Where is the Economy Headed?


With the present state of the Nigerian economy, Nume Ekeghe wonders if the country is not in recession

Since this year, Nigeria’s macroeconomic indicators have not been encouraging. From inflation, which climbed to 12.7 per cent in March 2016 and a stock market that have plunged, the situation in the country has been discouraging.

Also, the scarcity of foreign exchange and the insecurity in some parts of the country have all contributed to a spike in the prices of goods and services, especially household items.

Looking back to 2008 when the world economy faced its most dangerous crisis since the Great Depression of the 1930s, there appear to be some similarities with what is happening presently as the economies of a lot of other countries are facing challenges as well. From Russia, Argentina, Venezuela, and even China, the story is the same.

For Nigeria, oil price decline has put a strain on the capital inflow into the economy, pressure on the foreign reserves and exchange rate. Furthermore, there has also been an increased exit of foreign direct investments. According to the Nigerian Stock Exchange’s (NSE), monthly foreign outflows outpaced inflows, which was consistent with the same period in 2015.

Total transactions at the nation’s bourse decreased by 17.87 per cent from N117.27 billion recorded in February 2016 to N96.31 (about $0.49 billion) in March 2016. In comparison to the same period in 2015, total transactions decreased by 47.66 per cent from the N184.02 billion recorded in March 2015.

Also, the NSE figures had shown that domestic investors outperformed foreign investors by 28.48 per cent as total foreign portfolio inflows (FPI) decreased from 36.48 per cent to 35.76 per cent over the same period.

The deteriorating macroeconomic environment as well as some earnings-constraining policies from both the monetary and fiscal authorities has seen some commercial banks in the country gasping for breath.

In addition, the persistent scarcity of forex in the economy as the Central Bank of Nigeria (CBN) continues to ration dollar supply through its demand management strategy has increased the risk that banks’ asset quality could deteriorate further. Also, this might cause a lot of the financial institutions to default on their international obligations to correspondent banks and maturing forex obligations in view of the challenges currently facing banks and businesses in the country.

In 2015, the Nigerian economy grew by 2.82 per cent, compared with 6.23 per cent in 2014, signifying a major decline in economic activities across board. The issues surrounding the currency curbs introduced by the CBN and declining disposable income brought on by unpaid wages were responsible for the sluggish growth recorded in 2015.

These emerged just as one of the biggest global rating agencies, Standards & Poor’s (S&P) revised the country’s sovereign credit outlook to negative from stable, just as the country’s total merchandise trade fell to N3.65 trillion in the fourth quarter of last year compared to N4.02 trillion in the previous quarter. In a note, S&P stated that Nigeria’s foreign exchange policy was creating dislocations in product and financial markets, adding that the negative outlook it assigned to Nigeria reflected the possibility of a downgrade in the coming 12 months, “if there is deterioration of Nigeria’s fiscal or external accounts.”

Oil Prices
From 1999 till early part of 2008, the price of oil rose significantly. This rise was due to the oil demand in countries like China, India and the United States. In the middle of the financial crisis of 2007–2008, the price of oil underwent a significant decrease after the record peak of $145 per barrel it reached in July 2008. On December 23, 2008, the price of crude oil fell to $30.28 a barrel, the lowest since the financial crisis of 2007–2010 began.

This price sharply rebounded after the crisis and rose to $82 per barrel. By January 31, 2011, Brent price hit $100 and slowly remained within the range of $90–$120 per barrel until it stared to decline in 2014 and furthermore reached its lowest pricing at below $27.67 a barrel in January, the lowest since 2004. It however climbed to $46 per barrel towards the end of April 2016.

Analysts’ Opinions
Speaking with THISDAY, the Head of Research at Afrinvest West Africa Limited, Mr. Ayodeji Ebo said: “We are not in a good place right now. It is really a disturbing time because most people don’t know what is next. Government is focusing more on medium to long term strategies while leaving out short term strategies that can help the economy.

“Every economy thrives on businesses so it is imperative that government is specific on policies that would help drive businesses. Policies that would encourage importation of raw material should be put in place because as you know, some factories are shutting down and slowing down production as a result of these restrictions. Some of the challenges in the oil sector may be attributed to forex restrictions. So government should be flexible in that space.”

Furthermore, he added: “On the fiscal side, we need to see the 2016 budget. The waiting we believe would soon be over and how the 30 per cent allocated to capital expenditure would be channelled to its purpose.”
“Government should come up with strategies that would attract foreign investments liquidity. We need foreign exchange and we need to attract FDI‘s while we work on policies that would reduce the demand and wasting of local production.”

Also, a research analyst at WSTC Financial Services Limited, Mr. Tola Oni said: “The economy is in a slowdown phase both in the private and public sector. Private sector is affected by monetary policies by the CBN particularly forex restrictions and the fiscal policy are affected by government spending.

“Most economies are driven by private sector and the policies are not market friendly. This slow-down phase is driven by monetary and fiscal policies. The monetary policy restricts capital and it affects confidence in the country which does not attract FDIs. I wouldn’t want to say we are headed towards a crisis but I believe something would definitely give.”

On his part, a senior lecturer at the Department of Economics, Pan-Atlantic University (PAU), Dr. Bongo Adi said: “The economy is in a state of anomie. Government has not come out with any policy direction. There are no clear directions on anything and it is a big problem.

“It is easy to say give elaborate plans but this government is short of details and the nitty-gritty. For example, they went to China and the news from the presidency came about an agreement, which included currency swap. The Central Bank of Nigeria and the Finance Minister are saying another thing, while the presidency is saying something else.

“Government is speaking from both sides maybe they don’t understand the urgency or they are confused. A lot of people who supported this government are questioning their decisions. I have started to lose faith.”

But when asked if the economy is headed towards a recession, he said: “I don’t want to be a prophet of doom but from every indicator, we are headed towards that direction.”