Various sectors of the economy, during the year, operated under tough conditions with sub-optimal capacity, which weighed down outputs and reflected lacklustre performance, reports Kunle Aderinokun
2016 would remain in the annals of this nation as the most challenging and turbulent year economically. This year, the economy entered a recession, hitherto witnessed 29 years ago. The economic recession, which is a period of stagflation, low productivity and unemployment, was long foretold by pundits. Although indicators pointed in the direction of the downturn, there were no deliberate policies by the federal government to mitigate the challenges in the economy, but only rhetoric by officials. While the gross domestic product (GDP) entered the negative territory in the first quarter of this year when the economy contracted by 0.36 per cent, it maintained the downward streak in the second quarter and the economy officially entered recession, having recorded a negative growth of 2.06 per cent. And by the time the GDP data for the third quarter was released by the National Bureau of Statistics, the data lent credence to the reality that the economy, which recorded a negative growth of 2.26 per cent had sank deeper into the quagmire.
The government has attributed the recession to the dwindled fortunes of crude oil revenue, occasioned mainly by the continuous attacks on oil facilities in the Niger Delta. Oil, which is still the mainstay of the economy failed to lift it up because of the untoward activities of the militants in the Niger Delta, which for most part of the year, dealt a debilitating blow on the revenue accruing therefrom, coupled with impact of the crisis at the global oil market. According to the National Bureau of Statistics, oil production which had been benchmarked at 2.2 million barrels per day in the 2016 budget, averaged at 1.63mbpd, lower from production in second quarter of 2016. It got worse at various times of the year when production fell to abysmally low levels. For instance, sometime in May, crude production plummeted to about 1.4 mbd having lost about 750,000bd, at a time a barrel was being sold for about $47 with a budget benchmark of $38 per barrel.
Nevertheless, the non-oil sector, largely driven by the activities of agriculture (crop production), information & communication and other services, with a growth of 0.003 per cent, did not also muster enough contribution to impact economic growth. This is even despite the fact that interventions by the Central Bank of Nigeria (CBN) and some development finance institutions appeared to have gone some ways in providing succour for the agriculture sector, a major component of the non-oil sector.
However, the government continued to pay more of lip service to diversification of the economy to the non-oil sector as the necessary ingredients to enable participation in the much mouthed diversification seemed elusive.
The manufacturing sector, which would have been given the requisite fillip to stimulate the economy remained comatose during the year under review. While the CBN has announced a concession for the sector, opening up to them a special window in the foreign exchange market, whereby it directed banks to allocate 60 per cent of their FX for their needs, the impact, however, appeared to be unfelt by the operators as they continue to groan under FX challenges.
After a long wait, the federal government, in its bid to tackle fiscal challenges and lift the economy out of recession, unveiled a 10-point fiscal roadmap, designed to stimulate the economy and set it on the path of recovery and growth.
Highlights of the roadmap were rolled out by the Minister of Finance, Mrs. Kemi Adeosun, who represented the Vice President Yemi Osinbajo, at the annual dinner of the Lagos Business School. Adeosun itemised the fiscal policies and actions being taken to tackle the key barriers to economic growth.
A major component of the roadmap is to replace administrative measures on the list of 41 items with fiscal measures to reduce demand pressure on foreign exchange (forex) at the parallel market. CBN, in its wisdom, had barred importers from assessing forex, particularly the United States dollars, for the 41 items via the official window, a measure, which had generated intense controversy. Though the measure was applied in good faith by the monetary authority, it pushed importers to sourcing forex from the parallel market, which led to forex shortage and inadvertently affected the value of the naira and the economy.
But with the federal government’s decision to reconsider its policy on the 41 items, the expectation, according to the roadmap, is that there would be a reduction in the demand for US dollars to ramp up forex supply.
Highlights of the developments or issues that shaped different sectors of the economy within the last one year:
One of the major policy initiatives of the federal government and CBN in the banking segment was the implementation of the Treasury Single Account (TSA) which had put banks’ liquidity positions under stress. This was so because banks were in custody of trillions of naira in public funds, which even accounted for 80 per cent of liquidity in some banks.
Another major milestone in the year under review, which shaped the money market was the introduction of the flexible foreign exchange regime to resolve exchange rate crisis and an array of policy measures intended to achieve stability of the naira. The banks have had to count their losses and gains since the new regime was launched and others had incurred financial sanctions for various infractions from the CBN.
