Chika Amanze Nwachuku writes that with the deepening economic crisis, the federal government should take more proactive measures to forestall a total economic collapse
The Nigerian economy has been under intense strain due to the collapse in oil receipts.
Brent crude, used as an international benchmark plunged as low as $27.67 a barrel in January, the lowest since 2004. It rebounded briefly in April on the back of supply disruptions that helped to chip away at the global glut and pushed prices close to $50. Prices currently oscillate between $40 and $45 per barrel.
The low oil prices are wreaking havoc on oil exporting economies, with Nigeria, Angola, Venezuela, Azerbaijan, and Russia identified by the Organisation of Petroleum Exporting Countries (OPEC) as countries worst hit.
The oil cartel noted that the five countries were identified among the oil exporters hit by falling currency value.
Nigerian economy is reliant on oil sales. In fact, oil accounts for more than 90 percent of Nigeria’s exports and about 80per cent of government’s total revenue. So as oil prices take a nosedive, so does the Nigerian economy.
The inflationary rate has been 16.5 percent since June 2016. The real Gross Domestic Product (GDP) growth rate declined to -0.36 per cent in the first quarter of this year, compared to 2.11 per cent in fourth quarter of 2015, according to the National Bureau of Statistics (NBS).
The Nigerian economy contracted to 3.86 per cent and 2.35 per cent respectively in first quarter of 2015 and second quarter of 2015 before rebounding to 2.84 in third quarter 2015 and further shrunk to 2.11 per cent Q4 of 2015. The current decline represents the first contraction since June, 2004, a 12-year-low.
Unemployment rate also climbed to 12.1 per cent in the first quarter of this year, compared to 10.4 per cent in Q4 of 2015 and 9.9 per cent in the third quarter of 2015.
The rising unemployment and inflation rates, put together, pushed Nigeria’s misery index to an all-time high of 47.7 per cent, ranking the country as having the fifth highest misery index in the world, in the first half of 2016.
The misery index is an economic indicator created by renowned economist, Arthur Okun, to help determine how an average citizen is faring economically. This is calculated by adding the adjusted unemployment rate to the annual inflation rate. A rising misery index means the economy is not faring well.
CBN’s Laudable Efforts
In line with its statutory functions, the Central Bank of Nigeria (CBN), headed by Godwin Emefiele has put in place a lot of measures to strengthen the naira and to return the economy to growth part. Last year, the apex regulator suspended foreign currency funding for about 41 imported items, which Nigeria can do without.
Though this directive has elicited a lot of criticisms, the idea, according to the bank was to channel those resources for the support of the real sector rather than on frivolous imports. The bank had for 16 months, also restricted foreign currency supply and pegged the naira at N197 to N199 per dollar.
However, the central bank in June ended the 16-month old peg on the naira and introduced a flexible exchange rate regime to allow the currency to trade freely on the interbank market. But dollar liquidity has remained a concern in the system, even with periodic intervention by the central bank.
The liquidity crunch in the forex market continued last week as the naira further depreciated at the interbank market. The interbank spot rate closed at N332.07/$1 last Friday.
The naira/dollar exchange rate at the parallel market traded at N397/$1 last Friday. Penultimate week, it closed at N400/$1. Many economists say this disparity is unsustainable. Also, sentiments in the futures FX market also weakened last week as the one-year forward rate depreciated to N349.30/$1 from N345.42/$1 the preceding week.
Budget implementation stalled
The worsening financial crisis has stalled the implementation of the 2016 budget, prompting the federal government to resort to borrowing to fund the N6.06trillion budget.
Recently, the Secretary to the Government of the Federation (SGF), Mr. Babachir David Lawal stated that the 2016 budget would be partially implemented as a result of revenue shortfall. He had blamed the decline in economic activities on the militant group, the Niger Delta Avengers, which has claimed responsibility for the renewed attacks on oil installations in the oil-rich Niger Delta.
Although the signing of the budget was delayed, its eventual signing in May, had elicited great expectations that it would stimulate economic activities and revitalise the economy. The Minister of Finance, Mrs. Kemi Adeosun, had emphatically stated that the proposed N350billion quarterly injections by way of capital projects that was disclosed by the president would be implemented immediately, to help stimulate economic activities and reflate the economy. But three months down the line, meaning economic activities are yet to kick off.
Is the Economy Getting Better or Worst
From all indications, the situation has gone from bad to worse to horrific as all the macroeconomic indicators are not looking good. The NBS is expected to release its latest numbers in coming weeks and there are projections that the anticipated estimates would also be negative.
Besides, crude oil production has dropped to about 1.4 million barrels per day as a result of resurgence of militancy in the Niger Delta region.
