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Nigeria: Climbing Out of Recession



We must continue working hard to expand economic opportunity for all Nigerians. When all Nigerians can eat three square meals, that’s when the real recession ends. We have work to do.

After two years of suffering economic recession, the Nigerian economy has slightly recovered. Thanks to growth in oil production and impressive performance by the financial sector, official report showed the economy grew by 0.55 percent in the second quarter of 2017.

Crash in global oil prices and depleted sovereign wealth fund (from $30 billion to $3 billion under six years) through corruption and looting plunged the promising economy into a minus economic performance in 2015. For an import-dependent country such as Nigeria where even toothpick is sourced abroad, the plummeted foreign earnings led to dollar scarcity which widely constrained economic operations.

For example, manufacturing companies shutdown due to inability to source raw materials, equipment or expatriates. Inability to repatriate dollar earnings forced the US’ Delta Airlines to shut down its Nigerian operations. Banks laid off hundreds of employees by the dozen (a little over a thousand in a few cases).

Another fallout of the dollar scarcity was the natural devaluation of the Nigerian currency as the market threw more naira to buy the few dollars available on the black market. This craziness climaxed at N500 to $1 on the black market (only a year before, the dollar had sold for nearly 40 percent of that).

This was catalysed by the Nigerian President, Mohammadu Buhari’s, refusal to officially devalue the Naira which sold at the interbank rate around N200 to $1. Foreign investors retracted billions of dollars through the capital market knowing the Naira would crash. Economic activities slowed down. Lives suffered. Eventually, the Naira was officially devalued to around N315 to $1, the black market rate crashed to around the same rate and stability gradually returned to the market.

A recession indicates the economy is in bad shape in nearly all sectors of the economy. During recession, businesses post lower revenues, more losses, prices of goods and services sky rockets and jobs are lost. The government also experiences a drop in revenues and finds it hard to fund its developmental obligations.

The Nigerian government can be commended partly, for lifting the economy from its downward trend. The Trans-Forcados pipeline was repaired, which led to output of 200,000 b/d coming back on-stream. Amnesty programme budget for Niger Delta militants, was also tripled. The aggrieved militants were notorious for kidnapping expatriates and vandalizing oil pipelines resulting in losses of nearly 500,000 b/d.

These government efforts contributed to the production rise to 1.9 million barrels per day from 1.7 million last year. According to official statistics released, this is the first time government performance grew since fourth quarter of 2014, when the oil price collapsed.

The finance sector also grew 11.8 percent Year on Year in Q2, as opposed to a decline of 13.2 percent same time last year. This made it the second-biggest contributor to GDP growth in 2nd Quarter 2017. However this was not due to increased performing loans which fuels economic activity. The result is attributed to banks investing in high-yielding government securities, which is profitable on a risk-adjusted basis.

It is noteworthy that Nigeria’s treasury bills yield an attractive 18 percent interest per annum. Factory costs dropped in the quarter after the central bank introduced a window for investors to trade foreign currency at market-determined prices in April, making dollars more readily available to pay for imported inputs.

Monetary authorities also asked banks to start quoting prices on the so-called Nafex currency window, which has almost wiped out a premium of about 20 percent on the black market. The fixing of the FX liquidity issues also showed results as manufacturing, led by textiles, food and beverage companies, grew by 2.7 percent vs. a -5.5 percent last year.

Despite these sterling results, the non-oil sector was weighed down by poor performance from the services sector. The Real Estate sector declined by a slower rate of 3.5% YoY in Q2 2017 vs. 5.3% YoY in Q2 2016. Trade, a good indicator of consumer buying, contracted by 1.6% YoY vs. zero growth over the same period.

Russian investment bank Rennaisance Capital, describes Nigeria’s emergence out of recession as ‘pedestrian’. “We believe the non-oil sector’s recovery will be constrained by sluggish demand, which is reflected in YoY credit growth of -0.1% in July, vs. 19.9% a year earlier,” its Nigerian team wrote in a report.

The second-largest employer of labour in Nigeria, Atiku Abubakar was also unimpressed with the news of Nigeria’s emergence out of recession.

“The news is surely a boost for Nigeria — it tells investors, local and foreign, that our economy is worth investing in. While we rejoice, it’s also important to recognise that economic weakness at the bottom of the pyramid remains. Inflation is still high,” he wrote in a series of tweets.

He furthered: “We must continue working hard to expand economic opportunity for all Nigerians. When all Nigerians can eat three square meals, that’s when the real recession ends. We have work to do.” Pundits have posited that it is still too early and insignificant for the new macroeconomic performance to reflect on the bottom-line of the average Nigerian on the street.

For developing economies like Nigeria, GDP growth rates are often expected to be in double digits while developed economies like the US and UK typically post GDP growth rates of less than 2%. This is because the economy of smaller countries like Nigeria is expected to grow faster than more mature ones.

