Averting a Long Recession…


With recession, tougher times are ahead for Nigerians

Indications that the Nigerian economy would be in recession this year became rife with the latest forecast of the International Monetary Fund released last week and the admission by government that the economy was ‘technically in recession.’ But with the right mix of measures by the fiscal and monetary authorities, the dark days may not last, writes Kunle Aderinokun

The International Monetary Fund (IMF) has projected that the Nigerian economy would contract by 1.8 per cent this year. With this projection, the fund has officially cut its April Regional Economic Outlook GDP growth rate forecast of 2.3 per cent for the year, which it earlier lowered from 3.2 per cent growth rate estimation published in February. Effectively, by the IMF calculation, the economy would witness a recession this year.

The Bretton Woods institution, however, predicted that the economy would bounce back with a growth rate of 1.1 per cent in 2017, even the figures are way down from the 3.5 per cent it earlier projected for the next year.

The IMF, which gave its latest submission on Nigeria, amongst other countries, in its World Economic Outlook (WEO) Update released last Tuesday, cited “foreign currency shortages as a result of lower oil receipts, low power generation, and weak investor confidence.”

The Fund noted that it cut its forecasts for global economic growth this year and next as the unexpected UK vote to leave the European Union creates a wave of uncertainty amid already-fragile business and consumer confidence.

According to the IMF WEO Update, “The Brexit vote implies a substantial increase in economic, political, and institutional uncertainty, which is projected to have negative macroeconomic consequences, especially in advanced European economies.”

“Brexit has thrown a spanner in the works,” said Maurice Obstfeld, IMF Chief Economist and Economic Counsellor. And with the event still unfolding, the report says that it is still very difficult to quantify potential repercussions.

Apparently giving a foretaste of what was to come, few days ago, Senior Resident Representative, IMF Nigeria, Gene Leon, said Nigerian economy would probably contract this year citing shortages in energy and the delay in the passage of the 2016 budget by the National Assembly. According to him, these factors have affected the national output, especially in the first half of the year and notwithstanding how better the economy performs in the second half, the positive growth would not “be sufficiently fast, sufficiently rapid to be able to negate the outcome of” the first and second quarters.

Leon, who gave these indications on behalf of the Bretton Woods institution in Abuja was quoted as saying, “I think there is a high likelihood that the year 2016 as a whole will be a contractionary year.”

The statement, however, contradicts the Fund’s earlier GDP growth rate forecast of 2.3 per cent for the year, cut down from the 3.2 per cent projected in February, which was alluded to in the Staff Report published at the end of the 2016 Article IV Consultation on Nigeria in April. The World Bank toed the line of the IMF by lowering its forecast to 0.8 per cent in May, citing weakness from the disruptions of oil output by the Niger Delta militants and low prices of crude oil at the international market.

Acknowledging that the economy is in recession , the federal government, however, urged all and sundry to ignore the recent projections from the IMF that the Nigerian economy would be vulnerable to global shocks. According to the Finance Minister, Kemi Adeosun, who briefed the Senate last Thursday, the IMF forecast is a ruse.

Adeosun, who stated that even though the economy was ‘technically in recession” it would be short-lived as she was optimistic that it would bounce back by the third quarter of the year.

According to her, IMF projections were not necessarily in tandem with reality, insisting that she remained confident in the potential of the Nigerian economy to weather the current economic crisis.

“I am not too worried about IMF projections. I will tell you why: The IMF, one of its functions is global economic surveillance. They equally issued a negative report on Britain as a result of Brexit.

“But I don’t think we should panic every time IMF speaks. I think we need to be confident about what we are doing and where we are going. I remain extremely confident as I said.

“IMF has given its projections which is that we may continue to go into negative territory and I am not sure what we have seen suggests that.

“Agricultural output seems to be going up… That tells you that things are moving in the right direction,” she said.

Her optimism that the economy would come out stronger was predicated o n the policies and programmes that the government had put in place to address the downturn.

Besides, the finance minister was elated that fuel subsidies had been totally eliminated, adding that the petroleum products in the country were now market-driven, as the subsidy removal by the government had paved the way for healthy competition among oil marketers.

“Is Nigeria in recession? Technically, if you go into two quarters of negative growth. Technically, we are in recession but I don’t think we should dwell on definitions. I think we should really dwell on where we are going.

“I think if we are in a recession, what I will like to say is we are going to come out of it and it will be a very short one because the policies that we have will ensure that we don’t go below where we need to go and I think with what we are doing, we will begin to turn the corner by the third quarter.

“I can confirm there is no more subsidy. It is a market-driven price and indeed, one of the good things that we are now seeing is that prices have actually been coming down.

“There is now competition between filling stations for market share which is a good thing, which means overtime, the market will continue to correct itself,” she said.

But the IMF conclusion that the economy would contract did not come as a surprise as the National Bureau of Statistics had reported that the economy contracted in the first quarter. And the CBN had warned that the economy would enter recession if a negative GDP growth is recorded in the second quarter. According to recent data from the National Bureau of Statistics, the economy contracted to about 0.36 per cent in the first quarter of the year, the first time in over a decade.

Some experts fear that the economy might have shrunk further in the second quarter, which ended in June, a development they say would lead to recession.

