Nigeria@60: Economy seeking bailout from ‘hard pressed’ government

Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed
Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed

The Nigerian economy has since independence experienced a mixed bag of performances – from the years of the oil boom, attaining the largest economy in Africa and the current era of contraction and recession triggered by coronavirus pandemic

By Goddy Ikeh

NIGERIA’s economic development efforts and outcomes since independence in 1960 have been varied from time to time and recent studies on the Nigerian economy have revealed the effects of salient political and economic policy landmarks and anti-development syndromes such as poor leadership, widespread corruption, political cultism, dominant external influence, high cost of governance and security challenges on it.

The studies observed that although Nigeria is politically independent it has not been free to galvanize the resources in the interest of the citizens to achieve the desired level of development.

In general, the correlation between available resources and development outcomes in Nigeria has been perverse. The market fundamentalists pressurized the country to abandon its planning strategy, while at the same time discouraging the necessary capital investment to ensure sustainable growth and development. Accordingly, the situation was exacerbated by military intervention which aggravated political instability and stymied democratic governance.

But since 1999 when the aberration was put in abeyance together with its stressful and corruption-ridden neo-liberal economic management system, opportunities have been created for economic emancipation and sustained growth. The outcome was an emerging economy with relatively stable exchange rate, fairly predictable macroeconomic environment and good prospects for growth. The GDP growth rate which was only 1.1 percent in 1999 recorded an average growth of 5.4 percent between 2000 and 2004 and rose to 6.9 percent in 2005. Value added in manufacturing grew at an average of 8.8 percent between 2000 and 2004. Capacity utilisation rose from about 34 percent in 1999 to over 53 percent in 2007. Furthermore, corruption is being vigorously tackled with an intensity never witnessed before now; although it still remains endemic in the country.

But in another study on Industrial Policy in Nigeria: Opportunities and Challenges in Resource-rich country by Louis N. Chete, John O. Adeoti, Foluso M. Adeyinka and Femi Oladapo Ogundele, they stated that between 2011 and 2012, the primary sector, in particular the oil and gas sector, dominated Nigeria’s GDP, accounting for over 95 percent of export earnings and about 85 percent of government revenue while the industrial sector accounted for 6 percent of economic activity. It added that in 2011, the manufacturing sector contributed only 4 percent to GDP.

It also observed that the economic transformation agenda, otherwise known as Nigeria Vision 20:2020, was aimed at setting the direction for current industrial policy in Nigeria. The industrialization strategy was therefore aimed at achieving greater global competitiveness in the production of processed and manufactured goods by linking industrial activity with primary sector activity, domestic and foreign trade, and service activity.

But by 2013, Nigeria was named the largest economy in Africa with GDP of over US$500 billion. It was also the continent’s biggest oil exporter with huge oil and gas reserves. The economy recorded considerable acceleration in growth; real GDP grew by 6.3 percent, 7.6 percent, and 7.4 percent in 2009, 2010, and 2011 respectively. Despite these figures, poverty was persistently high, and the structure of the economy is that of a typically underdeveloped country.

The study noted that over half of Nigeria’s GDP was accounted for by primary sectors, with agriculture continuing to play an important role, while the oil and gas sector was the major driver of the economy, which in 2011 made up over 95 percent of export earnings and about 85 percent of government revenue. The sector also contributed 14.8 percent to GDP in 2011—in contrast, the industrial sector accounts for a tiny proportion of economic activity (6 percent) while the manufacturing sector contributes only 4 percent to GDP.

The Gross Domestic Product, GDP, in Nigeria was worth 448.10 billion US dollars in 2019, according to official data from the World Bank and projections from Trading Economics. The GDP value of Nigeria represents 0.37 percent of the world economy.

Unfortunately, in 2016, Nigeria slipped into recession for the first time in more than two decades as growth shrank for the second consecutive quarter.

The economy contracted 2.1 percent in the three months to the end of June 2016, worse than analysts expected, while inflation hit an 11-year high of 17.1 percent, underlining the depth of the nation’s economic crisis.

