Despite Flashes of Recovery, Nigerian Economy Remains in Distress

ANALYSIS FOR TUESDAY

Two years on, a combination of factors including delayed response by the federal government to the structural adjustments needed to avert an economic crisis, policy inconsistencies, missteps and outright lack of political will to embrace whole-hearted reforms, pushed the economy on a negative trajectory. Ndubuisi Francis writes that in spite of recent reversals in some macroeconomic fundamentals, the economy is still on a long path to recovery

After nearly five years of stability, the price of oil in the global market took a plunge in the middle of 2014 and continued a precipitous journey south. Towards the end of that year, the price of the commodity had taken a slide by over 40 per cent from June when it was on a high of $115 per barrel to below $70 a barrel.

This was to trigger a lot of concerns and reactions by a motley crowd of state and non-state actors.
The administration of former President Goodluck Jonathan under whose watch the fall in oil price commenced came up with a cocktail of belt tightening measures to stave off a looming revenue squeeze.
On the heels of the global uncertainty occasioned by the fall in commodity prices, including oil, the International Monetary (IMF) and the World Bank had advised Nigeria and other emerging markets, low/middle income, commodity-dependent countries to evolve contingency plans to continue managing their economies.

As part of measures to ensure a more sustainable revenue profile in the 2015 budget, the then government unveiled a set of measures to tackle the huge revenue gap created by the falling oil price and massive decline in production occasioned by oil theft in the Niger Delta. Emphasis was placed on increasing non-oil revenue, including surcharges on luxury items.

Beyond raising additional revenues, the government said the implementation of the surcharges policy was designed to send a compelling message of addressing socio-economic inequalities in the country.
Luxury surcharges were therefore introduced on private jets with all local and foreign registered private jets operating in Nigeria to pay an annual surcharge of N3,200 per kilogramme based on the weight of each aircraft.

There was also a 50per cent import tax adjustment on Yachts, just as Champagnes, wines and spirits attracted an import adjustment tax of 50per cent. International travel surcharge also came into the mix.
All first and business Class foreign air travels tickets attracted a flat rate of N15,000 per ticket as foreign travel surcharge.

Besides surcharges, the Federal Ministry of Finance, in conjunction with the Federal Inland Revenue Service (FIRS), as a short-term measure, also conducted a review of the implementation of the Pioneer Status incentive granted to some oil and gas companies. This was targeted at unlocking some additional tax revenues in 2015.

Consequently, 22 companies, which were granted Pioneer Status contrary to the provisions of the Industrial Development Act were identified.
The Nigeria Investment Promotion Council (NIPC) was directed to restrict the Pioneer Status granted to the 22 companies to three years and the FIRS raised assessments on four of the companies that were liable to pay.

It was also in tandem with the belt tightening measures and efforts to address the huge revenue shortfall engendered by the fall in oil price that the National Assembly, for the first time in many years, acquiesced to a 25 per cent cut in its annual budget of N150 billion in 2015.

These were some of the fiscal measures the Jonathan administration embarked upon to address the plummeting oil price before leaving the stage for the then incoming Buhari government.
It is instructive that while the revenue squeeze set in, the then Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala had repeatedly told Nigerians that tough times were ahead. She had also assured that there was no need for panic as the then government would address the challenges with appropriate measures.

When the Jonathan administration lost power, she had also admonished the incoming administration to muster the political consensus on how to build fiscal buffers, noting that had the Excess Crude Account (ECA) not been depleted, the unfolding economic difficulties occasioned by the fall in oil prices would have been mitigated.

She recalled that during her stint as finance minister under former president Olusegun Obasanjo, between 2003 and 2006, the need to build fiscal buffers was explored, culminating in the creation of the ECA.

According to her, with the $22 billion that administration left in the ECA, the country was able to weather the global financial meltdown between 2008 and 2009, when oil prices plummeted to about $40 per barrel from about $147 per barrel without borrowing. Okonjo-Iweala expressed regret that on her return as finance minister in August 2011 under the Jonathan administration, the ECA had plummeted to about $4billion, adding that it was on record that she had mounted a strident but futile campaign on the need to build the buffers again.

