Setting the Economy on the Path of Recovery

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The poor outing of the economy in the third quarter has, once again, necessitated the call on the monetary and fiscal authorities to rise to the occasion and stem the rising tide of negativity for better output, writes Kunle Aderinokun

The thrust expected in the economy seemed far-fetched as the challenges bedevilling it continued to weigh down outputs. This is evident in the data released by the National Bureau of Statistics (NBS) on the Quarterly Gross Domestic Product (GDP) estimates last Monday, which showed that in the third quarter, the economy contracted by 2.26 per cent, signifying that it sank deeper than the second quarter when it recorded a negative real gross domestic growth of 2.06 per cent. The current GDP growth was lower by 0.18 percentage points from growth recorded in the preceding quarter and also lower by 5.08 percentage points from growth recorded in the corresponding quarter of 2015. But when assessed quarter on quarter (unadjusted for seasonality), the real GDP increased by 8.99 per cent.

Just like in the previous quarter, identified as a major contributing factor to the woes of the economy is the continuous attack by militants on oil resources, its mainstay. According to NBS, the contraction in GDP was largely caused by the militancy in the Niger Delta, which resulted in a drop in oil output during the third quarter to 1.63 million barrels per day (mbpd) and the oil sector’s contribution to GDP, despite the rebound in the agriculture sector.

During the quarter, aggregate GDP stood at N26,558,952.83 million (in nominal terms) at basic prices. Compared to the third quarter 2015 value of N24,313,636.94 million. Nominal GDP grew by 9.23 per cent. This growth was higher relative to growth recorded in the third quarter of 2015 by 3.22 percentage points.

Specifically, the NBS noted that, “During the period under review, oil production according to NNPC, averaged at 1.63million barrels per day (mbpd), lower from production in second quarter of 2016. Oil production was also lower relative to the corresponding quarter in 2015 by 0.54million barrels per day when output was recorded at 2.17mbpd.”

As a result, it pointed out, the real growth of the oil sector slowed by 22.01 per cent (year-on-year) in third quarter of 2016. This represented a decline relative to growth recorded in same quarter of 2015 at 1.06 per cent. Growth declined by 23.07 percentage points and 4.54 percentage points relative to growth in third quarter of 2015 and second quarter of 2016 respectively. Quarter-on-Quarter, growth was 8.07 percentage points.

The nation’s statistical agency stated that, as a share of the economy, the oil sector, which contributed 8.19 per cent of total real GDP, went down from the figures recorded in the corresponding period of 2015 and the preceding quarter of 2016 recorded at 10.27 per cent and 8.26 per cent respectively.

However, it was not all negative for the economy as a bit of positivity was recorded in the non- sector. According to NBS, growth in the non-oil sector was largely driven by the activities of agriculture (crop production), information & communication and other services.

“The non-oil sector grew by 0.03 per cent in real terms in the third quarter of 2016, reversing the last two quarters of negative growth recorded in Q1 and Q2 2016. This was 0.41 per cent points higher from the second quarter of 2016, yet 3.03 percentage points lower from the corresponding quarter in 2015. In real terms, the non -oil sector contributed 91.81 per cent to the nation’s GDP, higher from shares recorded in the second quarter of 2016 (91.74 per cent) and the third quarter of 2015.”

Below Expectation

As it stands, the economy is deeper in recession, which it officially entered in the second quarter, having contracted for two consecutive quarters. 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.

In the wake of the recession early September, the federal government had expressed the optimism that the economy would bounce by the second half of the year but aspirations appeared to be unattained with the current scheme of things.

Specifically, despite the appalling outing of the economy as indicated by the NBS data in the second quarter, the presidency had 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 Minister of Finance, Kemi Adeosun, had the month earlier, 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.

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.

Discouraging Outlook, Way Out

Meanwhile, with the turn of event, economic analysts and observers have reacted and expressed their opinions as to the direction the economy would take.

