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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

President Buhari’s Second Term: A chance to provide peace, prosperity, and security?

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Nigerians re-elected President Buhari for another four years in what many have termed – a chance to make amends. In what could be called his third stint at the helm of affairs in Africa’s most populous country, questions about a coherent economic strategy are already being asked. In the last dispensation, protectionist posturing was worsened by a management style perceived to be distant while crucial decisions were delayed.

The economy is set to continue its recovery from the worst recession in its history. Nonetheless, the forecast is for economic growth to remain well below historic averages in the next five years. According to economic survey by Economist Intelligent Unit (EIU), Nigeria’s Gross Domestic Product (GDP) is set to reach $473.5bn in 2019 and rise to $680.9bn by 2022. This prediction will hinge, for the most part, on the current intensity of economic reforms and current rate of investment being sustained.

 

Background of the economy leading to election 2019

The Nigerian economy grew by 1.9% in 2018, an improvement from 0.8% recorded in 2017, with the non-oil sector being the fulcrum for the growth picture. Over the last quarter of 2018, the economy recorded a solid growth of 2.4% – with the expansion in the non-oil space (2.7% YoY) taming the contraction observed in the oil sector (-1.6% YoY). Dissecting the components in the non-oil territory, all subsectors expanded, with the services and Agriculture sector leading the pack. Notably, improvement in the number of active subscribers in ICT subsector coupled with mild support from transport drove the expansion in the services sector (3.8% YoY). Furthermore, while the Agriculture sector improved by 2.5% in Q4 18, it was disappointing compared to its four-year average of 3.8%. On the flipside, the oil sector dived into recessionary waters buoyed by low crude production (-2.6% to 1.91mbpd).

 

Declining Income per Capita

It is important to note that Nigeria has a huge population of over 180million and a population growth rate of 2.6% – higher than the 2018 GDP growth of 1.9%. GDP growth is projected to reach 2.0% and 2.2% in 2019 and 2020 respectively before rising to 3.2% by 2021. This means Nigeria would have had five consecutive years of declining income per capita – from 2016 to 2020. A burgeoning youth population is also unlikely to be matched by job growth, meaning unemployment – at over 40% – is likely to rise even further.

A breakdown of the GDP components show that Nigeria’s gross fixed investment, at $66.5bn, will account for just 14.0% of GDP in 2019. This pales in comparison to that of other notable emerging economies – Brazil (19%), India (27.12%), China (42.86%), and South Africa (18.7%). Majority of countries in the world have gross fixed investment of 18-22%. The EIU goes further to forecast that gross fixed investment in Nigeria will rise by just one basis points to 14.1% ($86.2bn) by 2022.

 

Why does this matter?

The importance of this component of GDP is that it is a clear indicator of the future productive capacity of the economy. The aforementioned basically means that the current and projected rate of investment is simply suboptimal and far below the level required to propel Nigeria to an accelerated growth path. It is incapable of providing Nigeria with the investment impetus that will have the desired multiplier effect on output. Nigeria has also grossly underinvested in its infrastructure. The existing infrastructure gap is estimated at over $300bn and requires 10% of GDP ($37.6bn)/annum over the next 10 years to bridge – an unlikely feat given that  current infrastructure needs are far in excess of current cash flows. Nigeria’s capital budget in 2018 was $7.98bn – 26.6% of total budget and 2.2% of GDP. This compares to 6% of combined GDP of emerging market economies. Nigeria’s share of emerging markets total spend on infrastructure is currently less than 1%.

 

Few options, Tough Choices

Nigeria’s high population growth rate means it must be much more efficient with economic policy. Putting Nigeria on an accelerated path to a free and market driven economy requires making tough game-changing decisions now. It will begin with figuring out how to raise the level of gross fixed investment to levels above and beyond the global average of 18-22%. Investment in the next 3-5 years will depend on policies and incentives.

Galvanizing domestic and international investment will be crucial. This will require a structure that incentivizes private investment considerably more than what is currently obtainable. Achieving this will require significant increases in public investment in infrastructure, in addition to more comprehensive and deep-seated market oriented structural reforms.