Also, rising inflation had been a major source of concern to the CBN which had on several occasions resorted to tightening of monetary policy to curtail the headline index.
There were further efforts to boost credit to the real sector of the economy through various interventions in aviation, agriculture and power sectors by the apex bank.
The increasing proportion of non-performing loans (NPLs) in banks was also a serious concern during the year as falling oil prices made it difficult to recover massive exposures of the financial sector to the energy and to a greater extent, the power sector.
The period further marked an interesting chapter for the Bureau de change operators which had come under fire from the apex financial regulator which had tried to sanitise the segment as a way of fixing the exchange debacle.
The FX crisis greatly affected trading activities in the capital market in the year under review. Experts particularly blamed it for the low inflow of foreign investments in the country. Foreign investors are not incentivized to bring in their investments as there are no clear cut assurances that when such foreign investments are brought in they can be easily repatriated when they feel the need. This really impacted the level of trading activities on equities during the year.
Another factor that has affected the Capital Market has been a generally weak economy. The weak economy is largely traced to low oil price and low production due to resurgence of militancy and attacks on oil assets in the oil rich Niger Delta region as the country’s economy is largely dependent on receipts from the oil sectors.
Trade and Investment
As part of efforts of the Federal Ministry of Industry, Trade and Investment, it unveiled the strategic masterplan for the growth and diversification of the economy. Essentially, it seeks to create an enabling environment to improve the ease of doing business and implement the Nigerian Industrial Revolution Plan (NIRP) as well as providing support for Micro- Small and Medium Enterprises (MSMEs) to enhance job creation; promoting trade and investment as engines for growth as well as promoting a digital economy.
If substantiated, the recent claim by the Minister of Industry, Trade and Investment, Dr. Okechukwu Enalemah, that the country recorded over $20 billion investment inflows in the last one year, should be a plausible feat for the ministry and the country in general.
Notably, the Bank of Industry (BoI) has been outstanding in the period under review with several innovations which had increased credit to community projects and small businesses across the country.
But the challenge remained that foreign investments in particular had not been forthcoming as expected, with rising unemployment and discouraging foreign trade data and high inflation.
A recent capital importation report suggested FDI accounted for the smallest share of imported capital at $340.64 million, or 18.69 per cent of the total in the third quarter of the year.
Agriculture and Rural Development
The year witnessed the launch of the “Green Alternative: The Agriculture Promotion Policy 2016-2020”, which is a four-year blueprint on growing and repositioning agriculture for critical economic transformation.
The document, widely celebrated by stakeholders does not only seek to achieve food security but also enhance the country’s capacity to produce and export items in order to earn the badly needed foreign exchange.
Another notable development during the year was the sustained campaign to find lasting solution to the recurring cases of herdsmen and farmers’ clashes across the country. Although, the grazing reserves bill is yet to be passed into law by the National Assembly, several state governments had since volunteered and released large expanse lands for grazing purpose.
Also of note was the landmark initiative by the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) with the support of the ministry of agriculture on the commencement of an innovative scheme which would allow the movement of cattle from the northern parts of the country to markets in the southern region by railways, which was further targeted to reduce instances of herdsmen clashes as well as improve the economic well-being of Nigerians.
The manufacturing sector performed ‘poorly’ in 2016 as a continuation of its appalling outing in the preceding year when it contributed only 5 per cent to the nation’s Gross Domestic Product. According to data obtained from the office of the Director-General, West African Institute of Financial and Economic Management, “In developed countries where the real sectors are thriving, manufacturing contribute as much as between 35 and 40 per cent to the GDP. For instance, in Malaysia, the manufacturing sector contributes about 45 per cent to the GDP.”
Political and economic factors contributed significantly to the decline in the manufacturing sector. For instance, poor infrastructure and epileptic power supply are key impediments to the industry. The industry as a whole operates on more than 70 per cent of energy it generates, using generators. And operating these generators significantly increases the cost of production of goods. Power supply has remained abysmally low on account of low gas supply and other sundry operational issues in the sector. The administration-led by Buhari inherited an average power generation mark of 4000MW. This rose to 5074MW for the first time ever in February but subsequently dipped and now hovers around 3800MW.