Power shortages are so severe that millions of Nigerians rely on generators to run their homes and businesses. The myriad of economic headwinds have also severely stunted the growth of Nigerian stock market, forcing some foreign portfolio investors to exit the country. The banking sector, which plays very important role in the economic development is going through its tough times in years, with most of them declaring less than impressive results, while others are recording huge declines in their bottom line.
Interest rate is on the upswing; small scale businesses are going down; in fact most of them have closed shop. A lot of Nigerians are losing their jobs as most companies embark on job cuts as a cost cutting measure.
In its Doing Business 2016 report, released in May, the World Bank had noted that Nigeria remained one of the poorest business destinations in the world. It ranked the country 169 out of 189 countries in its latest report on the ease of doing business globally.
The report examined the business economic conditions of 189 countries across the globe with emphasis on getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, regulations for starting a business, dealing with construction permits and resolving insolvency. Although this year’s ranking was a marginal improvement over 2015 ranking that placed the country in the 170th position, Nigeria trails behind African countries such as Mauritius (32), Rwanda (62), Botswana (72), South Africa (73) and Ghana (114) – all competing for foreign direct investments.
The implication is that the Nigerian environment is not conducive for business to thrive.
Nigeria Technically in Recession
Last month, the Minister of Finance, Adeosun disclosed that Nigeria’s economy has entered into a technical recession. Though the minister admitted that “things are tough,” she however insisted that the economy “is in good hands and there should be no panic.”
She said: “Things are tough, but we are not ignorant. “I want to assure Nigerians the economy is in good hands and we are absolutely doing our best. We want to assure Nigeria we are on the right path; we are on the right track.”
Adeosun’s pronouncement followed on from the International Monetary Fund’s (IMF’s) disclosure that Nigeria’s economy will contract by 1.8 percent this year. It also came less than a week after the NBS revealed that the Consumer Price Index used in gauging inflation in the country had risen to 16.5 percent, the highest in 11 years. The Fund had cut Nigeria’s GDP growth forecast from 2.3 percent in April to – 1.8 percent, lowest in 29 years.
Nigeria is Broke
Last week, while playing host to the United Nations Population Fund’s Executive Director and Under Secretary-General of the United Nations, Prof. Babatunde Osotimehin, President Muhammadu Buhari admitted that Nigeria was facing financial difficulties due to the slump in crude oil prices.
He said: “Nigeria has suddenly become a poor country as a result of oil price crash.”
“It has been a very difficult year for Nigeria. Before we came to office, petroleum sold for about $100 per barrel. Then it crashed to $37, and now oscillates between $40 and $45 per barrel”, a truly worried president Buhari commented.
He said the prudent manner his administration had been handling the nation’s resources made it impossible for people to know that there is severe shortage in the country, adding that accountability was serving the government in good stead, despite severe shortage of resources in the country.
Speaking on the poor state of the economy in a recent interview with THISDAY, the Managing Director/CEO of Maxifund Investments and Securities Plc, Mr. Okechukwu Unegbu declared that the economy has been in the doldrums.
“In other words, it is static. Instead of the economy growing, we are noticing negative factors such as increasing rate of inflation, unstable exchange rate, interest rate is on the upswing, a lot of people are losing their jobs, small scale businesses are not functioning and a lot of them have closed down and a lot of their workers now jobless.
Finally, there is no economic direction at the moment, even though I am aware that they are working to bring a blueprint for the movement of the economy. As at now, the economy is comme ci, comme ca, that is, it is rather not growing, but static.”
On his part, an economist and a faculty member at the Pan-Atlantic University,
Dr. Austin Nweze argued that the economy on its own cannot grow- it requires the political institutions to give it the firepower it requires. He posited in a recent interview with THISDAY that the economy will keep on bleeding for as long as the political system that creates the strength to fire the economy continues to delay decisions or not knowing what to do. “With the weak political institution that we have, the economy will keep on suffering. You can’t separate the economy from the political class. It has a big influence”, Nweze said.
According to him, the infrastructure and economic policies are such that without a strong political institution, nothing will really function well.
Besides, he noted that the political institution we have is lopsided in favour of only very few and we need a system that will provide justice, quality, equity and fairness.
Nweze remarked: “Malaysia had a similar situation. There are three major ethic groups in Malaysia, the Malays, Indians and Chinese. But the political side has been able to accommodate everyone and make policies that will allow different groups to express themselves. The Chinese, for instance, are mainly business people and they are the richest in Malaysia. The issue of hypocrisy is not there. So, until we solve that and allow everybody to express themselves, then the economy will not take shape.”