Amid the fear of imminent recession, the CBN, which had also warned that the factors that contributed to the negative growth output (some of which were also highlighted by the IMF) still existed, had at its May Monetary Policy Committee (MPC) meeting therefore moved to buoy the economy, necessitating the adoption of flexible foreign exchange regime and leaving the monetary policy rate unchanged at 12 per cent.

The fiscal authority has also moved to reflate the economy with the release of N235.916 billion of the N1.587 trillion capital for MDAs.

However, economic analysts and observers have reacted to the latest IMF growth projection and expressed their opinion as to the direction the economy would take.

Acknowledging the efforts of the federal government, a former managing director of Guinness Nigeria Plc, Seni Adetu, said “the government is evidently making significant efforts to course-correct and get the economy back on track in the second half. “

According to him, “The recent removal of the Forex restrictions and subsequent floating of the naira will surely help restore some investor confidence and this should boost the economy. Additionally, a fast-tracked and flawless implementation of the 2016 budget will help reverse this contraction in this half, even if the government itself has been transparent enough in admitting only a partial implementation is achievable. Therefore, it seems to me that some of the economy-inducing initiatives of the second half will impact more on 2017; and so you question whether the expected improvement of the second half will be sufficient to compensate for the poor first half – and that is where I get IMF’s point, and I am disposed to making sense of it.”

But time would tell if the measures adopted by the monetary and fiscal authorities are effective.

However, Director General, West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, agreed with the IMF saying, “The IMF is correct in saying that the Nigerian economy will contract further in 2016.”

“Already”, Ekpo pointed out, “the economy is in a recession and it is a special type because it is affecting both the demand and supply sides of the economy.”

“With insufficient revenue government would have serious challenges in trying to reflate the economy. With marginal rise in global oil prices, government is unable to benefit because of the activities of Niger Delta Avengers. Declining revenue from oil would affect foreign reserves and the recent forex framework of the CBN would heighten speculation and uncertainty.”

Ekpo posited that, “If the recession persists and the economy enters a depression then the worse should be expected. The economy has no fiscal buffers. What is needed now is the articulation and implementation of robust fiscal policy to restore growth. It should be noted that the IMF is part of the problem based on their one-size-fits-all policy advice.”

Similarly, Executive Director, Corporate Finance, BGL Capital, Femi Ademola, stated that, “the comment by Mr Gene Leon that the Nigerian economy will probably contract this year is very accurate considering the performance of the economy since the beginning of the year.”

He added that, “In addition, to the decline in economic growth from 6.23 per cent in 2014 to 2.79 per cent in 2015, the Nigerian economy recorded a negative GDP growth of 0.36 per cent in the first quarter of 2016. Although the culprit was the lull in economic activities in the country since the middle of 2015 due to the change in government and the consistently low price of oil in the international market, the delay on the passing of the budget for the fiscal year 2016 also contributed to the decline in economic growth.”

“While the budget has been passed since the middle of the second quarter, the capital votes have not been released for implementation due to the combined challenges for bureaucratic bottlenecks and the loss of national revenue due to the resume restiveness in the oil producing Niger Delta region of the country. These problems would likely result in another negative growth in GDP for the second quarter of the year. In economic parlance, when an economy witnessed a negative GDP growth for two or more consecutive quarters, then a contraction has occurred,” he lamented.

Ademola, however, believed “if the country eventually reports positive economic growth for the remaining two quarters in the year, it could be out of recession by early 2017,” pointing out that, “this would require a quick and massive release of capital and the deployment of resources to infrastructure spending to boost economic activities.”

To an investment manager/analyst, Tola Odukoya, “the position of the IMF is not news given the obvious headwinds that have exerted downward pressure on the performance of the Nigerian economy for almost two years, the effect of which we are now beginning to see.”

Odukoya explained that, “at the macro level, the softening of the global oil market led to weak revenue generation for Nigeria thereby weakening government’s revenue profile and the domestic currency, lower consumption, savings and investments while inflation is rising.”

“Meanwhile, at the micro level, there is a clear drop in demand as average household income has contracted – due in part to rising unemployment, whilst industries continue to grapple with the challenge of lower capacity utilisation amongst other issues,” he added.

In his own analysis, the Chief Executive Officer, Global Analytics Consulting, Tope Fasua, lamented that, “the painful aspect is our reliance on IMF and the rest to help us set direction for the economy” even though, he admitted that, “in truth they pay more attention to the analytics and statistics than we do.”

He believed that, rather than relying on the IMF, “we should define our own track and run on it.”

According to him, “What has probably been lacking is the imagination to take the economy through a totally different trajectory. There is no reason why our economy should not grow by 10 per cent each year. The trick is to unlock productivity via mass mobilisation. Some of us advised on this but the economy seem stuck on flogging dead horses. Yes, if we continue the way we have, wasting a lot of time and alienating the productive sectors of the economy, IMF would be proven right.”

Going forward, Adetu said, “The important thing going forward is that we focus on doing the right things – remove any ambiguity around our medium to long term economic strategy and cascade to the key shareholders so that investor confidence is fully restored, boost local production, intensify efforts at improving our infrastructure and diversifying our economy.”

“It is sad that we are now sounding like broken records on these necessary interventions,” he however added.