Other factors include increase in the prices of petroleum products used by industries, multiple taxation, unabated smuggling and inadequate access to finance, both locally and abroad.
Arguably the sector that was most hit by the foreign exchange challenge in the country has been the real sector. For the better part of 2016, operators in the sector lamented the negative effects of scarcity of FX on their operations. Operators in the sector could not access FX, especially the United States Dollars, at the official rate and had to resort to the parallel market for the needs. The situation persisted even after the adoption of the market-driven flexible exchange regime in June.
The FX challenge has led to the closure of several industries and manufacturing concerns in the country while the surviving industries are doing so at reduced capacity utilisation. Two major fallouts of this has been increase in prices of finished products and mass layoff of workforce leading to increase in the unemployment ratio in the country.
Financing has also been a major challenge for the real sector in the outgoing year.
According to operator, cost of lending ranges between 30 and 36 per cent. This, many of them argued has discouraged many businesses in the sector from accessing finance for manufacturing activities. The firms who braved the odds eventually pass on the costs to the consumer in form of hiked prices.
Yet another factor that literarily crippled the real sector within the year was the effect of the suspension of the Export Expansion Grant (EEG) policy. Many export-based businesses that would have helped to generate forex in the year could not do so due to backlog of receipts that they were unable to access and this compounded their operations during the year.
Oil & Gas
During the year, petrol supplies remained stable through the price modulation exercise which is expected to lead to the full deregulation of the downstream petroleum sector. This has also kept the regular queues for fuel in check but has also seen pump price increase from N86.50 that he met it to N145 per litre.
Also, during the year under review, the NNPC restructuring and reintroduction of a productive business model within which a ‘20 fixes’ model (later trimmed to ‘12 fixes’ by current NNPC GMD, Dr. Maikanti Baru) were initiated. The reforms Kachikwu initiated before handing over to Baru saw to the monthly publication of the operations and financial flows of NNPC. It also resulted in the NNPC recording some margins of profit albeit momentarily for the first time in a very long time.
Also drafted was a national oil and gas policy, which would be harmonised with the omnibus Petroleum Industry Bill (PIB) to create for the industry a reformed and up-to-date policy instrument..
Besides, processes for a far-reaching resolution of the Niger Delta issues which would see the region becoming peaceful for business and development commenced in the year.
Also, the process of a new funding model to end the perennial Joint Venture cash call problem in the sector commenced with the petroleum ministry negotiating a $1.7 billion discount on the $6.8 billion cash call arrears owed international oil companies by the country. Similarly activated were the processes to have new investors co-locate new refineries and share facilities with existing refineries in Kaduna, Warri and Port Harcourt.
However, the refineries have continued to remain unproductive irrespective of the federal government’s promises of revamping them.
Fuel is still being imported as recent data from the National Bureau of Statistics indicated that N595.5 billion was spent on fuel importation in the first six months of 2016, rising by N34.3 billion from the amount spent in the last six months of 2015.
Three major issues characterised the aviation industry in 2016. One is concession, the second is the plan to establish a national carrier, a protracted plan, which the present administration has given vigour and enthusiasm and the third issue is the threat of extinction of Nigerian airlines.
During the year, government came up with the plan to concession airport so that the private sector would participate in the infrastructure development of the sector, as government’s lean finances could not continue to fund such facilities. It also gave given new vigour to the quest for national carrier.
There are many who support the establishment of national carrier because they believe it would reinforce Nigeria’s reckoning in air transport in Africa and beyond and when successful it would check the outrageous fares charged by international carriers that operate in the country.
Those who oppose it insist that the idea of a national carrier has become old fashioned, advising government to support indigenous airlines so that they could expand capacity and become profitable in their operations.
This year may be one of the worst for Nigerian airlines. Acute shortage of forex, paucity of aviation fuel sold at exorbitant prices to airlines and depletion of passenger traffic due to the present economic recession have put Nigerian airlines in a quandary.
Economic crunch forced Nigerian oldest airline, Aero Contractors out of schedule services and it is currently threatening the existence of others. There is limited capacity as many aircraft due for check could not be ferried overseas for maintenance because of lack of forex. Domestic flight service is characterised by flight cancellation and delays, leaving thick fog of uncertainty in the mind of passengers. 2016 may not be a good year for the aviation industry because nothing significant was achieved. What could be asserted as development are mere promissory notes, which are the usual rhythm of every government.