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Nigeria’s economy: Exiting recession but remains vulnerable – IMF

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Economic momentum appears to have gained steam in recent months, led by the country’s non-oil sector. Industrial production improved in Q4, and consumer confidence also picked up.

Nigeria’s economy consolidated its ongoing recovery in Q4 ’17, as real GDP expanded by a strong 1.9% y/y, the highest quarterly growth since Q4’ 15. This was driven by the non-oil sector which rose 1.3% y/y, the highest in eight quarters, reflecting strong improvements in the agriculture, manufacturing and services sectors (92.6% of GDP).

Meanwhile, the oil sector received a boost from a 150,000 barrels per day increase in oil production to 1.9mbpd, expanding 8.3%y/y. In full year terms, real GDP increased 0.8% y/y in FY’17, largely in line with the estimate of 0.7% y/y suggested by PWC.

Agriculture GDP increased by 4.2% y/y in Q4 ’17 (Q3 ’17: 3.0% y/y), as a result of improvements in crop production (89.8% of agriculture output). Agriculture output generally peak in Q4, a reflection of the crop harvest season, specifically for tubers and grains.

Also, this would partly provide an explanation for the sharp moderation in the monthly increase in food inflation in Q4 ’17. Agriculture’s contribution to real GDP growth at 1.1% was the highest in five quarters.

 

Government’s GDP Growth Expectation

Image 1: President Mohammadu Buhari, President of The Federal Republic of Nigeria

The expectation of the Buhari administration that the Nigerian economy will grow this year up to 3.5 per cent is on course, Special Adviser to the President on Economic Matters, Dr. Adeyemi Dipeolu said on 27th February 2018.
His optimism was anchored on the latest GDP figures announced by the National Bureau of Statistics that said date.

The National Bureau of Statistics figures indicate a further growth in the fourth quarter of 2017, showing the economy grew in the fourth quarter of 2017 by 1.92%. In the previous third quarter of 2017, the Nigerian economy grew by 1.4%, and this latest figure for the fourth quarter marks the third consecutive growth since the exit from recession in the second quarter of 2017.

The latest GDP figures now show the economy improving in all major sectors, including especially the non-oil sector which had contracted for quite a while. Here is the statement by Dr. Dipeolu on the latest National Bureau of Statistics figures on the economy: “The figures recently released by the Nigerian Bureau of Statistics (NBS) for the fourth quarter of 2017 (Q4 2017) and the full year 2017 (FY 2017) show a consolidation of post-recession growth in the national economy.

“The growth of 1.92% in Q4 2017 was an improvement on both the previous quarter and the previous year. This quarterly growth contributed to an overall positive growth rate of 0.82% in 2017 which translates to a 2.24% points increase from -1.58% in 2016.

“There are two encouraging aspects of the figures. The first is that all major sectors of the economy namely agriculture, industry and services are now experiencing positive growth.

“Agriculture, which accounted for 25% of GDP in 2017, grew by 4.23% in Q4 2017; while Industry grew by 3.92%. The Services sector, which is about 53% of GDP, returned to positive growth in Q4 2017. Although the increase was marginal at 0.10, it represented a positive swing of 2.76% points from the level in Q3 2017.

“The other notable element of the data is that the non-oil sector experienced a strong growth of 1.45% in Q4 2017 as compared to a contraction in the previous quarter and the whole of 2016. This showing, the strongest since 2015, points to steady improvements across the economy.

“Also noteworthy in this regard were strong quarterly growth in crop production, crude oil production, metal ores, construction, transportation, trade, electricity and gas production.

“The positive trajectory for the economy should begin to gain momentum as the multiplier effects of investments in infrastructure, including power, roads, and rail, alongside improvements in the business environment begin to manifest.

“The agricultural sector is expected to continue its strong growth, while manufacturing should also show sustained growth based on improved availability of foreign exchange and greater backward integration in several of its sub-sectors.

“Taking all these factors into consideration, the Federal Government estimate of 3.5% growth in 2018 is quite achievable”.
To the Director, Union Capital Markets Limited, Egie Akpata, the figures released by National Bureau of Statistics were somewhat expected. “We are starting to see the results of policy changes around FX management by Central Bank of Nigeria (CBN) and the overall increase in oil prices,” he said.

Akpata, however, cautioned that, “The CBN has a delicate job to ensure that FX supply is maintained to the market while managing interest rates so that the private sector can borrow for expansion.”

“It remains to be seen how much extra spending the government will release ahead of the February 2019 elections. The CBN will have to deftly manage FX supply, liquidity and interest rates in Q4 so as not to derail the continued economic expansion,” he added.

Meanwhile, the IMF in the referenced report submitted, “Higher oil prices would support a recovery in 2018 but a ‘muddle-through’ outlook is projected for the medium term under current policies, with fiscal dominance and structural constraints leading to continuing falls in real GDP per capita,”.

In the report, it identified risks to growth including additional delays to implementing policies and reforms ahead of 2019 elections, security tensions, and oil prices, a fall in which could see capital flows reversed.

“Further delays in policy action — including because of pre-election pressures — can only make the inevitable adjustment more difficult and costlier,” the report said.

The lender repeated its call for Nigeria to simplify its complex foreign exchange system, a bugbear for the IMF for more than a year which has left large gaps between official rates and various windows that certain groups can use to get other rates.

“Moving towards a unified exchange rate should be pursued as soon as possible,” the IMF said. “(IMF) staff does not support the exchange measures that have given rise to the exchange restrictions and multiple currency practices.”
The Fund further singled out the central bank, saying it should discontinue direct interventions in the economy.

CBN frequently injects hundreds of millions of dollars into the foreign exchange market to keep its own rates stable.

Vulnerabilities that need to be curtailed

Despite the growth foreseen in 2018, there are some few vulnerabilities that need to be curtailed. Risks are balanced. Lower oil prices and tighter external market conditions are the main downside risks.

Domestic risks include heightened security tensions, delayed fiscal policy response, and weak implementation of structural reforms. Stress scenarios highlight sensitivity of external and public debt, particularly to oil exports and naira depreciation.

Faster than expected implementation of infrastructure projects are an upside risk. A further uptick in international oil prices would provide positive spillovers into the non-oil economy.

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Nigeria

Nigeria’s economy in 2019: Woes or fortune?

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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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