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Nigeria’s Economic Growth to Pick but Three Scenarios are put into consideration



By Q2’17, the Nigerian economy exited its recession, recording a positive growth rate of 0.5% y/y. The recovery was in part due to a sharp recovery in the oil sector, driven by an improvement in oil prices and production volumes.

In addition, the non-oil sector recorded a positive growth for the second consecutive quarter, spurred by ongoing recovery in the manufacturing sector due to improved foreign exchange (FX) liquidity. Asides the improvement in real GDP, the performance across several other macro-indicators suggest that the economy is on track for a broad-based recovery.

The International Monetary Fund (IMF) has projected that the Nigerian economy will expand by 1.9 per cent in 2018, but would remain subdued due to population growth, cautioning that the country’s projected growth was still lower than its population growth rate of 2.7 per cent.

The IMF also pointed out that concerns about policy implementation and market segmentation in the foreign exchange market would be a challenge in the medium-term.

I n driving Nigeria’s economic growth, three scenarios have been examined such as the implementation of structural reforms, impact of political shocks, and economic diversification on key economic indicators in Nigeria.

In the analysis, it is assumed that oil will continue to be the main driver of fiscal and export revenues over the forecast period. As such, the extent to which the Nigerian economy moves towards its nearterm development aspirations is dependent upon the success of its import substitution policies.

Scenario 1: Implementation of structural reforms and Policies

Oil price increases from an estimated average of US$55/bbl in 2017 to US$60/bbl in 2018 and remains at this level to 2022. Between 2018 and 2019, the supply of oil moderates due to the OPEC production cut agreements while the demand for oil increases mildly in line with the global growth recovery.

On the other hand, between 2020 and 2022, the demand for oil weakens as advanced economies gradually move to greener sources of energy, and investment in oil production slows. Towards the end of the forecast period and beyond, the global oil market rebalances.

Domestic oil production rises to 2.0 mbpd in 2018, and increases further to 2.2 mbpd by 2019, remaining at this level through to 2022. This is expected to be driven by minimal production disruptions in the Niger Delta region, as the mediation efforts of the government pays off. The government is committed to the implementation of structural reforms, with policies aimed at improving the business environment.

Economic growth increases steadily from 0.7% in 2017, maintaining an average of 4.4% between 2018 and 2019, before rising to trend at 7% in 2022. There is stability in oil exports and an improvement in non-oil revenues as a result of the government’s tax reforms.

The fiscal deficit narrows and the pace of borrowing slows, providing head room for significant rate cuts. The economy records a consistent and growing current account surplus, driven by a significant reduction in imports between 2019 and 2020 as the government’s import substitution policies yield results.

However, between 2021 and 2022, imports pick up as a result of strong economic growth and increasing per capita income. Final consumption expenditure of households grows steadily, as employment growth strengthens and real incomes increase, owing to price stability.

Inflation declines from 16.5% y/y in 2017 to 6.2% y/y in 2022, due to exchange rate stability and increased food production arising from the success of government’s import substitution policies. Nominal GDP per capita rises to a peak of US$3,301.9 in 2022, which continues to spur consumer spending.

Investor confidence supports high investment

The share of investment to GDP increases from 16% in 2017 to 26% in 2022, in line with the estimates of the investment level required to drive growth to trend. Foreign investments return to pre-recession highs as lower constraints in the business environment and a more predictable operating landscape results in an improvement in Nigeria’s economic freedom score and ease of doing business ranking.

In addition, there is improved macroeconomic stability and consistency in policy making which improves investor confidence. Increased credit to the private sector provides a boost to investments, riding on lower macro risks, higher government capital expenditure implementation, and implementation of the Economic Recovery and Growth Plan (ERGP).

Scenario 2: Weak policy implementation

Oil price remains stable at an average of US$60/bbl through the forecast period and domestic oil production remains firm at 2.2 mbpd from 2018, through to 2022. The implementation of structural reforms to improve the business environment, the drive for non-oil revenues and import substitution progress at a sluggish pace.

Growth advances moderately

Economic growth increases marginally to about 2% in 2018, and further to an average of 4.4% between 2019 and 2022. Oil export earnings increase, supported by higher oil production and prices. However, initiatives to boost non-oil revenue records only marginal success. As the size of the budget continues to increase, the fiscal deficit remains large, negatively impacting capital expenditure.

With slow progress in the substitution of food imports, Nigeria’s current account surplus narrows. Final consumption expenditure of households grows at an average of 3.7% between 2017 and 2022. This is due to a modest recovery in purchasing power, owing to improving employment conditions and increased real income.

Investment slightly above recession levels

The share of investment to GDP rises from 15% in 2017 to an average of 16% between 2018 and 2022, below the 26% required for the economy to return to trend. The business environment remains challenging due to the slow pace of reforms, and the lack of a market driven exchange rate policy puts a lid on investment. As a result, capital inflows remain below pre-recession levels.

The combination of these factors, in addition to a narrowing current account surplus, results in uncertainty and volatility in the foreign exchange market. Although monetary policy is accommodative between 2020 and 2022, domestic investment provides no significant reprieve as banks are cautious in lending to the real sector.

Scenario 3: Heightened political risk environment

Oil price remains stable at an average of US$60/bbl through the forecast period.

However, there is a reduction in oil production to an average of 1.7 mbpd by 2019, before a gradual recovery to 2.2 mbpd by 2022, as security challenges in the Niger Delta region disrupt oil production activities. Political tension accelerates in the wake of the general elections in 2019, causing insecurity in the crisis prone region of the North-East, and negatively impacting policy implementation.

Fiscal sustainability comes under threat

Government revenues weaken, as oil exports fall due to lower oil production. The non-oil revenue drive of the government suffers a setback due to the deteriorating conditions in the broader economy which impacts the non-oil sector. Consequently, the government records a significant increase in its fiscal deficit, and ramps up borrowing. However, this comes at a high cost in the domestic and external debt market, due to rising risk premium as credit rating agencies downgrade Nigeria’s sovereign bonds in 2019. Sub-nationals continue to struggle to meet salary obligations, and capital expenditure remains consistently weak. The need to increase Internally Generated Revenue (IGR) continues to gain prominence, with minimal success among states.

Growth deteriorates considerably

Economic growth deteriorates considerably from 1.9% in 2018 to 0% in 2019, largely due to increased risks in the political environment. Political tensions in the Niger Delta negatively impact oil production, while security concerns in the Northern Nigeria affect food output.

However, in the aftermath of the 2019 elections, the government makes quick interventions to pacify the various interest groups. As a result, growth picks up to 2.3% in 2020, before rising steadily to 4% by 2022.

Final consumption expenditure of households’ declines by -1.3% in 2019, before recovering to an average of 4% between 2020 and 2022. This is because inflation increases to 17.8% y/y in 2019, due to supply shocks such as declining food production and a weaker exchange rate. Similarly, Nigeria’s nominal GDP per capita declines 2.8% to US$2,288.3 in 2019 (2018F: US$2,350.9).

Investment falls to recession levels

The share of investment to GDP remains flat at an average of 14% from 2019 through to 2022, due to risks in the political and economic environment. It is assumed that Nigeria’s economic freedom will weaken to 5.2 points in 2019 (2016: 5.9 points), similar to the levels recorded at the beginning of the democratic dispensation between 2000 and 2001.

As a result, capital outflows increase, and foreign direct investment weakens to about $4.4bn, around levels recorded during the 2016 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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