Confronting the Fragile Economic Recovery



By Obinna Chima

The International Monetary Fund (IMF) last week declared that Nigeria’s economic backdrop remains challenging, despite some signs of relief in the first half of 2017. The fund also noted that near-term vulnerabilities and risks to economic recovery and macroeconomic and financial stability remained elevated in the country.

The IMF’s verdict came few days after the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) warned at its last meeting that the nation’s economy may relapse into another recession due to threats to economic recovery.

This therefore requires that both the monetary and fiscal policy authorities to put all hands on deck in order to lift the economy out of the doldrums.

 The IMF had after its visit to Nigeria last month, pointed out that economic activity in the country contracted in the first quarter of the year by 0.6 per cent, mainly as maintenance stoppages reduced oil production.

It said: “However, following four quarters of negative growth, the non-oil economy grew by 0.6 per cent (year-on-year), on the back of a rebound in manufacturing and continued strong performance in agriculture. Various indicators suggest an uptick in activity in the second quarter of the year.

“Helped by favourable base effects, headline inflation decreased to 16.1 per cent in June 2017 but remains high despite tight liquidity conditions.

“Preliminary data for the first half of the year indicate significant revenue shortfalls, with the interest-payments to revenue ratio remaining high (40 per cent at end-June) and projected to increase further under current policies. High domestic bond yields and tight liquidity continue to crowd out private sector credit.

“Given Nigeria’s low growth environment and the banking system’s exposure to the oil and gas sector, non-performing loans increased from 6 per cent in 2015 to 15 per cent in March 2017 (8 per cent after excluding the four undercapitalised banks).”

Also, the CBN Governor, Mr. Godwin Emefiele, had at the end of last month’s MPC said the committee was seriously worried about the increasing indebtedness of the federal government, which resulted into N2.51 trillion deficit in the first half of 2017.

The MPC had also noted that the economy was going through a fragile economic recovery and thus called for bold fiscal and monetary measures to ensure that the economy does not relapse into another recession.

Emefiele said: “Available forecasts of key macroeconomic indicators point to a fragile economic recovery in the second quarter of the year.

“The committee cautioned that this recovery could relapse in a more protracted recession if strong and bold monetary and fiscal policies are not activated immediately to sustain it.”

The federal government has projected that the economy would grow at 2.2 per cent this year.

The government’s forecast is contained in its: 2018-2020 Medium Term Fiscal Framework and Strategy Paper, which forms the basis for its 2018 budget.

It also projected a 4.8 per cent growth in 2018 and 4.5 per cent in 2019, before reaching seven per cent in 2020.

 The Nigerian economy slipped into a recession in 2016 as low crude prices and oil produc­tion slashed government revenues, caused dollar shortages and crippled its economy.

 It contracted 0.5 per cent in the first quarter, its smallest fall in five quarters of decline.


Need for Policy Shift

The federal government has been advised to adopt policies that would that the vulnerabilities and risks to Nigeria’s economic recovery, macroeconomic and financial stability are not affected.

Some financial analysts that made this call during separate interviews with THISDAY stressed the need for the government to ensure effective implementation of the 2017 budget.

The advice came following the declaration by the International Monetary Fund as well as the CBN earlier that Nigeria’s economic backdrop remained challenging, despite some signs of relief in the first half of 2017.

To the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismark Rewane, “there is a lot of work to be done to take the economy out of its present challenges.”

 According to Rewane, the “speed at which the government is moving in terms of policy implementation is too slow.”

He therefore called for shift in terms of policy implementation in the country.

The Director General of the West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo called for more fiscal stimulus.

“Right now, we are in a recession and monetary policy cannot do anything. What we need now is more of a fiscal stimulus and there should be no delay in policy implementation. We need structural reforms now.”

The Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, urged the government to ensure that the implements the Economic Recovery and Growth Plan (ERGP).

“We cannot control oil price, but we can control what we produce. So, the government must ensure that the peace in the Niger Delta is sustained. Then the policies they have put together in the ERGP, the government needs to evolve actionable plans towards implementing those policies.

“For example, the target for the power sector, we need to have actionable plans on how to achieve that. The issue of stopping the importation of refined petroleum products must also be addressed.

“Also, our approach to infrastructure financing should be reviewed such that public-private partnership is adopted because government does not have the wherewithal to fund infrastructure,” he added.

On his part, the Chairman, Polar-Afrique Consulting Limited, Dr. Chris Itsede, believes the government is getting into indebtedness and an ambitious spending plan which obviously outstrips its expected revenue stream.

Itsede, who is the founding Director General of the West African Institute for Financial and Economic Management, said what he expected was for the government to scale back expenditure and tighten spending efficiency, so that for example, if you spend N1, it would be sure of getting at least 85 per cent of the real value of that N1.

“That is spending efficiency and that is what we should be thinking about now. If you look at the numbers now, our debt profile as a country is really alarming. It has never been this bad.

 Research Analyst at FXTM, Lukman Otunuga also stressed the need for governments at all levels in Nigeria to focus on infrastructural development.

Otunuga pointed out that while major roads in the country are in poor condition; the power sector remains a cause for concern, health and education also needed to be revamped.

According to the analyst, rectifying these issues has the ability to not only create jobs but also support economic growth and boost investor confidence.

He said: “focusing on the fiscal side, this still remains a gray are with the nation’s long-running infrastructure problems compounding to its woes. With the overall projected fiscal deficit tagged at N2.36 trillion one can only hope that the approved budget offers a helping hand to the nation.

“As we head deeper into the third quarter of 2017, market players may closely observe hard domestic data at home to gauge the nation’s health and verify if an economic recovery really is on the cards for 2017.

“Nigeria’s mission to diversify away from oil reliance while recovering from an economic deceleration remains an on-going quest and it will be interesting to see how far the nation has progressed by year end.”

According Otunuga, the current speed of Nigeria’s recovery could be described as slow and steady, with the macro-fundamentals gradually stabilising.

“Although I remain optimistic over Nigeria resurging from an economic meltdown and eventually breaking away from its dependence on oil as an engine for growth, there are still external risks which could present headwinds on the road to recovery.

“The greatest threat to Nigeria’s current recovery in the medium to longer term is depressed oil prices. Falling oil has the ability to directly impact the nation’s government revenues, external reserves, and stability of the nation’s foreign exchange market,” he said.

Inflation in Nigeria cooled for the fifth consecutive month in June at 16.1 per cent, illustrating further signs of price stability while manufacturing and non-manufacturing activities have both moved in a positive trajectory. Also, the naira has continued to display resilience against the US dollar this year, with prices currently trading around N363 on the black market.

Although the repeated intervention by the Central Bank of Nigeria has supported the naira’s recovery and stability and confidence over Nigeria’s economic recovery continues to play a leading role.

Therefore, the government needs to ensure that it implements the 2017 budget so as to drive spending. In addition, it must promote activities that would ensure that earnings from the non-oil sector continue to improve in its quest to diversify away from oil.