This year, the performance of the Nigerian economy has been worse than the projections made by the Lagos Chamber of Commerce and Industry, LCCI, for 2020, due largely to the effects of coronavirus on the economy as well as the global economy.

Muda Yusuf, Director-General of the LCCI, who had reeled out the 2020 projections, attributed the projected high cost of goods in the country to poor infrastructure, multiplicity of levies, excessive regulations, among others.

Yusuf noted that while Nigeria may have recorded improvement on the Ease of Doing Business Ranking due to some recent policy measures, the realities on ground would continue to differ if the highlighted challenges were not properly addressed.

He said that the performance of the trade sector in 2020 would be shaped by the direction of government policies. Yusuf anticipated that the manufacturing sector would continue to benefit from the Central Bank of Nigeria’s aggressive credit push.

He, however, predicted that competition between foreign and local producers would fade on prolonged closure of land borders.

The director general said that the headline inflation was expected to trend higher in 2020 and that it would be driven by implementation of new minimum wage and continued closure of the land border. He said that higher Value Added Tax rate of 7.5 percent and the early disbursement of funds for budget implementation, following the return of the budget cycle would also be contributory factors.

“We expect economic growth to remain subdued at around 2 percent by 2020 as consumer demand, as well as private sector investment, will most likely remain weak.

“We are of the view that failure by government to fix structural constraints with regards to fixing power challenges and rehabilitating deplorable road networks, will perpetuate the poor productivity and performance of the sector. In our opinion, continued protectionist measures of government will most likely limit growth in 2020,” he added.

In its medium term outlook for Nigeria in June, The LCCI predicted bleak, short medium term for the country due to the effects of the coronavirus pandemic on the economy.

Toki Mabogunje, President LCCI, told journalists at a press conference that  the pandemic had resulted to unprecedented collapse in commodity prices, capital flight, turmoil in the capital market, supply chain disruption across sectors, and destabilisation of commercial and economic activities.

“Hence, we resonate with the International Monetary Fund’s position on a looming severe contraction of the economy by year end 2020,” she said.

The LCCI president, however, said that the current COVID-19 experience presented an ample opportunity for the government and policymakers to pursue structural reforms and put in place home-grown policies to engender a rebound of the nation’s economy.

According to her, reforms such as the liberalisation of the petroleum downstream sector, exchange rate convergence, securitizing government’s equities in joint ventures, privatizing government’s redundant assets and PPP-led infrastructural development are critical.

She said that export diversification, agro-based industrialization and cut in governance costs were direly needed to aid the rebound of the economy going forward, and especially in times of adversity.

Mabogunje, however, acknowledged the sustained recovery of the Nigerian economy as GDP growth advanced to 2.55 percent in the final quarter of 2019, compared to 2.28 percent in the preceding quarter.

She, however, also noted the broad-based underperformance across key sectors such as agriculture, trade and manufacturing, with strong potential to drive economic diversification.

On oil prices, she expressed deep concern about the slump in crude oil prices due to weakening demand, as Brent, Nigeria’s benchmark grade, had dropped by over 60 percent since the beginning of the year.

She said that the agreement by the Organization of Petroleum Exporting Countries and Allies and G-20 to reduce supply by 13.2 million barrels may not significantly boost oil prices to desired levels if global oil demand remains subdued.

On the nation’s external reserves, Mabogunje said the Chamber had noted the continued depletion in external reserves since the beginning of the year.

Also on foreign exchange, Mabogunje projected that another ‘price adjustment’ was inevitable in the next three months if global oil prices fail to pick up by the end of the second quarter.

On inflation, Mabogunje projected that consumer prices, especially food, would come under pressure in coming months due to disruption to agriculture value chain and commencement of planting season. “This will reduce agricultural output,” she said.

She urged government to stem rising consumer prices through measures aimed at bridging supply gaps and reducing transportation costs.

On the socio-economic and business impact of lockdown, the LCCI President acknowledged the efforts of Federal Government, states, monetary authorities and organized private sector towards containing the COVID-19 pandemic.

On the flip side, Mabogunje said that the current economic crisis provided a silver lining in the form of opportunities.

According to her, the pandemic would open up opportunities in areas inclusive of import substitution, creativity, innovation, and the non-oil export.

