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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 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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