Lifting the Economy out of Recession


The Nigerian economy officially entered recession as the real GDP growth rate further declined in the second quarter, thus tasking the fiscal and monetary authorities on accelerated efforts for quick recovery, writes Kunle Aderinokun

The National Bureau of Statistics (NBS) last Wednesday disclosed that the nation’s real Gross Domestic Product (GDP) growth rate dipped by -2.06 per cent (year-on year) in the second quarter of this year, which was 1.70 percentage points or 170 basis points lower than the decline by -0.36 per cent recorded in the preceding quarter. It was also 4.41 percentage points or 441 basis points lower than the growth rate of 2.35 per cent recorded in the corresponding quarter of 2015.

The latest GDP figures have put paid to the fear of recession that had enveloped the economic landscape of Nigeria and thus confirmed that the economy is officially in recession. A recession occurs if an economy has contracted for two consecutive quarters or longer but it is not expected to last for more than a year. It is a period of general economic decline characterised by high unemployment, high inflation, fall in retail sales, stagnation, amongst others.

NBS attributed the further decline in GDP growth rate in the second quarter mainly to significant drop in output in the oil sector (year-on-year) and partly to slight decrease in non-oil sector growth.

According to the bureau, “during the period under review, oil production was estimated at 1.69million barrels per day (mbpd), 0.42 million barrels per day lower from production in first quarter of 2016. Oil production was also lower relative to the corresponding quarter in 2015 by 0.36million barrels per day when output was recorded at 2.05mbpd

“As a result, real growth in the oil sector was negative 17.48 per cent (year-on-year) in the second quarter of 2016. Growth declined by 10.68 percentage points and 15.59 percentage points relative to growth in the second quarter of 2015 and first quarter of 2016 respectively. Quarter-on-quarter, growth also slowed by -19.11 per cent. As a share of the economy, the oil sector contributed 8.26 per cent to total real GDP, down from the contribution recorded in the corresponding period of 2015 and the first quarter of 2016 by 1.54 percentage points and 2.03 percentage points respectively.

“Growth in the non-oil sector was largely driven by the following seven activities of agriculture, information & communication, water supply, arts entertainment and recreation, professional scientific and technical services, education and other services which all grew positively while the remaining 19 major sectors, many of which are substantially indirectly dependent on the oil sector recorded negative growth.

“The non-oil sector accordingly, declined by 0.38 per cent in real terms in the second quarter of 2016. This growth rate was 0.20 percentage points lower than the first quarter of 2016 (-0.18 per cent), and 3.84 percentage points lower from the corresponding quarter in 2015 (3.46 per cent) In real terms, the non-oil sector contributed 91.74 per cent to the nation’s GDP, higher from shares recorded in the first quarter of 2016 (89.71 per cent) and the second quarter of 2015 (90.20 per cent).”

However, when measured quarter on quarter, NBS further revealed, the real GDP increased by 0.82 per cent. According to the bureau, during the quarter, nominal GDP was N23.483 trillion at basic prices, which was 2.73 per cent higher than the second quarter 2015 value of N22.859 trillion. This growth, it explained, was lower than the rate recorded in the second quarter of 2015 by 2.44 percentage points or 244 basis points.

FG’s Optimism

Nevertheless, following the appalling outing of the economy as indicated by the NBS data, the presidency contended that the nation’s economic outlook remained bright, irrespective of the contraction in the GDP growth rate recorded.

According to a statement issued in Abuja last Wednesday by the Media Aide to the Vice President, Laolu Akande, the Presidency assured Nigerians that the second half of the year would be better.

Apparently allaying the fears of Nigerians, the presidency in the statement, which quoted the Special Adviser to the President, Economic Matters, Dr. Adeyemi Dipeolu, noted that the recession would be short-lived, assuring Nigerians that many of the challenges faced in the first half either no longer existed or had begun to ease.

It pointed out that the data released by the NBS on the GDP growth rate, while confirming a temporary decline, also indicated hopeful expectations for the country’s economic trajectory.

Besides, the presidency also said apart from the growth recorded in the agriculture and solid mineral sectors, the Nigerian economy, in response to the policies of the Muhammadu Buhari presidency, was doing better than the IMF’s forecast, with clear indications that the second half of the year would be much better.

It assured Nigerians that the administration would continue to work diligently on the economy and engage with all stakeholders to ensure that beneficial policy initiatives are actively pursued and the dividends delivered to them.

This is the not the first time the Buhari administration would be allaying the fears of Nigerians on the economy in recent times. The Minister of Finance, Kemi Adeosun, had last month, while reacting to the projection of the International Monetary Fund (IMF) that the Nigerian economy would contract by 1.8 per cent this year, stated that even though the economy was ‘technically in recession’, the downturn would be short-lived as she was optimistic that the economy 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 on the policies and programmes that the government had put in place to address the downturn.

The IMF Position

The IMF, which reviewed its April Regional Economic Outlook growth rate forecast for Nigeria last month, had projected -1.8 per cent GDP growth rate for the country by end of the year. It cut the growth rate forecast from 2.3 per cent for the year, which it earlier lowered from 3.2 per cent 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 had 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.

Apparently giving a foretaste of what was to come few days earlier, Senior Resident Representative, IMF Nigeria, Gene Leon, had said the 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.”

No Surprise

Economic analysts and market watchers said they saw it coming as indications were already rife that the economy would slip into recession as evidenced in the prolonged challenges in the economy. Notwithstanding, the pundits are optimistic that the economy is redeemable.

