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

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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

Nigeria’s economy to experience higher growth if liquidity can be unlocked

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“Unlocking Liquidity will restore growth and stability for Nigeria,” Ayo Teriba, Economist and CEO, Economic Associates.

If Nigeria is to achieve sustainable economic growth and stability in its economy, unlocking liquidity must be given top priority.

Dr. Ayo Teriba, an economist and CEO, Economic Associates, made explained this point at the Q2, 2019 one-day quarterly conference on Nigeria’s economic outlook in Lagos.

He decried the fact that Nigeria was at the low end of the liquidity ladder in Africa, arguing that the situation had to be addressed urgently.

Liquidity he pointed out was critical to increasing the nation’s external reserves that serve as a buffer against shocks in commodity prices.

One of the ways he believed Nigeria could improve its liquidity, is by attracting capital inflows, which was important considering the revenue challenges of the government.

In the evolving race for global liquidity, Teriba made a strong case for the alignment of policies to strengthen liquidity.

According to him, “The Federal Government is focused on growth, while the Central Bank of Nigeria is concerned about stability. There is no express concern about liquidity”.

He was of the view that liquid markets are about making sure that there are buffers against shocks, and for Nigeria, having more capital inflows was important than outflows.

Speaking further Teriba identified the various options for unlocking liquidity in the economy, which include;

Privatization: Which implies partially selling its equity across all State-Owned Enterprises, SOEs to retain a minority stake. (Brownfield Foreign Direct Investment Inflow)

Liberalization: This implies the development of idle land and building and unbundled infrastructure projects. (Greenfield Foreign Direct Investment Inflow).

Commercialization: Getting rental income from wholesale leasing of idle lands and buildings.

Securitization: This suggests securitization of future income streams from all financial and non-financial assets.

Teriba called for a strategic reform of revenue generation in the federation and across all tiers of government.

The economist stressed the need for Nigeria to move beyond exports, taxes and debts towards rental income and equity. He stressed that Nigeria had a lot to gain from securitizing its assets.

Some of the assets he identified for the government to consider are the following;

Corporate Assets: Which are government wholly-owned or majority equity holdings in State-Owned Enterprises, SOEs.

Financial Assets: Which represent the government’s minority equity holdings in Joint Ventures and other companies

Tangible Non-Financial Assets: Taking the steps of commercializing and securitizing idle lands and buildings, amongst other assets.

Giving further insight on capital flows, he identified foreign direct investment, FDI and Remittances as the major types that Nigeria should utilize.

He gave an example of Saudi Arabia that has developed a privatization plan worth $ 100bn, which will bolster the liquidity of the Gulf nation.

Dr. Teriba also referenced the Liberalization and Privatization plans of India, that has positioned the densely populated nation, as one of the leaders in FDI.

The CEO of Economic Associates was of the strong view that Nigeria needs a robust strategy to attract more foreign investments to compensate for lost export revenues.

In an interactive session with participants, he called on Nigeria to explore how it can leverage the Diaspora remittances, noting Africa was one region that had a challenging environment for remittances. Currently has a foreign reserve of approximately $45bn which can triple within a year, if it prioritizes unlocking liquidity through the various capital inflow options available.

Coming into 2019, considering various views on FX stability and expected calmness in the polity post-election had revealed an improvement in economic growth over the year. Notably, growth was projected to be anchored on stronger performance in the non-oil sector as the lower investment in the oil sector– save for the addition of the Egina oil field – amidst shut-ins at key oil exporting pipelines will result in slower growth in the oil sector and by extension a much slower contribution to overall GDP. Notwithstanding, the optimism of stronger contribution from the non-oil sector, has boosted the impact of the innovative programmes by key industry players in the ICT on the overall subsector growth. Reflecting the improved activity in the ICT subsector in Q1 19, coupled with recovery in both the Agriculture and manufacturing sectors, economists expect a much robust growth in GDP over 2019 by 20bps to 2.2% YoY (FY 18: 1.9% YoY).

Starting with the harbinger of growth, some economists retain their surmise on most sub-sectors in the nonoil territory with slight changes to services – driving a nonoil sector growth of 1.8% YoY (FY 18: 2.1% YoY). While some made an upward adjustment to the growth assumption for ICT subsector, the high base of growth in the prior year, the lull in the real estate and slower growth of credit creation in financial services is expected to constrain the rate of growth for the overall services sub-sector. In the ICT subsector, the upward projection to the assumption emanated largely from the now telling impact of the innovative customer acquisition programs. For financial services, notwithstanding the recent policies aimed at enhancing private sector lending – there are not much traction, as banks remain cautious in growing their risk assets. Lastly, there’s a believe that activities in real estate sector would remain muted given its oversupplied state. That said, activities in services is expected to expand modestly by 1.7% YoY (FY 18: 3% YoY).

On Agriculture, there is an optimistic view of a recovery in crop production due to favorable weather and government intervention aimed at curbing ongoing conflict in the northern region. On the government intervention, the RUGA (rural grazing area) settlement program was recently proposed, which requires each state to provide lands for the herders to grow their cattle. Though the program was suspended due to kickbacks from various states, there are positivity on some form of concession by the State government given the critical nature of the sector. Further buttressing the point is the ongoing discussions on a peace pact between the Zamfara state government and armed bandits in a bid to improve farming activities in the state. That said, economists expect the sector to grow by 3.2% YoY (FY 18: 2.3% YoY).  Elsewhere, while the general elections slowed activities in the manufacturing sector, some economic pundits see some traction in the sector beyond Q1 2019. Further upside would be payment of the minimum wage approved at the start of the year and successful implementation of the presidential order to clear the Apapa gridlock which had been a strain on producers over the last two years due to difficulty in transporting raw materials. That said the manufacturing sector is expected to grow by 2.13% YoY.

In the oil sector, it was highlighted at the start of the year that the plausible risk to crude oil production would be the resumption of militant attacks during the first quarter of 2019 should the electoral process get violent. With militant attacks out of sight, there is no impending risk to overall production asides minor pipeline leakages. Asides that, additional 200,000bpd capacity from Egina oilfield which resumed operations in January further supports the stance of increased production. For context, while NNPC is yet to provide any data on Nigeria’s oil production this year, the channel checks with external sources reveals that actual production touched 2mbpd (condensates inclusive) in April. That said, it is expected average oil production to print at 2.04mbpd – 6.4% higher than the prior year. Thus some economists suggest that the Nigerian economy will experience a 2019 growth estimate of 2.2% as against an initial prediction of 2% as a result of improvement in both the oil and non-oil sector.

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