PERSPECTIVE
Rislanudeen Muhammad looks at how the economy plummeted into a recession and what can be done to reverse it
Nigeria’s 2016 budget was tagged budget of economic recovery and growth strategy. It was aimed at pulling the economy out of recession and stagflation. Africa’s largest economy slipped into recession second quarter of 2016 having had two consecutive quarters of negative GDP growth rate. The economy contracted -0.36 per cent in first quarter and -2.06 per cent second quarter 2016, further sinking into recession with -2.24 per cent GDP in third quarter of 2016. Fourth quarter of 2016 data in unlikely to take any different trajectory.
Nigeria’s recession deepened in the third quarter and oil production fell, the National Bureau of Statistics (NBS) reported late November 2016 as dollar shortage kept Africa’s biggest economy in a stranglehold. Nigeria’s Q3 GDP contraction was largely caused by declines in oil and manufacturing sectors output, down by -22.1 per cent and -4.38 per cent respectively. This reflects the continued foreign exchange shortages and sub-optimal crude oil output due to attacks on oil facilities in the Niger Delta. Given the persisting dollar illiquidity and volatility in Brent crude price, IMF projection of -1.8 per cent GDP for year end 2016 seem to be more than a reality. Meanwhile, Moody’s analysts were rather optimistic that Nigeria ‘s GDP could expand by 2.5 per cent in 2017 provided oil output of 2.2 million barrels daily is achieved, a tall order given the sabotage act by so called Niger Delta avengers. The NBS report came a day before a major November interest rate decision by the Central Bank in period of galloping inflation that has peaked to 18.48 per cent in November 2016. Dollar scarcity in an import dependent economy has pushed prices high and further exacerbated by currency restrictions hitherto imposed to defend the naira. Fiscal spending has been slow notwithstanding the fact that deficit financing to reflate the economy towards growth and away from recession was projected in 2016 budget. In the meantime, Central Bank’s monetary policy committee concluded its last meeting for the year in November 22, 2016 and unsurprisingly agreed to retain monetary policy rate at 14 per cent. Fixed income market continued to re-price assets in tune with inflationary trend. October treasury bills nominal rate for example was 17.48 per cent and because treasury bills and bonds are not taxable, real rate is around 24 per cent. Foreign portfolio investors (FPIs) stand to benefit. But such incentive measure has yet to improve the dollar liquidity as the FPIs seem to think about other factors beyond rates in taking investment decision.
NBS reported further increase in November 2016 consumer price Index which measures inflation to 18.48 per cent year on year, 0.15 percentage points higher than 18.33 per cent recorded in September 2016. Increases were recorded across all major divisions, which contribute to the Headline index.
With an economy in recession, suffering from stagflation and largely import dependent, it is difficult to think about taming inflation because of negative interest rate and keeping monetary policy rates high with hope of attracting foreign portfolio investment (especially in the fixed income markets whose rates are tied to MPR) and also improve liquidity in foreign exchange market. That has naturally traded off the growth we needed to pull the economy out of recession.
Meanwhile, many deposit money banks have granted their customers dollar denominated loans while their cash flow and repayment source is in naira. Major short-term advantage is improved dollar liquidity and single digit interest rate on dollar loans as against highly expensive, double digit naira loans. However, due in large part to depreciation of naira exchange rate as well as persistent excess demand for dollars, loan repayment become difficult or near impossible. More so, loans granted in dollars were largely booked without hedging against exchange rate risk. With Nigerian economy in recession, even naira loan repayments are becoming difficult. This pose the risk of worsening non-performing loans, already at 11.7 per cent, above five per cent CBN maximum risk tolerance level per cent CBN June 2016 financial stability report. Over time, key CBN prudential ratios like capital adequacy and liquidity ratios may be difficult to be met by banks exposed to dollar loans without commensurate dollar cash flow.
A call for rate reduction to support cheaper local borrowing by the government was advocated by the Honourable Minister of Finance just before the September 2016 MPC meeting. Without prejudice to CBN’s independence, I think it is time to have an effective synergy of monetary, fiscal and trade policies as for umpteenth time, it is becoming clear that lack of harmony in policies will not get the economy back on track. With consistent, month on month inflation increase from 9.6 per cent in January to 18.48 per cent in November 2016, life among the poor and vulnerable is gradually heading into Hobbesian state of nature.
The 2017 medium term economic framework and fiscal strategy paper had a very optimistic anticipation of Nigeria getting out of recession by 2017. Indeed while 2016 budget was anchored on reflating the economy and pulling it out of potential recession as at then, 2017 was premised on recovery and growth. What happened? What went wrong to the extent that the economy slipped deeper into recession and will 2017 budget get us out of it? 2016 budget provided for N1.8 trillion capital expenditure or 30 per cent of total budget and N2.2 trillion deficit funding. Capital expenditure performance is low in 2016 due in large part to inability of government to get the required loans needed to finance the deficit. 2017 capital expenditure is projected at N2.24 trillion also 30 per cent of total budget while total borrowings will be N2.3 trillion or 2.18 per cent of GDP, disaggregated as N1.067 trillion or 46 per cent external borrowing and N1.254 trillion or 54 per cent internal borrowing. Oil benchmark of $42.5 a barrel is realistic given the current and projected near term price of above $55 a barrel. Provision of N65 billion in 2017 as against N20 billion in 2016 for Niger Delta Amnesty may be an attempt to deal with the sabotage activities as without optimal production level of 2.2 million barrels a day, projected income may not be attained and deficit level further accentuated. The budget also projected income diversification with projected non oil and other revenues of N1.583 trillion as against N1.985 trillion oil revenue. As in 2016, there may be high budget performance in recurrent, loan repayments and other obligations but low in capital expenditure aspect of the budget in 2017 provided revenue as well as borrowing estimates are not met. In fact while the 2017 budget is big in nominal term, it is actually smaller than that of 2016 in dollar real term.