Managing Director and Chief Economist, Global Research, Africa, Standard Chartered Bank, Razia Khan, said the poor performance of the economy in the second quarter was expected given that the “FX shortages impacting activity had come to a head just prior to the FX liberalisation.”

And Khan believed that “with FX availability not having improved significantly, some headwinds are likely to remain, even into H2.”

However pointing that “the weaker NGN has provided a boost to FAAC allocations”, she noted that, “implementation of the budget will also help,” going forward.

Wondering “if these factors alone will drive sufficient momentum for a recovery in the second half of the year, Khan was however concerned that, “with banks unlikely to be driving lending growth much higher, recovery could be more drawn out.”

“What was interesting about the GDP print was that the dip in non-oil GDP was fairly shallow – only 0.4% y/y. It’s a situation that can be recovered pretty easily. The contraction was mostly driven by the oil sector – and that is a much more severe problem (but not insurmountable),” she added.

Similarly, Executive Director, Corporate Finance Department of BGL Capital, Femi Ademola, pointed out that the economic recession was not unexpected, recalling that “since late 2014 when preparation started for the 2015 general elections, economic activities in Nigeria has been suffering decline.” Ademola noted that, “The expectation of a reigniting of the economy immediately post-election was impacted by the change of government which has to start with its own plan.

He added that, “The sharp and consistent decline in oil prices and its effect on national revenue also limited the capacity of the government to return the economy to its earlier peak.”

All these economic fundamental challenges, he therefore stated, “resulted in volatile exchange rate regime which practically snuffed out life from domestic production while importation become overly expensive.”

He said, “The combination of these two resulted in the decline in the GDP and high inflation since the beginning of the year 2016.”

“In other words, the GDP and inflation figures are not unexpected considering that economy has been experiencing a lull for over a year now. Although there should be a lag period before the effect of the MPC actions are felt, the increase in inflation may also be justifying the notion that inflation in Nigeria cannot be controlled using monetary policy instruments, it requires structural and fiscal reforms to abate,” he explained.

Ademola advised: “With the GDP figure for the second quarter which shows a sharper decline than the previous quarter, it becomes clearer that the government needs to boost economic activities by releasing funds to the economy through capital votes while the monetary authority needs to channel funds to the sectors of needs while sterilising excess liquidity in the financial services sector using other policy instruments outside of interest rate.” He believed “If we can do things differently now, there is a chance that the country would return to positive growth by early to middle 2017.” Aligning with Khan and Ademola, Associate on Macroeconomic and Fixed Income Analysis at FBN Capital Ltd, Chinwe Egwim, said, “There are no major surprises in this release as we expected a contraction in Q2.” “Given the macro challenges (steep slide in oil prices, production shortages due to vandalism, FX sourcing issues in an import dependent country and hike in inflation) the negative reading was a foregone conclusion.”

Egwim recalled Adeosun saying the federal government was committed to stimulating the economy through its capital releases, social intervention programs, import substitution strategies, tackling the oil production crisis in the Niger Delta and policies geared towards attracting foreign portfolio and direct investments.

The FBN Capital analyst expects “to begin to see signs of recovery as we enter Q4,” but cautioned that, “there is still a lot of work to do and delays in releasing capital could also delay the recovery.” “There is also a risk that revenue collection shortfalls may lead to capex cuts,” she added.

In the same vein, CEO, Global Analytics Consulting Limited, Tope Fasua, who was not surprised by the unfortunate development, noted that, “It is a final testimony that all is not well.”

“Officially we are now in a recession even though we have since been living with the realities of an economic depression – high unemployment, high inflation, or stagflation, high poverty rates, and low human development indices. It seems all the bad guys have congregated on Nigeria. I hope the government rediscovers its mojo. The time for buck-passing is long over,” he stated.

Way Forward

Meanwhile, analysts at Eczellon Capital Ltd led by its chief executive officer, Diekola Onaolapo, said the second quarter report “only further reiterate the need for greater collaboration between monetary and fiscal authorities to address the current poor performance of the economy .”

According to the analysts, “On the monetary side, there is a need for the CBN to review its stance of the 41 items exempted from the inter-bank which defeats the essence of a single FX market and starve businesses of required foreign capital to transact.

“We opine that fiscal measures will be more effective and will help achieve the goals of import substitution that the apex bank had in mind when it banned the 41 items from the inter-bank FX market.”

The Eczellon analysts took cognizance of the 0.84 per cent quarterly growth that was largely influenced by the 4.5 per cent expansion in the Agriculture sector. This, they posited, could be “linked to the relative peace in the North-Eastern part of the country; and possibly a gradual shift towards increased local production of food; given the very unfavourable FX environment.”

“It is expected that Agriculture will continue its strong performance for the remaining quarters of the year particularly as the nation enters its harvest season, and government’s push for greater local production of food in the country especially for staple commodity like Rice,” they added.

The Eczellon analysts believed “the foregoing, coupled with the injection of c.N430.0bn into the economy in recent months for capital projects should provide a lever for a gradual recovery of the nation’s economy in the coming quarters.”

They therefore concluded that, “while it may seem that the economy has reached its low and could be prepping for recovery in the coming quarters, it is imperative that the authorities (monetary and fiscal) do not dampen the momentum by actions/pronouncements that could heighten volatility in an already dire economy.”