A GDP growth rate of 0.5% though a good development is quite paltry and will need to improve in the coming quarters for the wider economy to feel the effect. More nominal growth translates to real growth and less erosion of value.

London-based financial analysis organization, World Economics says: “It is too early to speculate if the recovery is built on solid fundamentals for a sustained recovery but the changes reflected are not insubstantial.” Fortunately, the World Bank had earlier projected that Nigeria will get out of recession with a 1 percent growth by the end of 2017.

Thankfully, there are indications to support the continuous growth of the economy. Inflation has been on a reduction eight months straight. Further reduction will allow for increased buying power which will stimulate the Trade and Real Estate sectors. It seems the government can continue increased oil production by at least keeping Niger Delta militants happy.

Something interesting has also begun to happen. The pressure of the dollar scarcity and consequent job losses compelled the market to go into local production to generate revenue. Agricultural produce and exports have been shooting up.

Information from South African retail giant ShopRite shows that in the midst of weaker purchasing power & devaluation, its Nigerian franchise made an impressive 50 percent revenue growth. These sales were driven by a whopping 80 percent of products locally sourced in Nigeria.

On the other hand, Angola is Shoprite’s largest Non-RSA market. Both Nigeria and Angola have something in common, Oil revenue and currency devaluation, yet did not have the same outcome.

Rennaisance Capital is revising its 2017 GDP growth forecast up to 0.7% vs. 0.5% previously, owing to a more favourable outlook for oil output.

The downside risk to this growth outlook is a resumption in attacks on oil facilities that results in output falling.
Overall, conditions in Nigeria have improved further over the past months and managers are expressing renewed optimism that the economy will continue to grow and regain strength after the recession.

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President Buhari’s Second Term: A chance to provide peace, prosperity, and security?



Nigerians re-elected President Buhari for another four years in what many have termed – a chance to make amends. In what could be called his third stint at the helm of affairs in Africa’s most populous country, questions about a coherent economic strategy are already being asked. In the last dispensation, protectionist posturing was worsened by a management style perceived to be distant while crucial decisions were delayed.

The economy is set to continue its recovery from the worst recession in its history. Nonetheless, the forecast is for economic growth to remain well below historic averages in the next five years. According to economic survey by Economist Intelligent Unit (EIU), Nigeria’s Gross Domestic Product (GDP) is set to reach $473.5bn in 2019 and rise to $680.9bn by 2022. This prediction will hinge, for the most part, on the current intensity of economic reforms and current rate of investment being sustained.


Background of the economy leading to election 2019

The Nigerian economy grew by 1.9% in 2018, an improvement from 0.8% recorded in 2017, with the non-oil sector being the fulcrum for the growth picture. Over the last quarter of 2018, the economy recorded a solid growth of 2.4% – with the expansion in the non-oil space (2.7% YoY) taming the contraction observed in the oil sector (-1.6% YoY). Dissecting the components in the non-oil territory, all subsectors expanded, with the services and Agriculture sector leading the pack. Notably, improvement in the number of active subscribers in ICT subsector coupled with mild support from transport drove the expansion in the services sector (3.8% YoY). Furthermore, while the Agriculture sector improved by 2.5% in Q4 18, it was disappointing compared to its four-year average of 3.8%. On the flipside, the oil sector dived into recessionary waters buoyed by low crude production (-2.6% to 1.91mbpd).


Declining Income per Capita

It is important to note that Nigeria has a huge population of over 180million and a population growth rate of 2.6% – higher than the 2018 GDP growth of 1.9%. GDP growth is projected to reach 2.0% and 2.2% in 2019 and 2020 respectively before rising to 3.2% by 2021. This means Nigeria would have had five consecutive years of declining income per capita – from 2016 to 2020. A burgeoning youth population is also unlikely to be matched by job growth, meaning unemployment – at over 40% – is likely to rise even further.

A breakdown of the GDP components show that Nigeria’s gross fixed investment, at $66.5bn, will account for just 14.0% of GDP in 2019. This pales in comparison to that of other notable emerging economies – Brazil (19%), India (27.12%), China (42.86%), and South Africa (18.7%). Majority of countries in the world have gross fixed investment of 18-22%. The EIU goes further to forecast that gross fixed investment in Nigeria will rise by just one basis points to 14.1% ($86.2bn) by 2022.


Why does this matter?

The importance of this component of GDP is that it is a clear indicator of the future productive capacity of the economy. The aforementioned basically means that the current and projected rate of investment is simply suboptimal and far below the level required to propel Nigeria to an accelerated growth path. It is incapable of providing Nigeria with the investment impetus that will have the desired multiplier effect on output. Nigeria has also grossly underinvested in its infrastructure. The existing infrastructure gap is estimated at over $300bn and requires 10% of GDP ($37.6bn)/annum over the next 10 years to bridge – an unlikely feat given that  current infrastructure needs are far in excess of current cash flows. Nigeria’s capital budget in 2018 was $7.98bn – 26.6% of total budget and 2.2% of GDP. This compares to 6% of combined GDP of emerging market economies. Nigeria’s share of emerging markets total spend on infrastructure is currently less than 1%.


