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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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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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