates.

“This will likely pose some distortions at a time when the system is grappling with sharp decline in liquidity arising from a reduction in government spending, lack of foreign credit lines and drop in foreign investment.”

They argued that government’s ability to release capital spending for the rest of the year would, however, depend on its effectiveness in resolving the problem in the Niger Delta as the restiveness in the region has affected its revenue.

On lending rates, they said that although the reduction in liquidity ratio and the adjustment of cash reserve requirement from two per cent to one per cent will have a positive impact on cost of funds.

They, however added that the main challenge is weather all other costs borne by banks can be compressed within the seven per cent spread allowed between deposit and lending rates.

Source: The Nation