 

The Game changing Formula

Raising the level of investment in infrastructure given the government’s current revenue and borrowing constraints requires rethinking ways to attract private sector funding in the form of Public Private Partnerships (PPP). Outright sale and concessions of government assets– airports, seaports, inner city highways and trunk roads– should be a key consideration for policymakers.

Airports concession has the potential to lower the average cost for aviation operators by 50%. The government’s stake in the power distribution companies should be sold to the private sector while the power sector forbearance needs to be dealt with. The rail investment program needs to be accelerated while the road networks to major seaports need to improve.  Another item that is top on the list of reforms is the foreign exchange policy where a movement to currency convertibility with minimal intervention is paramount. Fears of a wild depreciation if the Central Bank of Nigeria lets go of its current policy of a managed float, are greatly exaggerated. The almost insignificant deviation between the parallel and the Investor Exporter Foreign Exchange (IEFX) window – which is closer to market equilibrium than the official rate – supports this fact. There is also the issue of fuel subsidy which has now taken the form of under recovery as the Nigerian National Petroleum Company (NNPC) now fully bears the brunt of the subsidy as the sole importer of Premium Motor Spirit (PMS). Deregulating the downstream sector of the petroleum industry requires the removal of subsidies, which will spur competition, bring about efficiency and increased investment in domestic refining – the lack of which has been a huge drain on Nigeria’s foreign exchange earnings over the years.  Not only is a game changing formula now imperative, it has become inevitable. Nigeria can continue at its current pace of reforms and investment – a recipe for chaos, social and political disintegration; or take drastic measures to raise public and private sector investment to levels that will accelerate productivity and economic growth.

THE ROAD AHEAD

Ending extreme poverty must be a top policy priority for Nigerians and the new government. The country has the capacity to deal effectively with poverty: large endowments of natural resources, especially oil; a young and highly educated population; and many people adept at entrepreneurship and the creation of wealth.

Nevertheless, there are many threats to the creation of wealth. Two of them stand out: widespread corruption and the absence of peace and security in many regions. Corruption, like embezzlement of public funds, has plagued Nigeria since independence. Buhari came to power in 2015 promising to clean up corruption and restore professionalism in the public services. Although he appears to have made significant progress in that fight, his critics say that he only targeted his political opponents and ignored his allies and supporters. Still, many Nigerians give him credit for his efforts and for not illegally amassing wealth for himself. To deal more effectively with corruption, Buhari must now significantly improve openness and transparency in government communication, especially with respect to government procurement programs.

The Buhari government also needs to deal with extremism and other threats to peace and security like Boko Haram and the lawless armed gangs who roam parts of the country kidnapping people and holding them for ransom. This must be done not just through military action but also by providing opportunities for young people, especially in the rural areas, for self-actualization.

Finally, the government must address the issue of lack of basic infrastructure for development: passable roads, adequate and reliable power, water treatment plants (access to clean drinking water is a major problem for most communities), basic health care, affordable housing (especially in urban areas), police protection, and other services that can enhance the ability of citizens to live in peace.

Posterity will judge Buhari and his government by how well they use the opportunity granted to them by Nigerian voters to make peace, security, and prosperity possible for their fellow citizens.

On the economic front, we expect resilience in agriculture sector and a recovery in the oil sector to be the key drivers for growth in non-oil and oil sector accordingly. In the non-oil sector, muted growth in ICT and in turn services as well as weak growth in Manufacturing due to depressed consumer wallet and delay with minimum wage bill, guides to slower growth in the non-oil sector of 1.3% YoY (2018: 2.0% YoY). In the oil space, the additional 200kbpd from the Egina oil field guides the expectation of an expansion in crude production over 2019 (2.06mbpd), albeit capped by OPEC cut. That said, it is expected growth in the oil sector to print at 7.1% (2018: 1.1%). Overall, 2019 growth estimate is forecast to 1.98%, a notch away from 1.93% recorded in 2018. For Q1 19, a slowdown in growth is expected to 1.3% YoY driven by a contraction in the oil sector (-1.1% YoY) and moderation in non-oil sector growth.

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