Speaking on the state of the economy in August, the minister of finance, budget and national planning, Zainab Ahmed, warned that unless Nigeria achieved a very strong third quarter 2020 economic performance, the country might slide into recession. Addressing the opening of a five-day interactive session on the 2021-2023 Medium Term Expenditure Framework, MTEF, and Fiscal Strategy Paper, FSP, in Abuja, Ahmed, said the COVID-19 pandemic had put further pressure on Nigeria’s foreign exchange.

“Nigeria is exposed to spikes in risk aversion in the global capital market, which will put further pressure on the foreign exchange market as foreign portfolio investors exit the Nigerian market,” the minister said.

“Nigeria’s Q2 GDP growth is in all likelihood negative and unless we achieve a very strong Q3 2020 economic performance, the Nigerian economy is likely to lapse into a second recession in four years with significant adverse consequences.

“In response to the developments affecting the supply of foreign exchange to the economy, the Central Bank of Nigeria (CBN) adjusted the official exchange rate to N360, and more recently to N379.”

The minister added that the disruptions in global trade and logistics would also negatively affect customs duty collections in 2020. According to her, COVID-19 containment measures, although necessary, have inhibited domestic economic activities, with consequential negative impact on taxation and other government revenues.

However, the Weekly Economic and Market Report by Cordros Securities released on September 25 in Lagos stated that faced with declining output and upward pressure on domestic prices, the Monetary Policy Committee (MPC) reduced the Monetary Policy Rate (MPR) by 100bps to 11.5% and widened the Asymmetric corridor around the MPR to +100/-700bps (Previously: +200/-500bps), while holding the other parameters constant.

According to the report, this firmly established the CBN’s dovish stance as it continued on its quest to push more credit to the private sector. It explained that the MPC attributed rising prices to be due to structural rigidities and supply chain challenges rather than monetary factors.

“We do not expect any significant growth in domestic credit or aggregate demand, especially given the historical ineffectiveness of the MPR in stimulating output and as banks remain concerned about extending credit amidst the fragile macroeconomic conditions.  In our view, the MPC needs to address the issue of the exchange rate, and forex illiquidity, which in our view, are major hindrances to any meaningful economic recovery,” it said.

Elsewhere, Nigeria’s PMIs remained in contractionary territory for the fifth consecutive month as weak consumer spending; low level of business activities, and high cost of procurement brought about by currency weakness and limited access to foreign exchange, continued to dampen the country’s macroeconomic environment.

According to the CBN, Manufacturing PMI for the month of September stood at 46.9 points (August: 48.5 points) while the non-Manufacturing PMI stood at 41.9 points (August: 44.7 points). While the supplier delivery time grew faster (53.5 vs. 53.0 points in August), production level (47.3 vs. 49.2 points in August), new orders (46.4 vs. 49.2 points in August), employment level (44.1 vs. 44.6 points in August), and raw materials inventories (43.0 vs. 46.1 in August) continued to contract.

The weak PMI indicates a slowing in the pace of economic recovery even as the rate of COVID-19 infections declines, and as restrictions are eased. Activities are expected to remain under pressure amidst weak household consumption, rising inflation, and forex exchange weakness and illiquidity.

Obviously, the figures painted a gloomy economy, but the central bank has decided to apply its intervention measures to curb the rising inflation and address the recession in the economy, which is yet to be officially declared.

According to CBN Governor, Godwin Emefiele, this was part of the resolutions of the Monetary Policy Committee meeting held this September.

“The committee was therefore of the view that to abate the pressure, it had no choice but to pursue an expansionary monetary policy using development finance policy tools, targeted at raising output and aggregate supply to moderate the rate of inflation.

“At present, fiscal policy is constrained and so cannot, on its own, lift the economy out of contraction or recession, given the paucity of funds arising from weak revenue base, current low crude oil prices, lack of fiscal buffers and high burden of debt services. Therefore, monetary policy must continue to provide massive support through its development finance activities to achieve growth in the Nigerian economy,” he said.

– Sept. 35, 2020 @ 10:05 GMT |

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