Her clamour for the rebuilding of the ECA, she said, was drowned by a cacophony of voices from the federating states to share everything. She stressed that with the revenue drop arising from the fall in oil price, many had wondered whether it was an act of irresponsibility on the part of the government not to have saved when oil prices were high, noting that it was that insistence to share accruals in the ECA that depleted the fiscal buffers.

How IMF perceived the previous govt’s measures
Following the steps taken by the past government to address the price shock, the Managing Director of the International Monetary Fund (IMF), Christine Lagarde had described them as ‘excellent’.
Lagarde said both the monetary and fiscal policies were commendable, and urged the then incoming administration headed by Buhari to build on the legacies.

Lagarde, who observed that the right measures had been put in place to manage the price shock, said: “I will like to say that the economic policy that has been in place, especially in the last few months has been really excellent, whether it is the fiscal tightening of the exchange rate of depreciation, or general focus on keeping the economy afloat despite the major external shocks as a result of low oil prices.

“The right measures have been taken, the right policies have been put in place, and very clearly now, a lot of work should continue to be done by the next team. But the problems remain the same—the external shocks are the same, the prospects for the oil prices are reasonably low and the efforts to diversify the economy as has just been attempted by the current team will hopefully continue, for the benefit of Nigeria,” she said.

State of the economy before Buhari assumed office
Although, the price of oil had dropped to about $46 per barrels at the time the last administration was leaving office, the economic fundamentals were still strong. Nigeria’s real GDP grew by 3.96 per cent year-on-year in the first quarter of 2015. The official exchange rate of the naira to the dollar was N198/$. The foreign reserves stood at about $32 billion and inflation rate was at a single digit of about 9 per cent.

The journey to recession
Among the wrong steps taken by the incumbent administration and which ultimately contributed to the current negative trend was to allow the economy rudderless for over six months after the president assumed office. Uncertainty pervaded the landscape as there was no cabinet in place, and no economic direction was provided. For a country that already lost half of its revenue to drop in oil prices, it was unfathomable. Foreign direct investment went to the nadir and existing foreign investors, divested billions of dollars from the economy while local ones were left in the lurch.

When the cabinet was finally constituted by president Buhari, a sucker Punch has already been dealt the economy. Even when the cabinet was in place, the problem of an economy bereft of direction persisted. There was no economic team to provide the much-desired economic roadmap. Fiscal measures were for a long time not forthcoming.

On the monetary side, when the Nigerian economy started to experience considerable slowdown in GDP, the Central Bank of Nigeria (CBN) attempted to stem the tide, and in November 2015, introduced the asymmetric corridor to encourage banks to lend to businesses rather than deposit with the CBN.

This was counter-productive and rather increased excess liquidity instead.
In 2016, the CBN hiked its benchmark Monetary Policy Rate (MPR) to mop up excess liquidity and ease the pressure on the Naira as well as inflation.
Further effort to stabilise the naira continued in 2016, and CBN was compelled to peg the naira around N200/$ to N300/$ at the interbank segment.

This was expected to make the naira gain some stability. Rather, the interbank rate and the parallel rate widened as the apex bank managed to keep the interbank rate at around N300/$.
As oil revenue continued to nosedive, the naira went into a free fall against the dollar with dwindling oil revenue and depleting foreign reserves.

When the country slipped into recession in the second quarter of 2016, many analysts believed the worst economic contraction in 29 years would have been averted but for the delayed response by the Muhammadu Buhari administration to the structural adjustments needed to navigate through an economic crisis.
That failure, they posited, resulted in a contraction of the gross domestic product (GDP) growth rate of 2.06 per cent in the second quarter of 2016.

But instead of admitting that it had taken a number of missteps that could have averted the worst economic contraction in 29 years, the presidency and Ministry of Budget and National Planning attempted to put a spin on the damning economic data released by the NBS and engaged in a game of one-upmanship with the International Monetary Fund (IMF), assuring Nigerians that the economy will beat the fund’s gloomy forecast of -1.8 per cent for the year.

One other misstep of the Buhari administration was the way it managed the Niger Delta issue, a region from where the bulk of the nation’s revenue is tapped.

