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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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Nigeria’s economy in 2019: Woes or fortune?



As 2019 begins with hopes and aspirations, there are expectations from the federal government to better the economy with a view to making it have more meaningful impact on Nigerians. Here are the looks at the key indicators that will characterize the economy and determine its fortunes this year.

The economy appears to have lost its sparkle; its growth has dwindled. And there are palpable fears that the effect of political activities in the lead-up to the general elections, scheduled to commence on February 16, could overshadow whatever gains the economy may muster during this period, thus, compounding its woes. As it stands, the federal government has abandoned the economy for politics and the economy is already bearing the brunt.

After five quarters of recession, which the economy entered in the second quarter of 2016, having plummeted to a gross domestic product (GDP) growth rate of -2.06 per cent, the economy exited the quagmire in the second quarter of 2017 with a GDP growth rate of 0.55 per cent, which was revised upward to 0.72 per cent, according to data from the National Bureau of Statistics.

Then, the economy turned the corner as it grew at 1.40 per cent in the next quarter- that is, the third quarter of the year, and sustained the improvement recording a GDP growth rate of 2.11 per cent in the fourth quarter of the year 2017. However, in the first quarter and second quarter of 2018, the economy reversed the rising streak as evidenced in the slowed growth rates. NBS data showed that the GDP growth rate fell to 1.95 per cent in the first quarter of 2018 from the 2.11 per cent it achieved at the end of 2017. It dropped further to 1.50 per cent in the second quarter.

The agency noted that the clashes between farmers and herdsmen, which took its heavy toll on agriculture, mainly dragged down the growth rate during the quarter under review. Agriculture, being a major component of the non-oil sector was badly affected. However, with improvement in the non-oil sector, the economy received an impetus for growth, which pushed the GDP growth rate to 1.81 per cent. According to NBS, growth in the third quarter was largely helped by the non-oil sector, which contributed 90.62 per cent to the total GDP, while the oil sector contributed 9.38 per cent to growth in the review period. Oil GDP was reported to have contracted by -2.91 per cent compared to -3.95 per cent in second quarter and 23.93 per cent in third quarter 2017.

Despite the improvement in growth rate in the third quarter of 2018, the economy is still experiencing slowdown and was recently put on red alert of slipping into another recession over weak economic growth.

According to the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, who raised the alarm at a recent Monetary Policy Committee meeting, the economy may be under threat of relapse into a recession, which it recently exited from with fanfare, given the weak economic growth of the second quarter of 2018.

Emefiele also raised concerns about threat to efforts to curb inflation, stabilise exchange rate and build reserves, considering the macroeconomic fundamentals at the period.

The consumer price index, which measures inflation dropped from 11.28 per cent in September 2018 to 11.26 per cent in October 2018 and rose again to 11.28 per cent in November 2018, but when compared with the levels in the corresponding year of 2017, when it dropped from 15.98 per cent in September to 15.91 per cent in October and 15.90 per cent in November, it was not where the monetary authority had envisaged it would be. The apex bank has the onerous task of bringing inflation to its targeted single digit, especially in an election year.

Also, of note as a potential contributor to relapsing the economy into recession, as pointed out by the CBN governor, was the delay in budget implementation. A situation, where three months after presidential assent and about three months to the end of 2018, there was no budget implementation was unhealthy for the economy. According to the apex bank, long years of fiscal policy lag had contributed to the weakness in the economy. Most of the inimical factors identified by Emefiele at that time are still at play.

Given this scenario, as the New Year begins, economic managers have the arduous task of resolving those issues as well as ensuring the economy not only continues to grow, but also record appreciable and inclusive growth. While 2019 is an unusual year, being an election year, more, but critical efforts would be required by handlers to put the economy on a sure footing with a viewing to avoiding a relapse into recession.

The federal government has proposed a budget of N8.83 trillion for the 2019 fiscal year. Nigerians would not accept any excuse for delay in its passage and poor Implementation. The executive and the National Assembly should therefore quickly address the grey areas and harmonize their positions so that the appropriation bill could be passed into law and implemented in earnest.