Managing Director and Chief Economist, Africa, Global Research, Standard Chartered, Razia Khan, noted that going by the data of the Q3 GDP, Nigeria’s economy would close the 2016 in negative growth. “Our expectation of a more modest decline in Q3 GDP data versus the contraction of 2.1 per cent y/y in Q2-2016 proved to be unfounded.” According to her, “The latest data has revealed a much-larger-than-expected decline in real GDP for Q3-2016, with the Nigerian economy contracting 2.24 per cent y/y. This weakness was largely the result of an outsized fall in the oil sector (down 22 per cent y/y), exceeding the y/y drop in Q2-2016 (17.5 per cent y/y), despite the resumption of amnesty payments to Niger Delta militants in August.

“Growth in the non-oil sector, which accounts for c.92 per cent of GDP, was finally positive (but only just, with ‘growth’ of 0.03 per cent y/y), following two consecutive y/y contractions in Q1 and Q2. While the flat non-oil GDP data marks some improvement versus previous quarters, there is little to suggest meaningfully improved economic momentum.”

In fact, Khan pointed out that, “With no evidence of improved FX liquidity, and the FX shortage still one of the key constraints on activity in Nigeria, we now expect negative growth to persist in Q4-2016.

“Consequently, we lower our 2016 GDP forecast to -1.7 per cent y/y (0.4 per cent prior). We raise our real GDP growth forecast for 2017, but only on a weaker base. Important reforms, not least those centred on Nigeria’s FX market, are required to unlock faster and more sustained economic growth, in our view. Despite the challenge posed by weaker oil earnings, Nigeria’s record on economic reform to date has disappointed.”

Painting a gloomy picture for the economy, Chief Executive Officer, The CFG Advisory, Adetilewa Adebajo, feared that, “There is still momentum on the downward growth trajectory for the economy as a whole so recession in going into depression.”

Aligning with Khan, he added that, “While the non-oil economy seems to have bottomed out, it’s only agric and a generic “others” sector of the economy posting growth above 4 per cent. It is now evident that we will close the year in negative territory.”

Pointing out that, “This is clearly a man-made recession,” Adebajo lamented that, “the inability of government to finance its budget deficit and revenue shortfall 4 weeks to the end of the year means that the stimulus needed to boost the economy is not going to happen this year.” “To worsen the situation, the CBN has mismanaged the Naira and done nothing to restore confidence to the new flexible exchange rate system,” he added.

Also, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, was of the opinion that, “Since the government did not really do anything to spur growth, the decline in economic growth for the third quarter of 2016 shouldn’t come as surprise.”

He lamented that, “While the fiscal authority is having challenges getting liquidity to boost the economy, the monetary authority that should lead the charge in curtailing the recession continues to play the blame game. It is therefore ludicrous to expect a different result.”

According to him, “In an economic recession, the monetary authority is expected to help spur growth through a lower interest rate especially in our case where the prolonged monetary tightening was part of the cause of the recession. This is because monetary policies (are) short term and dynamic; hence they are very useful tool to deploy while the fiscal policies take longer term before the impact is felt. In addition, the fact that the current high inflation is cost push should necessarily have made the authority to lower interest rate while using other monetary policy tools to curb excess liquidity.

“The fiscal authority also need to do all to reflate the economy. As experienced in the US in 2008/2009 when the country faced economic crisis, there is need to spend more money on critical infrastructure so as to get more people engaged in economic activities and also increase consumption. The fund needed for this may have to be borrowed, again as seen in the US; hence the National Assembly should work with the executive as much as possible to get the borrowing plan sorted.

Going forward, Ademola believed the actions stated in the foregoing, “supported by other unconventional monetary policies such as intervention in critical sectors of the economy, would get us out of the economic recession if well-articulated and implemented.”

To Chief Executive Officer, Global Analytics Consulting Ltd, Tope Fasua, development is “exasperating.”

“Perhaps because of the 4-year tenure of our governments, their views are rather short-term in nature. And so are the panaceas being offered. We have a fundamental problem in Nigeria and these times offer the best opportunity for us to finally do something tangible about them. Adducing these problems to crude oil – whether the fall in prices, or disruption in production – is a tragedy in itself.

“Nigerian economy currently bears all the symptoms of a proper depression, and that is usually results from Stagflation. The solutions are beyond the realm of economics, and require very deep thinking and clear-mindedness, plus a healthy dollop of selflessness. I’m afraid, these are rare commodities to find in today’s Nigeria. Things may get worse,” he submitted.