This exacerbated the nation’s woes as militants blew up oil installations, culminating in drastic revenue losses. The country bled from both price and quantity shocks.
Flowing from a cocktail of these factors and more,
Nigeria officially slipped into a recession based on NBS’ GDP growth figures for Q2 2016, which showed that the economy contracted by 2.06 per cent, compared to the negative growth of 0.36 per cent recorded in Q1 2016.
Since then, the economy has recorded fifth consecutive contractions or negative growth.

Hardship
Although most Nigerians and corporate entities have been buffetted by the negative impact of heavy loss in oil revenue, they had managed to stay afloat. However, the economy’s slide into recession in the second quarter of 2016 has worsened the situation for individual and corporate Nigerians.
As at the second quarter of 2016, the NBS reported that 4.8 million Nigerian had lost their jobs. The banking sector was among the worst hit due to the implementation of the Treasury Single Account (TSA).
The manufacturing sector also got a bitter pill of the economic downturn with capacity utilisation at very low ebb.

Cost of food has also hit the rooftops and most families can barely afford three square meals a day. Parents whose children and wards are studying abroad cannot afford the foreign exchange needs due to the scarcity and high exchange rate of the greenback.

Many are on a suicide binge as the economic monster bares its fangs. These economic adversities are still very much around although optimism is strong in the air that Nigeria will exit recession soon following positive signals on some economic fundamentals.

How the govt has managed the economy
In preparing the 2016 Budget, which was the first the Buhari administration put together by itself, the government opted for an expansionary budget.
The Buhari administration, in a bid to pull the country out of recession, decided that a potent way was to resort to huge spending and consequently embark on an expansionary budget of N6.06 trillion in 2016.
It also introduced the Social Intervention Programme (SIP) with a N500 billion allocation in 2016. Under the SIP, the national home school feeding programme was one of the four social investment programmes for poor and vulnerable Nigerians designed by the administration.

The other three programmes were: N-Power Volunteer Corps, which was designed to hire half a million unemployed graduates; Government Enterprise and Empowerment Programme (GEEP), which provides soft loans ranging from N10,000 to N100,000 for artisans, traders, market women, amongst others; and the Conditional Cash Transfer, which provides a stipend to the most vulnerable and poorest Nigerians.
Similarly, the Budget 2017, which was recently passed the 2017 Appropriation Bill of N7.441 trillion by the National Assembly is retaining a budget of N500 billion for the SIP.

$30bn External Borrowing Plan
In the 2016 Budget, the federal government set out to borrow $29.96 billion from multilateral institutions to finance capital projects and budget deficit under the medium-term External Borrowing Plan. The approval of the borrowing was mired in controversy when it was presented to the National Assembly.

Eurobond Issue
Nigeria’s $500 million notes under the $1.5 billion Global Medium Term Note programme was recently consolidated to form a single series with the existing $1 billion notes, which the country issued in February and will mature by 2032.
The federal government therefore announced that it priced its offering of the $500 million aggregate principal amount of notes at a yield of 7.5 per cent under the $1.5 billion (increased from US$1 billion) Global Medium Term Note Programme.

The N1 billion notes (Original Notes) were issued on February 16. The terms and conditions of the $500 million notes, said the statement, will be identical to those of the Original Notes, paying a coupon of 7.875 per cent per annum and maturing on February 16, 2032.
When the $500 million Eurobond was issued, it was eight times oversubscribed. The proceeds of the Eurobond are to be channeled into defraying domestic debts.

Bailout to states
By September 2015, about 27 states of the federation were broke and were unable to pay salaries. The governors, cap in hand, approached the federal government for a lifeline. Consequently, a bailout was arranged for the states. At the last count, N1.5 trillion has so far been given to the states as bailout. But there are allegations that some governors diverted the bailout.
However, the Federal Ministry of Finance has set up Financial Sustainability Plan to check abuses by states in the management of bailouts and states’ finances.

Efficiency Unit
The federal government also last year set up an Efficiency Unit (E-Unit) to monitor its agencies and ensure all expenditures are necessary and represent the best possible value for money.
The E-Unit is domiciled at Federal Ministry of Finance and is expected to review all government overhead expenditure, to reduce wastage, promote efficiency and ensure quantifiable savings for the country.