The budget has been predicated on an oil-price benchmark of $60 per barrel. In recent times, oil prices have been sliding at the international market and currently stood around $54 per barrel. The falling oil prices have been identified as threat to implementation of the budget and as such, the relevant authorities would do well to peg the budget at the most appropriate benchmark.

As part of its strategy to mobilize revenue, the federal government through the ministry of finance, in July 2017, created Voluntary Assets and Income Declaration Scheme (VAIDS), a tax amnesty, which was expected to rein in $1 billion from tax evaders and avoiders. By the end of the scheme, one year later, with only about N30 billion, the proceeds fell short of the government target, but the scheme was able to swell the tax database by five million to 19 million from 14 million. The government is expected to follow up on this initiative as well as intensify the revenue mobilization from more alternative sources than oil and borrowing to fund the budget. As at the end of 2018, the total collection by the Federal Inland Revenue Service was about N7 trillion.

Besides, the federal government is expected to review the power sector transition market policy performance this year after its first five years of implementation.

It is obvious that this present administration led by President Muhammadu Buhari, which is already pre-occupied with politicking ahead of the general elections, would not be able to solve the burgeoning unemployment problem. With unemployed Nigerians now at 20.9 million, having risen by 17.6 million in nine months, one of the major tasks before the incoming administration is to tackle the factors causing unemployment or to put it more aptly, provide employment opportunities in the economy and tame the rising scourge of unemployment.

Besides, Nigerians are anxiously waiting for positive outcomes from the talks, between the Nigeria Labor Congress and federal government over the N30, 000 minimum wage, that have resumed and are expected to be brought to a logical conclusion before the general elections.


Experts’ Views on the Economy

But in the view of the Chief Executive Officer of Financial Derivatives Company Ltd, Mr. Bismarck Rewane, political jostling and the elections would becloud the talks on the minimum wage. He also expressed the opinion that political activities and elections would becloud 2019 budget talks by the legislature and the first monetary policy committee (MPC) meeting in the month of January.

Also, in his projections, Director, Union Capita Market Ltd, Mr. Egie Akpata, posited that 2019 would likely be more challenging for the Nigerian economy than 2018.

According to him, most variables which were in the country’s favor last year, but not capitalized on, have reversed. “Oil prices, local interest rates, inflation, stock market indices, political environment and other variables that were positive for most of 2018 are now negative and will remain so for most of 2019.”

On the key areas that are likely to impact the entire economy, Akpata noted that in the aspect of government finances, it was unfortunate that for the federal government, tax revenues could be generated by threat or decree.

“The VAIDS programme fell far short of expectation and so did many other initiatives to diversify government revenues away from oil. These failures are not surprising. Individuals and companies have to be financially buoyant to pay a lot of tax. The reality is that most sectors of the economy are in a recession and profitability has been badly eroded.

“Self-inflicted damage from Apapa ports congestion, inability to solve the power crises, government crowding out the private sector in the debt markets, insecurity in large sections of the country amongst others mean that corporate profitability is unlikely to improve and hence better non-oil revenue for the government will take a while to materialize.”

Akpata added that, the federal and state governments had shown that they were unable to reduce their costs and instead had resorted to massive borrowing, particularly at the federal level.

This borrowing, he pointed out, was almost entirely to fund overheads. “Unfortunately, this produces very high market borrowing rates which very few private companies can afford. As long as the economy continues to have a risk free rate close to 20 per cent, it is unlikely that there will be massive credit to the private sector to drive the investment needed to grow the economy at the required levels.”

“Until there is a political force to stop government simply borrowing to fund overheads, FGN debt will continue to grow at an alarming rate. Since a default is very unlikely, the market will happily give the FGN all the debt it wants to pay its bills today. Repayment is largely a problem for future governments to worry about,” he also submitted.

He argued that the presented 2019 budget showed that “it is business as usual – unrealistic revenue targets, huge borrowing and waste on fuel subsidy. None of these are a positive for government finances,” stating that, the ongoing minimum wage battle with the NLC would likely result in some kind of wage increase, which will put more pressure on government finances.

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