Few options, Tough Choices

Nigeria’s high population growth rate means it must be much more efficient with economic policy. Putting Nigeria on an accelerated path to a free and market driven economy requires making tough game-changing decisions now. It will begin with figuring out how to raise the level of gross fixed investment to levels above and beyond the global average of 18-22%. Investment in the next 3-5 years will depend on policies and incentives.

Galvanizing domestic and international investment will be crucial. This will require a structure that incentivizes private investment considerably more than what is currently obtainable. Achieving this will require significant increases in public investment in infrastructure, in addition to more comprehensive and deep-seated market oriented structural reforms.


The Game changing Formula

Raising the level of investment in infrastructure given the government’s current revenue and borrowing constraints requires rethinking ways to attract private sector funding in the form of Public Private Partnerships (PPP). Outright sale and concessions of government assets– airports, seaports, inner city highways and trunk roads– should be a key consideration for policymakers.

Airports concession has the potential to lower the average cost for aviation operators by 50%. The government’s stake in the power distribution companies should be sold to the private sector while the power sector forbearance needs to be dealt with. The rail investment program needs to be accelerated while the road networks to major seaports need to improve.  Another item that is top on the list of reforms is the foreign exchange policy where a movement to currency convertibility with minimal intervention is paramount. Fears of a wild depreciation if the Central Bank of Nigeria lets go of its current policy of a managed float, are greatly exaggerated. The almost insignificant deviation between the parallel and the Investor Exporter Foreign Exchange (IEFX) window – which is closer to market equilibrium than the official rate – supports this fact. There is also the issue of fuel subsidy which has now taken the form of under recovery as the Nigerian National Petroleum Company (NNPC) now fully bears the brunt of the subsidy as the sole importer of Premium Motor Spirit (PMS). Deregulating the downstream sector of the petroleum industry requires the removal of subsidies, which will spur competition, bring about efficiency and increased investment in domestic refining – the lack of which has been a huge drain on Nigeria’s foreign exchange earnings over the years.  Not only is a game changing formula now imperative, it has become inevitable. Nigeria can continue at its current pace of reforms and investment – a recipe for chaos, social and political disintegration; or take drastic measures to raise public and private sector investment to levels that will accelerate productivity and economic growth.


Ending extreme poverty must be a top policy priority for Nigerians and the new government. The country has the capacity to deal effectively with poverty: large endowments of natural resources, especially oil; a young and highly educated population; and many people adept at entrepreneurship and the creation of wealth.

Nevertheless, there are many threats to the creation of wealth. Two of them stand out: widespread corruption and the absence of peace and security in many regions. Corruption, like embezzlement of public funds, has plagued Nigeria since independence. Buhari came to power in 2015 promising to clean up corruption and restore professionalism in the public services. Although he appears to have made significant progress in that fight, his critics say that he only targeted his political opponents and ignored his allies and supporters. Still, many Nigerians give him credit for his efforts and for not illegally amassing wealth for himself. To deal more effectively with corruption, Buhari must now significantly improve openness and transparency in government communication, especially with respect to government procurement programs.

The Buhari government also needs to deal with extremism and other threats to peace and security like Boko Haram and the lawless armed gangs who roam parts of the country kidnapping people and holding them for ransom. This must be done not just through military action but also by providing opportunities for young people, especially in the rural areas, for self-actualization.

Finally, the government must address the issue of lack of basic infrastructure for development: passable roads, adequate and reliable power, water treatment plants (access to clean drinking water is a major problem for most communities), basic health care, affordable housing (especially in urban areas), police protection, and other services that can enhance the ability of citizens to live in peace.

Posterity will judge Buhari and his government by how well they use the opportunity granted to them by Nigerian voters to make peace, security, and prosperity possible for their fellow citizens.

On the economic front, we expect resilience in agriculture sector and a recovery in the oil sector to be the key drivers for growth in non-oil and oil sector accordingly. In the non-oil sector, muted growth in ICT and in turn services as well as weak growth in Manufacturing due to depressed consumer wallet and delay with minimum wage bill, guides to slower growth in the non-oil sector of 1.3% YoY (2018: 2.0% YoY). In the oil space, the additional 200kbpd from the Egina oil field guides the expectation of an expansion in crude production over 2019 (2.06mbpd), albeit capped by OPEC cut. That said, it is expected growth in the oil sector to print at 7.1% (2018: 1.1%). Overall, 2019 growth estimate is forecast to 1.98%, a notch away from 1.93% recorded in 2018. For Q1 19, a slowdown in growth is expected to 1.3% YoY driven by a contraction in the oil sector (-1.1% YoY) and moderation in non-oil sector growth.

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