It works across all Ministries, Departments and Agencies to identify and eliminate wasteful spending, duplication and other inefficiencies, and is expected to identify best practices in procurement and financial management and share such knowledge with the MDAs to ensure its adoption

Economic Recovery and Growth Plan (ERGP)
The medium-term ERGP (2017-2020) which was initiated by the Ministry of Budget and National Planning, has among its broad strategic objectives, restoring sustainable, accelerated inclusive growth and development; investing in the people; and building a globally competitive economy.
It targets the growth of Nigeria’s gross domestic product, GDP, by 2.19 per cent in 2017 and 7.0 per cent by the end of 2020.

It also envisages reducing inflation to single digit by 2020 and increasing federal government’s revenues from N2.7 trillion in 2016 to N4.7 trillion in 2020. It prioritises key turnaround interventions and enablers to generate concrete, visible impact by 2017 and articulates medium term economic policies for implementation between 2017 and 2020.

It equally focusses on achieving macroeconomic stability; economic growth and diversification; competitiveness and business environment; and governance and security.

Tax Reforms
Nigeria’s tax-to-GDP is considered about the lowest in Africa. In realisation of this and the quest to bolster the revenue base, a national tax policy review committee was consequently put in place by the government.
The committee has already turned in its report, but the present government says it seeks to raise taxes, not reform taxes.
The acting President, Prof. Yemi Osinbajo recently approved the revised national tax policy to address low taxation in the country.

The Finance Minister, Mrs. Kemi Adeosun said: “What the (review) committee report has shown is that we should look at actually increasing VAT on some luxury items. At five per cent, we have lowest VAT. “And while we don’t think VAT should be increased on basic items, if you are going to drink champagne, for instance, in the UK, you drink champagne, the VAT is 20 per cent. So why should it be 5 per cent in Nigeria. “So, they have made recommendations that we should pull out some luxury items and increase VAT on those items immediately. “And I think that is a very valid and sensible suggestion which we are going to take to the national assembly to see how we can implement it.”

Budget performance
The federal government recently disclosed that N1.2 trillion of a capital budget of N1. 5trillion in the 2016 budget had been implemented. Although many feel the impact is not being felt. The good thing is that the administration has decided to give capital investment increased attention even in the 2017 Budget.

The Downsides
Despite some positive signals in the economy, the recent report by the NBS has been everything but positive in many fronts.

In its “Selected Banking Sector Data”, the NBS said banks reduced their lending to the economy by N115billion in the first quarter of 2017, even as Nigerians withdrew N1.5trillion through automated teller machines (ATMs) during the quarter.

The NBS’ report also disclosed that banks’ lending to 17 sectors of the economy fell to N16 trillion in the first quarter of 2017 from N16.12trillion in the fourth quarter of 2016, indicating a decline of 0.71 per cent or N114.8 billion.

Yet in another report, the NBS, said the total value of capital imported into Nigeria in the first quarter of 2017 stood at $908.27 million, the lowest in ten years.
The Capital Importation Report, released by the bureau, when compared to the $1.55 billion that the economy attracted in the fourth quarter of 2016 represents a $640.61 million differential or 41.36 per cent decline.

The decline in investment inflow, the report said, was due to the fall in “other investment” and portfolio investments category made up of equity, which dropped from $176.44 million in the fourth quarter of 2016 to $101.99 million in the first quarter of 2017.

Loans also declined from $917 .01 million to $369.28 million while bonds, which stood at $25.4 million at the end of the last quarter of 2016, recorded nothing in the first quarter of the current fiscal year.
“Capital importation was particularly low in January, at $187.9 million; this was only the fourth month since 2007 in which capital importation was less than $200million,” the NBS’ report said.

Mounting Debts
The International Monetary Fund (IMF) has stated that Nigeria’s debt to its Gross Domestic Product (GDP) would hit 24.1 per cent by 2018.
At the end of 2015, the nation’s debt to GDP was 12.1 per cent, which climbed to 18.6 per cent at the close of the 2016 fiscal year.

By the 24.1 per cent for 2018, this translates to a situation where the nation’s debt to GDP ratio would have risen by 100 per cent within a space of three years-(from 12.1 per cent in 2015 to 24.1 per cent in 2018).

The IMF, in its World Economic and Financial Surveys, which was released last week equally made a projection that Nigeria’s present level of indebtedness would have peaked at 23.3 per cent of GDP by the end of 2017.