On the much talked about economic diversification, Nweze said: “What we need to do now is policy choice. Everything is about policy. If you have a right policy in place and implement it, the economy will respond positively. So, the thing is that to increase production, you will need to encourage industrialisation and to industrialise, we need energy, we need entrepreneurs and that is why I mentioned Anambra, Abia, Kano and Ogun states.
Look at every state of the federation and local governments, they have at least two items of natural endowments that could also be used to build industries around. You don’t need to come to Lagos to become a big man, but you can stay in your village. So, when government is talking about diversification of the economy, they also have to consider centralising the economy, so that economic activities will be going on in all the nooks and crannies. So, that is the way to go about it but nobody is putting that in political space. Short-term thinking has never solved the problem. We need a strategic thinking, critical one.”
Proactive Economic Team Required
Speaking at recent business summit in Enugu state, a former Chairman of the Nigeria Economic Summit Group (NESG), Mazi Sam Ohuabunwa posited that for Nigeria to sail out of her present economic woes, President Muhammadu Buhari must ensure that strategic thinkers and a proactive economic team are brought on board to bring about appropriate and timely economic and fiscal policies.
Ohuabunwa identified a lack of thinking and patriotic commitment of Nigerian leaders as the cause of the current economic crisis facing the country.
Ohuabunwa said: “Enlightened is the word; enlightened, dedicated, patriotic leaders, who know that the purpose of leadership is to move people from a state of poverty, the state of low quality of life, to a state of wealth and a higher quality of life. The moment we focus our attention on the quality of life of Nigerians, then politics will play less impact,” he noted.
He said: “The declining economy is an opportunity to develop possibilities for export. We should look at the opportunity that the collapsing oil economy is bringing to us. Today, oil contributes about 10.1 per cent of the nation’s GDP unlike what used to be the case in the time past. This is the time for Nigerians to think out of the box in order to grapple with the present state of affairs. Anything one can do to earn a dollar, which means we have to develop things that can be exported, should be done,” he said.
Can Monetary Policy Alone Address Nigeria’s Economic Challenges?
Economic experts argue that Nigeria’s economic challenges require the combined efforts of both the monetary and fiscal authorities to address. They authorites, according to the experts, must collaborate to put in place proactive measures and right policies that will inflate the economy.
The Chief Executive Officer at Graeme Blaque Group, a financial advisory firm, Mr. Zeal Akaraiwe, in a recent interview with THISDAY, stressed that the Nigerian economy is facing an unusual mix of challenges, which require strong collaboration of the economic team to tackle.
He reasoned that: “Monetary policy cannot act alone. So, our economic team – the Minister for Trade and Investment, the Minister for Finance, the CBN Governor, the Vice President, the Head of Customs, all need to sit down and map out a strategy that they would all execute jointly. CBN alone cannot get us out of this problem.”
The Finance Minister has emphatically stated that the economic team is working assiduously to revive the economy. She said the government had devised strategic measures, among which is discipline regarding how public money is spent.
She explained that the federal government opted for a conservative borrowing plan to fund the critical sectors of the economy and to ensure that future generation is not burdened with debt payment.
The minister also reiterated that the government is looking to develop the country’s infrastructure to allow the private sector to thrive which will in turn create jobs and unlock the economy.
Similarly, Vice President Yemi Osinbajo, who recently acknowledged the slump in Nigeria’s GDP, foreign portfolio investment into the country, as well as worsening power generation, also gave a firm assurance that these challenges would become a thing of the past.
“Our immediate tasks to achieve our economic objectives are: reduce fiscal and forex imbalances; boost dollar liquidity; curb inflation; lower interest rate; ensure lending to the real sector; increase foreign direct investment and foreign portfolio investments by sustaining enabling policies.”
As part of efforts to increase non-oil revenue and address the economic challenges facing Nigeria, Osinbajo said the federal government plans to add 700,000 more companies into the tax net.
“A great effort has been made to improve non-oil revenues. This includes bringing an additional 700,000 companies into the tax net as compared to the targeted 500,000 set at the beginning of the year,” he said.
To say the oil price crash is now upending the economy of Nigeria is to say the obvious.
The situation is bad, really bad, and rapidly getting worse. President Buhari and his economic team are facing increasing pressure as the worsening economic crisis has affected basic services. The dollar scarcity has persisted despite the CBN’s flexible exchange rate policy.
Manufactures and other sectors, are lamenting the persistent forex scarcity. The Port terminal operators are also groaning as dollar scarcity, low cargo volumes persist.
The question being asked is what could happen next? Nigerians are fed up with sundry promises and targets that often turn out to be mere wishes.