In analyzing proposed medium term borrowing of $29.9 billion, we have to look at several exogenous and endogenous factors. While existing debt to GDP ratio at 14 per cent and proposed fiscal borrowings of 2.18 per cent of GDP are still healthy, we need to be careful by looking at net revenue to GDP which is weak as well as current Debt Management Office(DMO)’s debt sustainability analysis report which capped total domestic and foreign borrowings at $22.08 billion. It is however important to note that due to lack of any fiscal buffer in savings, Nigerian government today do not have any option of financing its budget other than through borrowing. Indeed the 2016 budget itself was premised on deficit financing to the tune of N2.2 trillion out of which 1.8 trillion naira was for capital expenditure. In a period of recession where the economy has contracted for three quarters consecutively and still counting, the plausible way to pull ourselves out of it is by way of reflating the economy through massive investment in infrastructure, income and job creating sectors like agriculture, mining and manufacturing, public private partnership etc with multiplier implication of increasing employment and jump starting the micro economy. To that extent, the budget was rightly structured to deal with that challenge of stagflation and recession. However we need to be careful in ensuring we borrow for capital expenditure only, on projects that will generate growth and support repayment of the loan. We should not borrow for consumption. Notwithstanding our estimated debt to GDP ratio of about 14 per cent, which is low for an emerging economy like Nigeria, our current debt profile of about N16.3 trillion is already becoming a source of concern due in large part to our dwindling revenue especially from oil. The sum of N1.6 trillion is set aside for debt servicing alone in 2017 budget. We must therefore borrow with caution to ensure optimality in both borrowing as well as our spending pattern.
While budget 2016 unrealistically projected exchange rate of N199 to a dollar, 2017 budget projected another unrealistic figure of N305 to a dollar. In view of current distortions in the market, while naira was overvalued in late 2015 to part of 2016 before adoption of flexible exchange rate, it may be undervalued now with net beneficiaries at both situations being speculators and rent seekers. Even though tax revenue to GDP ratio is low at about 12 per cent post GDP rebasing, the fiscal budget did not anticipate any increase in tax but rather work towards enhancing efficiency of existing tax collection. This is a right decision as you don’t raise taxes in period of recession until at least the economy starts recovering.
The President in his budget speech did mention the underlying imperative for aligning fiscal, monetary and trade policies. This is important as those policies have hitherto worked at cross purposes and seem to contradict rather than complement each other. It is necessary to have clarity on foreign exchange policy for example to assure foreign and local investors who are expected to bring in the dollar liquidity badly needed to correct the market, deal with imported inflation, build in a more coherent public private partnership that will address our infrastructure challenge estimated at over USD350 billion. With a GDP size of over N100 trillion, 2017 budget is only about seven per cent Nigeria’s GDP. We should engage more in articulating clear policies that will encourage both private foreign and local investment in areas like power, Agriculture and Agro allied businesses, mining and developing small and medium enterprises by putting in place clear incentive measures as well as realistic and consistent monetary, fiscal and trade policies.
Even though the value of capital importation into Nigeria in the third quarter of 2016 fell 34 percent compared to same quarter of 2015 to USD1.822 billion, it is still an improvement as that figure represent over 74 per cent quarter on quarter improvement in capital importation compared to second quarter of 2016, a major improvement in foreign capital inflows since beginning of recession. This, may in part vindicate CBN’s decision not to reduce rates to support growth while focusing on attacking inflation and hence incentivizing foreign direct as well as portfolio investments especially in fixed income market given the high monetary policy rate of 14 per cent. The hope was for such improved capital inflows to improve dollar liquidity and allow manufacturers import critical inputs to jump start the economy, improve GDP growth rates and eventually reduce unemployment rate currently at 13.9 per cent. Ours is still import dependent economy. While government should be focused on reducing dependence on imports for basic needs like food as well as export income diversification, improvement in capital importation should in medium term support dollar liquidity and help in stabilising naira exchange rate provided the central bank deals with glaring opportunity for round tripping, arbitrage and speculative demand given the huge disparity between official and parallel market rates. As part of measures to get out of recession, improved investor confidence is needed to bolster liquidity in the foreign exchange market. In attempting to eliminate the wide spread between the official and black market, government should work towards improving credibility of the foreign exchange market by discouraging hoarding of local currency and speculative demand as well as maximally sanctioning incidences of round tripping and arbitrage. This will enhance foreign portfolio as well as diaspora participation in the market, improve liquidity, support GDP growth and employment, and reduce cost of doing business by taming inflation and ultimately reducing the unbearable misery index.
..Rislanudeen is an economist and former acting Managing Director of Unity Bank Plc