The Debt Management Office (DMO) had put Nigeria’s total debt profile as at December 31, 2016 at $57.39 billion (N17.36 trillion).
Of this amount, the external debt component stood at $11.41 billion (N3.48 trillion), while the domestic debt stock stood at $45.98 billion (N13.88 trillion).

Nigeria’s debt consists of domestic and foreign debts, owed by the federal and sub-national governments.
While the nation’s debt to GDP ratio is considered one of the lowest in Africa, there is growing apprehension occasioned by the spate of debt accumulation in recent years.
The World Bank had recently expressed concern over the ratio of debt payment to revenue.
The Bretton Wood institution argued that reduced revenue earnings might render the country’s debt unsustainable.

A total of N1.84 trillion was provided for in the 2017 budget for debt servicing.
The 2017 Budget recently passed by the National Assembly has a projection of N2.35 trillion to be borrowed.

Similarly, the 2016 budget projected a borrowing of N1.84 trillion for deficit financing.
According to the Senior Economist at the World Bank office in Nigeria, Yue Man Lee, for the nation’s interest payment to be sustainable, the country had to boost its revenue base or work towards balancing the debt profile.

“Nigeria’s debt-to-GDP ratio is relatively low. What is of concern is the ratio of interest payment to revenue. That is what is concerning. This reflects the fact that there has been a massive drop in revenues because of drop in oil revenues.

“There are two main strategies to reduce this debt burden. One is to increase the revenues. Here, in order not to be vulnerable to the volatility of the oil sector, the critical thing is to increase the non-oil revenues – the VAT, the income taxes and the excises outside of oil. This is something we have been discussing with the government about,” Lee said.

Outlook
As the last two quarters saw negative economic growth decelerate, fuelling optimism that the country is well on its way out of recession, the journey seems far, nevertheless.
According to the latest GDP figures by the NBS, in its Q1 GDP report, the economy contracted by 0.52 per cent (year-on-year) in real terms. This was 0.15 per cent higher than the rate recorded in the corresponding quarter of 2016 (revised to –0.67 per cent from –0.36 per cent) and higher by 1.21 per cent points from the rate recorded in the preceding quarter (revised to –1.73 per cent from –1.30 per cent).
Inflation rate has also continued a downward trend.

From 18.55 per cent in December 2016, Nigeria’s inflation rate increased to 18.72 per cent in January 2017, came down to 17.78 per cent in February, 17.26 per cent in March and 17.24 per cent in April.
The IMF had forecast a growth of 0.8 per cent in 2017 while the World Bank’s forecast is 1 per cent.
However, the CBN Governor, Mr. Godwin Emefiele, who spoke at the end of the Monetary Policy Committee (MPC) meeting of the central bank last week, reaffirmed his earlier projection that the nation’s economy would exit recession in the third quarter of the year, predicating his optimism on emerging macroeconomic variables.

Emefiele said with negative growth decelerating, increased capacity utilisation, and consecutive decline in the inflation rate, among others, his earlier forecast that the nation would exit the recession was valid.

“My view is that with all the positive signs we see: inflation tending downwards, GDP improving to the extent that negative movement has decelerated greatly and we have seen foreign exchange going to the real sector and industrial capacity is beginning to improve, we’ve seen positive signs in various economic sectors.
“So I am very confident that at the end of the third quarter, we will be out of the recession,” Emefiele declared.

He also stated that the central bank cannot determine what the convergence point of the various forex rates would be, adding however, that based on the indicators, the rates were already converging.
Emefiele recalled that about three months ago, the local currency was trading at above N500 to the dollar on the parallel market, but has appreciated to between N370 and N375/$.

IMF Outlook
Nigeria might be on its way out of recession, but the IMF predicted a 2.6 per cent growth for sub-Saharan Africa in 2017. However, the Fund put a caveat that Nigeria and others must embark on strong policy actions with a view to changing the dwindling economic fortunes of the region.

Putting in place a strong macroeconomic stability, tackling of structural weaknesses, and strengthening of social protection for the vulnerable are three key immediate measures the Fund recommended towards a robust economic growth in sub-Saharan Africa, the IMF said in its 2017 sub-Saharan Africa Regional Economic Outlook.
These are the areas the federal government should target for sustained growth beyond and not put every attention on how to exit recession.